Copper boom powers talks on Glencore-Rio Tinto deal

At Glencore’s capital markets day in early December, CEO Gary Nagle made a bold pitch, claiming the FTSE-listed mining company had the “right portfolio” to become the “world’s biggest copper producer by 2035”.

Never mind that Glencore is currently in sixth place and has traditionally focused on coal and iron ore, Nagle’s peacocking appears to have caught the interest of the only audience that really mattered.

Last week, it was revealed that Glencore is in “preliminary” talks with Rio Tinto, its larger rival, over a potential tie-up. If a deal goes ahead, Nagle’s dream for 2035 will no doubt be realised – in the form of a mining behemoth with a combined enterprise value of $260bn, occupying the third spot on the FTSE behind AstraZeneca and HSBC.

Mining M&A is a hit-and-miss business. But the conditions for “Glentinto” or “Rio Core” have rarely looked so favourable. Copper prices have soared above $13,300 a metric tonne last week over fears there is an undersupply. “Resource imperialism” is back in vogue as a result of the actions of the White House, and some analysts are talking about a commodity super-cycle.

Copper will be the wiring of any merger. Daniel Yergin at S&P Global projects a 10m metric tonne shortfall by 2040 unless more is done to meet demand from four key areas. They comprise: core demand from wiring appliances and computers; the energy transition and EVs, which require 2.9 times more copper than a conventional car; demand for defence products, expected to triple by 2040; and, most recently, the ballooning use of copper to electrify AI data centres.

Glencore and Rio both have portfolios to meet that challenge. The question is whether the mantra of “bigger is better” will actually deliver value. Rio’s new chief executive, Simon Trott, is reportedly more inclined than his predecessor, Jakob Stausholm, for an all-stock deal. He faces a challenge to boost copper growth, especially while progress on Rio’s huge Resolution mine in Arizona remains mired in the US legal system.

“Takeover talks between Rio Tinto and Glencore make sense from an economy of scale perspective, but the companies are worlds apart culturally,” said Dan Coatsworth at AJ Bell, contrasting Rio’s “methodical” approach versus Glencore’s “guns-a-blazing reputation”.

Another hurdle is Glencore’s coal portfolio and trading arm, and whether Rio’s shareholders will back a plan to acquire the whole before selling parts off, instead of imposing rules around a deal or pushing for a spin-off. “Just how Glencore’s coal and trading arms fit in with Rio’s business model, and push for improved sustainability credentials, are key questions to answer,” said Derren Nathan at Hargreaves Lansdown.

It’s also unknown whether BHP, another mining major, will gatecrash any deal. Having been rebuffed twice in its attempt to buy Anglo American, the executive team at BHP will be watching closely for any weak bid from Rio. A subsequent tie-up between Anglo American and Canada’s Teck Resources has put the boosters under consolidation in the sector.

Trott, who has been in post since August, will want to move cautiously given Rio’s acquisition of aluminium producer Alcan in 2007 was regarded as a bust.

Rio has until 5pm on 5 February to decide whether to make a firm offer for Glencore.