Rio Tinto is on Glencore chief Ivan Glasenberg’s wish list, but a takeover attempt at current prices would blindside the market, fund managers say.
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Mr Glasenberg has an impressive history of buying assets at the bottom of the market and riding the cycle up.
He has been quick to talk down iron ore this year, amid dramatic price falls and a huge increase in production by the majors. Speculation that Rio could be on acquisition-hungry Glencore’s radar has been bouncing around in investment circles for the past few weeks but some funds see it more as a thought bubble than a short or event medium-term prospect.
Pengana Capital fund manager Tim Schroeders said Rio is no doubt on Mr Glasenberg’s wish list but Swiss giant Glencore was unlikely to make a play.
“Where the two companies currently sit market cap wise, I doubt whether Glencore would be that aggressive,” Melbourne-based Mr Schroeders said.
Rio Tinto has a market value of $109.2 billion while Glencore is worth £47.1 billion ($84.8 billion) .
But Mr Schroeders pointed to the merger talks between Glencore, Xstrata and Vale in the wake of the financial crisis, saying “from an intention perspective Glencore would love to have the quality asset base of any of the top-three iron ore players”.
“They would love to be in iron ore longer term without spending the significant capital needed for a greenfields development” he says.
Resources fund managers say there would be “massive regulatory issues” around a Rio-Glencore tie-up.
“Let’s face it, they (Glencore) had to sell Las Bambas to do Xstrata (merger), what would they have to sell to do Rio?” one fund manager said.
“They couldn’t even pull off the nickel merger with Vale in Canada.”
Rio was named in a report this week by Wall Street brokerage Bernstein Research as a logical deal for Glencore, which is one of the few big resources companies contemplating acquisitions. Senior analyst Paul Gait wrote that the key problems in the mining industry, as identified by Glencore, included “too much iron ore” and Rio Tinto is too cheap.
“But these are all issues that are eminently fixable,” he wrote. “All that [is] required is to hand the world’s best mining assets to the world’s best management – and Glencore are making a pretty strong case that they, more than anyone else, understand what it will take to drive value in today’s market.”
Mr Schroeders says the internal view at Glencore is that it has superior management to Rio and BHP Billiton.
“The argument within Glencore is that management have had to work harder because of (the company’s) lesser-quality assets and their internal belief is that they do it better than BHP and Rio because they are not blessed with wonderful assets.”
Arnhem Investment Management’s Neil Boyd-Clark said it was important to note Glencore’s assets were of a lesser quality than Rio’s.
“Rio has some outstanding long-life, low-costs assets, so in an environment where commodity prices are coming under pressure it is likely to be the Glencores of the world that are struggling a bit more.”
Mr Glasenberg has pulled off a string of acquisitions in the past three years, including miner Xstrata and African oil and gas explorer Caracal.
He makes no secret of the fact the miner and commodities trader will pursue deals at a time when most of his rivals are divesting and returning cash to shareholders.
London-based Anglo American had been widely speculated to be at the top of Mr Glasenberg’s list of takeover targets. However, the Bernstein report questions the “validity of this belief”.