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Glencore's last minute gambit gives Rio cash-or-China dilemma

Jun 24 2017 10:44
Thomas Biesheuvel and Mark Burton, Bloomberg
Glencore CEO Ivan Glasenberg.

Glencore CEO Ivan Glasenberg. (File, AFP) (AFP/MIKE CLARKE)

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London - Glencore's last-minute bid for Australian coal mines leaves Rio Tinto Group with a dilemma to mull over the weekend: accept less money or risk upsetting its biggest customer.

On Friday afternoon in London, Glencore [JSE:] raised its bid for the mines, offering at least $225m more than a proposal from China’s Yanzhou Coal Mining, which Rio has already backed. Glencore added new incentives, promising a hefty deposit and compensation for regulatory delays, and countered concerns about funding.

“Glencore certainly aren’t making life easy for Rio,” said Paul Gait, an analyst at Sanford C. Bernstein in London. With the added terms, “that clearly makes it a lot more difficult for Rio to turn down.”

The move heightens pressure on Rio Tinto as Glencore makes a determined push to win the assets, situated near its own operations in the Hunter Valley. Its pursuit of Rio’s assets dates to 2014, when the mining giants considered merging their coal businesses. While Glencore is the biggest coal miner in the region, the pits face depletion, making the deal an attractive prospect.

Rio plans to review Glencore’s updated bid and provide an update before the shareholder meeting on Tuesday. If it decides the offer is superior, it will postpone the meeting and give Yancoal time to respond, the company said in statement.

Glencore, run by former coal trader Ivan Glasenberg, has consistently said the fuel is essential to the needs of the developing world in the long term, thanks to growing demand in Asia.

“Economically, the board will have no real rationale to reject this bid,” said Hunter Hillcoat, an analyst at Investec in London. Earlier this week, he said that Rio is very close to the Chinese and probably don’t want to risk that relationship.

Rio has sought to improve relations with China since 2010, when its head of iron ore in China, Stern Hu, was jailed for 10 years for espionage and taking bribes. In one sign of a closer relationship, Rio signed an agreement this month with state-run China Minmetals Corp. to discuss working together on exploration projects.

In the new bid, Glencore promised to pay a $225m deposit, which would be forfeited if the deal doesn’t win regulatory approval. Glencore would compensate Rio if the deal is delayed, either by paying $25m a month or cash flow from the mines after September.

Glencore has antitrust approval from Japan and said any China antitrust concerns aren’t justified. Coal & Allied shipments into China only account for less than 1% of regular imports, according to the mining company. Yancoal already has approval from regulators in China and Australia.

The prize for Glencore is a potential $1bn of synergies through combining mine output and product marketing, RBC Capital Markets analysts including Paul Hissey wrote in a note dated June 20.

If it wins, Glencore plans to raise at least $1.5bn by selling or monetizing assets. The company would prioritize coal and could sell a stake of as much as 50% in the mines it’s buying.

Rio has until Monday evening to accept the latest offer, Glencore said. Shareholders are expected to vote on the deal next week.

“Glencore has adequately addressed Rio’s concerns around the perceived shortcomings of its original bid, which places the ball firmly back in Yancoal’s court,” said analysts at Macquarie Group  in a note to investors.

glencore  |  rio tinto  |  mining


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