The next takeover target for Glencore: Fortescue?

John Tumazos has hit the 150mt nail on the head.

The question to Tumazos, owner of Very Independent Research, was: What, as a Fortescue Metals follower, did he make of Glencore, now rebuffed by Rio Tinto, taking over the upstart iron ore miner instead?

Fortescue is: already number four in the iron ore world; a nimbler iron-only titan among much larger and more complicated diversifieds; a miner with lowish-cost iron ore assets in Australia, that is, near-to-China; and new; a company built and controlled by billionaire Andrew Forrest (AKA Twiggy).

"My sense is that hell will freeze over before Fortescue wants to sell out," Tumazos said in an email, Wednesday.

Probably right.

But there are, nonetheless, good reasons for Glencore to at least consider or want the tie-up if, as well established by now, it aims to become a force in iron ore mining. For iron ore can still be a lucrative business with top assets even at the hurtful sub-US$100/tonne iron ore prices that are ruling the day and which look set to reign for some years to come.

Really, there's one very good reason.

Asset wise – stressing this aspect alone for a moment – Fortescue could bolt on to Glencore in ways none of the diversifieds could. It is a simple, but very large, iron ore mining company in one of mining's most valuable sectors where Glencore is incredibly weak.

Glencore has significant, and in cases, unparalleled strength in zinc (#1), thermal coal (#1), ferrochrome (#1) and then also copper, metallurgical coal, and nickel.

But not iron ore. Here its assets are, compared to the diversified miners – Anglo American, Rio Tinto, BHP Billiton and Vale – tiny. It has one iron ore mine set to come to online in 2017 and produce 7-million tonnes a year (Askaf). It also has offtake agreements on other developments such as juniors Alderon's Kami project in Canada's Labrador Trough.

Major iron ore contributors – at least not now – these projects are not.

The landscape in iron ore looks roughly like this in terms of yearly production: Vale (300mtpa+). Rio Tinto (290mtpa). BHP Billiton (225mtpa). Fortescue (155mtpa). And then Anglo American (45mtpa, but set to grow to 70mtpa in 2016). 

Here we are looking at more than half the market's output, consumed primarily by China.

From an iron-ore obsessed perspective, you begin to see the attraction of Fortescue. It's no iron-ore featherduster at number four among iron ore miners.

It is also near as you can get to major iron ore production without actually having to buy a diversified and deal, perhaps, with many unwanted assets, much higher pricetags and other issues.

You can build. And Glencore won't shy from this. But that is a much longer term strategy in a world of slow – and costly – mine construction, which for that matter may not get it the lower-cost assets it surely covets.

Nor quickly at a time when iron ore prices are sluggish.

On this front too, cost, Fortescue is doing well. It's advertising basic operating costs on Australian operations at under US$35/tonne this year and US$31-$32/tonne next year. It's not as good as Rio Tinto, which is near US$20/tonne and set to go a lower, or BHP under US$25/tonne, and also set to go lower, but it is pretty good. Glencore would see that too.

So if Glencore got Fortescue it would become a force to be reckoned with in iron ore mining, and meantime, it would have fewer headaches with regulators than if it was tieing up with another diversified.

Remember how when it merged with Xstrata it had to jump through all sorts of hoops, including asset sales, to make the combination happen. So Imagine the hurdles to overcome in a Glencore-Rio Tinto marriage, which would suddenly create another BHP Billiton sized company, with a marketcap in the US$150-$160 billion range.

Not impossible of course. But the simplicity of Fortescue is attractive.

Indeed it would be a Glencore dominant takeover instead of a marriage of equals or near equals. Glencore's marketcap is about US$70b. Fortescue's is just under US$10b.

But there is that thornbush which may prove impassable for Glencore and Fortescue.

Glencore likes to buy things cheap. But Fortescue is heavily owned by mining magnate Andrew Forrest who probably isn't keen on selling cheap while iron ore prices are in the dumps, at least in terms of recent history (five years or so). While Fortescue didn't respond to a request for comment on this view of things, it doesn't require going far out on a limb to think it.

On this point – the deal-making recalcitrance Forrest might show to an offer without a huge premium – Tumazos was daring enough to put some numbers in play.

"Glencore would have to offer more than a twofold premium to the current US$2.95 per share or US $9.2 billion market cap to get Fortescue to sell out."

Hence, hell freezing over.

And their would be, to speculate further, the possibility of others entering the fray if Glencore made a predatory move. Tumazos rhymed off a few possible white nights: "Gina Rinehart's Hancock Prospecting, a Chinese or Japanese entity, other local Australians or other overseas companies could surface," he said.

By the way, there's an analyst trip to Fortescue's operations coming up at the end of October. Tumazos plans to go.

This article appears courtesy of Mine Web. To read more daily international and financial mining news click here. 

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