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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

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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About the Author

Mathew Hodge

Director of Equity Research, Australia
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Mathew Hodge is director of equity research, Australia and New Zealand, for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc.

Hodge joined Morningstar equity research via the acquisition of Aspect Huntley and was previously a director on the team from 2019. He has approximately 20 years of experience, primarily covering the metals and mining sector. In addition, Hodge has sat on Morningstar's economic moat committee since 2014. More recently, he led the refresh of our capital allocation methodology in 2020 and chairs the subsequently formed capital allocation committee. In 2001, Hodge joined Aspect Huntley, which was acquired by Morningstar in 2006.

Hodge studied mining engineering at the University of New South Wales and previously worked in mining, principally as a mining engineer in underground coal. He holds the Chartered Financial Analyst® designation.

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