Glencore may take another run at merging with Rio Tinto

Rio Tinto rejected a merger deal with Glencore earlier this year, but the Swiss-based miner said it reserves the right to give the deal another crack in six months.

Glencore released a statement overnight confirming it had approached Rio via an informal telephone call in July to gauge the company’s interest in a possible merger.

Rio’s board unanimously rejected the approach and as such, Glencore is not allowed to make a move again right now but said it reserves the right to in the future.

If the deal went through, it would create the biggest mining company in the world with a value of $US160 billion, knocking BHP Billiton off the top spot.

But there a few issues in the way and analysts say Glencore is going to have to make the deal sweet if it wants Rio to budge.

"Rio is in no way a distressed seller, they've got plenty of opportunities ahead of them to continue to add value for shareholders, and unless the deal is very attractive, why would you pursue it?" UBS analyst Glyn Lawcock said.

Lawcock called Glencore’s move “smart” but said to make it successful would be “an entirely different matter”.

Iron ore is Rio’s main focus and makes up around 80 per cent of its revenue and although the commodity has fallen around 40 per cent this year, it is still in a strong position with multi-billion assets.

Glencore has reportedly reached out to Rio’s largest shareholder Chinalco is recent weeks to ascertain whether there is interest there, Bloomberg reported.

The Chinese-government owned company holds a 9.8 per cent share in Rio, and Bloomberg reports it has lost about $5 billion since it acquired the stake in 2008.

Chinalco has since failed to secure a seat on Rio’s board and may be in favour of a step-change at the company.

There are differing opinions about what the next step is.

“The pressure is on Rio now,” Chris LaFemina, a mining analyst at Jefferies LLC, said.

“If Rio management does not deliver material capital returns to shareholders, as promised, or if the iron ore price sharply falls next year, Rio could become much more vulnerable.”

However others are less optimistic.

“When it comes to Glencore, you can never say never, but the reality is I don’t see the attraction from a Rio point of view,” Arnhem Investment Management managing partner Neil Boyd-Clark said.

“Glencore shareholders might like the idea because you’re upgrading asset quality, taking advantage of higher-priced scrip and improving your balance sheet … but the only reason for this to happen from a Rio Tinto perspective would be an outrageous premium, which I don’t think Glencore is in a position to offer.

What’s clear is that any deal would create a company with market-leading positions in iron ore, copper, nickel, zinc, and coal.

 It would also mean a reported $US500m-$US1bn saving if the two miners combine their Hunter Valley mining operations.

And this is where most think the real end-game lies.

If Glencore can secure Chinalco’s shares, it can push for a seat and look to merge the coal mines.

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