Why some investors are wary of any Glencore deal

On the face of it, somewhat straight-laced Rio and aggressive deal-maker Glencore would seem unlikely dance partners, but dig deeper and there is much to be gained.

An autonomous haul truck dumps rock in the mine pit of Rio Tinto’s Gudai-Darri iron ore mine in the Pilbara. Picture: Bloomberg

“I never want to see one of my companies sitting across the table from Glencore.”

That’s how one big investor reacted to merger talks between Rio Tinto and Glencore which may come to nothing but have fired up speculation about a deal in the ballpark of $260bn.

What worried him was Glencore’s reputation as being the smartest guy in the room and the perception it has more to gain from any tie-up than Rio.

On the face of it, Rio and Glencore do seem unlikely dance partners.

“Rio’s a very straight up and down basically British company and on the other hand Glencore may be the smartest guy in the room but with business practices that have been brought into question,” is how one analyst summed it up.

Glencore has a reputation as an aggressive deal-maker and is fresh from last year’s $US7bn acquisition of Canadian coal mines from Teck Resources.

Rio became the first of the mining majors to exit coal years ago and has largely shied away from big M & A since the $US38bn acquisition of Alcan in the 2000s.

Rio has been fighting to restore its reputation since destroying 46,000-year-old rock shelters at Juukan Gorge in WA as part of an iron ore mine expansion in 2020.

Meanwhile, Glencore has had to pay fines and penalties of more than $US1.7bn over various bribery and corruption scandals.

Glencore chief executive Gary Nagle. Picture: Bloomberg

The common ground appears to be copper with a presumption other complications can be worked out. BHP’s copper-driven tilt at Anglo American was complicated by the need for Anglo to spin off its Johannesburg-listed platinum and the Kumba iron ore businesses.

Glencore is always eyeing deals.

The Gary Nagle-led company may have seen Kumba as an opportunity to realise a long-held ambition to move into iron ore mining at the right price in South Africa, where it has a strong presence.

Although the Swiss multinational made a merger approach in 2014 that involved Rio’s big Chinese shareholder, Chinalco, the latest talks caught many by surprise.

Some of the attraction for Rio would be getting its hands on the prized Collahuasi (Chile) and Antamina (Peru) copper mines.

Glencore’s copper operations in the Democratic Republic of the Congo would be a problem given Rio has avoided doing business in the conflict-prone central African nation.

A deal would deliver on Rio’s goal of reducing its reliance on Pilbara iron ore for earnings as the Chinese super cycle that provided free cash flow and dividends comes to an end.

But even if Rio did want to press forward, it might have trouble convincing shareholders about the wisdom of a deal.

Originally published as Why some investors are wary of any Glencore deal