We can analyse until the cows come home, but the fact is this merger makes complete sense. The consensus appears to be that Glencore has more to gain and with iron ore currently trading at rock bottom levels due to oversupply, the timing of Glencore’s approach is blatantly opportunistic. Nonsense.
Rio Tinto is the least diversified of all the big miners. Iron ore provides about 88% of its earnings. This is not a healthy state of affairs. The company will always be subject to what is a highly volatile market driven by constantly changing economic conditions. Leading shareholders in Rio may have dismissed Glencore’s approach as a predatory attempt to take advantage of the surplus of iron ore in the market and keep banging on about Rio’s “fantastic assets”. What a pathetic response: There is no such thing as a “fantastic asset” that is plunging in value.
Of course, Ivan Glasenberg is a smart cookie. After all, nobody understands the commodity market better than he does and, of course, he will try and strike the best deal possible for himself and his shareholders. Surely, he cannot be blamed for that? Pinkers would call it prudent management. Rio Tinto’s shareholders should ditch their misplaced pride. The truth is that Glencore offers the perfect escape route: Instant diversification.
One rather major stumbling block, however, remains: China. The Chinese commerce ministry probably wouldn’t be too keen on this deal with the country importing about two-thirds of the world’s internationally traded iron ore and hence making it not only heavily dependent on the newly formed mining giant but also further weaken the hand of China’s steelmakers.
The opening shot has been fired and one thing is for sure: Despite being barred under UK Takeover Panel rules from making another approach for six months, Mr Glasenberg will not give up on this eminently sensible idea. And nobody in their right mind would question that he will get his way. He always does.
Further reading: King & Core!