Would a combined Rio Tinto-Glencore mining giant be a good idea for investors?

Last week, reporting from Bloomberg and the Financial Times revealed that Rio Tinto, the world's second-largest metals and mining corporation, held conversations with Swiss-domiciled rival Glencore about merging. 

The report made it clear that while the two firms held early stage talks in October, a deal had not been reached. Follow-up reporting from Reuters suggests that these talks have now ended. Neither company, surprise surprise, was interested in talking to the media based on this news.

Rio Tinto vs Glencore share prices, over the last five years

But this news did get us thinking. It's not the first time this idea has been floated. 11 years ago, Glencore approached Rio Tinto with a takeover offer, which was turned down by the latter on the grounds that it wouldn't lead to sufficient shareholder value accretion. In addition, the mining industry (and in particular, Rio Tinto) has had a chequered history with making acquisitions. 

On the positive side, their 2000 acquisition of North Limited helped assert the company's dominance in iron ore mining while its 2022 acquisition of Turquoise Hill has helped its copper ambitions significantly. 

But, on the flip side, its 2007 acquisition of Alcan is often considered one of the worst of its kind in the industry's history and its 2011 acquisition of Riversdale Mining resulted in a $3 billion write down.

So would this merger, no matter how hypothetical, be a really good idea or a really bad one? To find out, we've asked Daniel Sullivan, Janus Henderson Investors' Head of Global Natural Resources. Daniel has been analysing this part of the financial markets for more than 35 years - so if there's anyone who can talk to the history of all this, it's Daniel.

What does this reporting suggest?

"If Rio Tinto seriously considered this, they must be concerned about iron ore downside," says Sullivan.

"They spent 10 years leaving coal and becoming green. Subsequent to these mid-2024 discussions, they have bought Arcadium Lithium (ASX: LTM)," he adds.

As for Glencore, Sullivan notes that the stock's current valuation along with its maturity as a miner may have been the catalyst for these talks. They may have also been inspired by BHP's multiple moves last year to try to acquire copper mining giant Anglo American.

"Glencore have been a seller as the company has matured and the founders are growing out of the company. They have struggled at times to get a multiple uplift (the market doesn’t like the coal, or the trading) but it is in-line with peers at the moment so that may have motivated them to try and get a combination," Sullivan notes.

"Glencore just recently bought Teck Resources (NYSE: TECK) and had hoped to buy the whole company and get the copper assets. Rio would get put into a number of countries that they don’t have much affinity for," he adds.

Would a combined Rio-Glencore entity be a good idea?

Sullivan is in the "yes" camp on this one.

"They all need to get much bigger. There aren’t many western world companies of significance left to work with. Global generalist investors probably come to the sector for cyclical or inflation protection reasons, and will see the largest and most liquid companies to invest in. This asset and commodity diversification lowers their risk," Sullivan argues.

And to get ahead of any questions or issues you, our highly informed audience, may raise, Sullivan argues that Alcan was a one-time bad idea.

"Rio Tinto's had its fair share of bad acquisitions. But [Alcan] was a long time ago and it was at an exceptional time, both the upside ‘super-cycle’ and the downside GFC collapse," he says.

What are the main pros and cons of such a deal?

• Pros: Better diversification, less cyclical risk to the price of iron ore (for Rio Tinto) or thermal coal (in the case of Glencore) markets, and market rating (low P/E for single high asset exposure)
• Cons: There are so few companies left to merge with. Therefore, a first mover will have advantages gaining size and being in a better position for the next merger after that. For example, if Rio did merge with Glencore, they would be bigger than BHP and easily able to consider buying any of the other big four targets (Freeport McMoran, Vale, Anglo American or Fortescue).

Here's some extra comment from Sullivan on the targets that a huge BHP and an even more huge Rio Tinto could go after if they wanted to:

"In the list of what is available, BHP (ASX: BHP) and Rio Tinto (ASX: RIO) could buy anything. The biggest is Freeport McMoran (NYSE: FCX). Both have had association, and consideration, and despite many difficulties, I think Freeport is the transaction that will allow one of them to become an American primary-listed company."

The US has the largest and most liquid market with the most investors to own local companies. I think this is more likely for BHP. They wouldn’t even get a page 1 feature in the S&P 500 market cap ranks at the moment given BHP would be stock number 84 (between Boeing and Deere.) Hypothetically, if BHP and Rio were bold enough to try and merge, they would be #33 in the S&P 500. If they used Freeport as the merger vehicle, they would be #28 with a market capitalisation of US$288 billion, alongside Chevron.

The P/E ratios of Glencore, BHP, and Rio Tinto

The next steps to creating the minerals champion would be to work down the list over time and try and add Anglo, Vale, Teck, and Ivanhoe. With Freeport McMoran having a market capitalisation of US$58 billion and Zijin Mining having a market capitalisation of US$57 billion, other players will be growing fast in the developing world. I also expect the Magnificent Seven, Berkshire Hathaway, or non-Western companies to attempt to buy most of these companies in the next few years.

Would Daniel consider buying shares in a combined Rio-Glencore entity?

"Yes because I think it would attract more investors because it will be bigger, more liquid, more able to shed smaller non-core assets, and in a better position for the next round of mergers," he says.