Glencore Bids on Rio Tinto Coal Assets
The sale is a mild positive for Rio Tinto and, potentially, a mild negative for Glencore.
Our fair value estimates for no-moat-rated Glencore (GLEN) and Rio Tinto are unchanged with Glencore’s proposal to acquire Rio Tinto’s interest in Coal and Allied. Glencore proposes to buy Rio Tinto’s 67.6% interest in the Hunter Valley Operations, 80% of Mount Thorley and 55.6% of Warkworth for USD 2.55 billion, USD 100 million more than Yancoal’s existing proposal. Glencore will also spend a further USD 920 million to acquire Mitsubishi’s 32.4% share of the Hunter Valley Operations and its 28.9% interest in Warkworth. If Rio Tinto deems the offer superior to Yancoal’s, Yancoal has the option to match it. Altogether, the deal involves approximately 23 million tonnes per year of thermal and semisoft coking coal mining capacity, of which Rio Tinto’s share is about 17 million tonnes a year.
The sale of coal assets is a mild positive for Rio Tinto and, potentially, a mild negative for Glencore. Rio Tinto shareholders should vote in favour of the sale, with a general meeting set for June 27. From a strategic viewpoint, Glencore, with adjacent operations, is a natural owner of Rio’s Hunter Valley coal mines and is well placed to extract cost savings. However, we think Glencore is overpaying, given current elevated coal prices that are unlikely to last. Even assuming an approximate 20% reduction in unit costs under Glencore’s ownership, and production continuing for an extra 15 years beyond the 24-year reserve life, the deal is value-destructive, though not materially so. For Rio Tinto, it sheds some of its lower-returning assets, with potential longer-term risk around the ongoing social licence.
We retain our no-moat ratings for Rio Tinto and Glencore. Glencore’s industrial assets, which account for about three fourths of group operating profit, lack cost advantage. Rio Tinto’s iron ore division has low operating costs, but the significant investments made through the commodities boom mean the overall group is unlikely to earn its cost of capital in the longer term.
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Mathew Hodge does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.