Why the large-scale merger craze is highlighted in the mining industry

The mining sector appears poised to strike a deal during a frantic year following market speculation about a potential tie-up between industry giants Rio Tinto and Glencore.

It comes after Bloomberg News reported on Thursday that British-Australian multinational Rio Tinto and Swiss-based Glencore are engaged in early-stage merger talks, although it is unclear whether discussions are still underway. .

Separately, Reuters reported Friday that Glencore approached Rio Tinto late last year about the possibility of combining its businesses, citing people familiar with the matter. The talks, which were said to be brief, were no longer considered active, the news agency reported.

Rio Tinto and Glencore declined to comment when contacted by CNBC.

The merger of Rio Tinto, the world’s second-largest mining company, and Glencore, one of the world’s largest coal companies, is expected to be the largest transaction in mining industry history.

Together, the two companies would have a market value of approximately $150 billion, surpassing the industry’s long-standing leadership position. BHPThis is worth about $127 billion.

Analysts were generally skeptical about the merits of the Rio Tinto-Glencore merger, pointing to limited synergies, Rio Tinto’s complex dual structure, and strategic differences over coal and corporate culture as factors making it difficult to close a deal.

“I think everyone was a little surprised,” Maxime Kogge, equity analyst at Oddo BHF, told CNBC by phone.

“Frankly, they have limited overlapping assets. Copper is the only place where there are synergies and opportunities to add assets to create a larger group,” Kogge said.

Global mining giants have been mulling the benefits of large-scale mergers to strengthen their positions in the energy transition, especially considering demand for metals such as copper that is expected to surge in the coming years.

Copper, a highly conductive metal, is expected to face a shortage because it is used to power electric vehicles, wind turbines, solar panels, energy storage systems and more.

Oddo BHF’s Kogge said it was currently “really tricky” for large mining companies to bring new projects online, citing Rio Tinto’s long-delayed and controversial Resolution copper mine in the US as an example.

“This is a very promising copper project and could be one of the largest in the world, but it has a lot of problems, so acquiring another company is a way to accelerate our expansion into copper,” Kogge said.

“To me this deal is not very attractive,” he added. “This goes against what every group has tried before.”

Last year, BHP proposed a $49 billion bid for smaller rival Anglo American, but it ultimately failed due to deal structure issues.

Some analysts, including JPMorgan, expect Anglo American to realize another unsolicited offer in 2025.

Analysts led by JPMorgan’s Dominic O’Kane said the bank’s “high confidence outlook” that 2025 will be defined by mergers and acquisitions (M&A), particularly among UK-listed miners and global copper companies, is just 2% higher than expected. He said it would bear fruit within a week. Year.

The Wall Street bank said its own analysis of the mining sector shows that the current economic and risk management environment is likely to favor M&A over organic project building.

Analysts at JPMorgan predicted that recent speculation could soon put Anglo American back in the spotlight. “Specifically the merits and feasibility of another combination proposal from BHP.”

BHP strengthened its copper and nickel portfolio by completing the acquisition of OZ Minerals in 2023 before pursuing Anglo American.

Analysts led by RBC Capital Markets’ Ben Davis said it was unclear whether talks between Rio Tinto and Glencore would lead to a simple merger or instead require the breakup of certain parts of each company.

Nonetheless, they said the M&A parlor game that began following merger talks between BHP and Anglo American will undoubtedly “begin in earnest again”.

“It still comes as a surprise that Glencore approached Chinalco, a major Rio Tinto shareholder, in July 2014 about a potential merger,” analysts at RBC Capital Markets said in a research note published Thursday.

Analysts said BHP’s move to acquire Anglo American could have sparked talks between Rio Tinto and Glencore. The former is looking to potentially gain more copper exposure, while the latter is exploring an exit strategy for its majority shareholder.

“We do not expect a direct merger to occur as we believe Rio shareholders will prefer Glencore, but there may be a transaction structure that will make both shareholders and management happy,” they added.

Analysts led by CreditSights’ Wen Li said speculation about a Rio Tinto-Glencore merger raises questions about the strategic alliance and corporate culture.

“Strategically, Rio Tinto may be interested in Glencore’s copper assets given its focus on sustainable and forward-looking metals,” CreditSights analysts wrote in a research note published Friday. “Additionally, Glencore’s marketing business provides synergies and could benefit Rio Tinto “We can expand Tinto’s reach,” he said. .

“However, Rio Tinto’s lack of interest in coal assets following recent sales suggests that any merger will require careful structuring to avoid unwanted duplication of assets,” he added.

From a cultural perspective, CreditSights analysts said Rio Tinto is known for its conservative approach and focus on stability, while Glencore has a reputation for “consistently pushing operational envelopes.”

“These cultural gaps could lead to integration and decision-making difficulties if a merger were to proceed,” CreditSights analysts said.

“If this materializes, it could have wider implications for large transactions in the metals (and) mining space, potentially putting BHP/Anglo American back into action,” they added.

— CNBC’s Ganesh Rao contributed to this report.