Glencore CEO Gary Nagle believes the recent surge in coal prices could bring Rio Tinto back to the negotiating table. That’s according to three investors who met with executives from both companies this week in Australia. Earlier this year, the parties discussed the possibility of creating a major mining giant worth $240 billion. Glencore’s trading business and copper assets were expected to combine with Rio Tinto’s operational expertise to meet growing global demand for copper.
However, in February the negotiations stalled. The companies were unable to agree on a cost estimate. Under British rules, Rio Tinto cannot resume discussions for six months. Despite this, Nagle is optimistic and believes in the possibility of a new round of negotiations. Investors who wish to remain anonymous confirm that the topic is not closed.
The issue comes down to asset valuation. According to Glencore, Rio Tinto calculated the cost based on spot prices of key commodities as of January 7, the day the negotiations were leaked to the press. A lot has changed since then. Coal prices soared by 26%, and Glencore’s shares rose by the same amount. Rio Tinto, on the contrary, added only 9% due to falling iron ore prices. As a result, Glencore’s share in the potential merger increased from 31.5% to 35%, approaching the desired 40% that the company originally requested.
Nagle is convinced that iron ore division Rio Tinto will continue to lose ground as the market becomes saturated. This, in turn, will further shift the balance of power in Glencore’s favor and make the deal more realistic.
In addition to coal and iron ore, the parties disagreed on the valuation of Glencore’s copper assets in Argentina, which are not yet being developed. The short-term rise in coal prices is not enough to change Rio Tinto’s position in the remaining months, according to one investor.
So while Glencore’s market position has improved, it will take more than just favorable pricing conditions to resume negotiations. Governance issues, corruption risks and deep integration of assets remain on the negotiating table.
Source: Reuters
Image: Glencore
