Analyst: Glasenberg could grab Rio by way of China

Not only did he get Xstrata without spending any actual cash (apart from the big payday for advisers and lawyers) he also snagged the top job of a new kind of mine to market behemoth.

It’s a business model now being furiously copied by Hong Kong’s Noble Group who’ve invested heavily in Mick Davis’ Xstrata 2 and Anglo-American which is setting up an internal trading arm. Dutch trading giant Trafigura is upping its investment in mines and Mercuria, created out of JP Morgan’s commodities business is making a big move into metals.

There is no shortage of possible takeover targets for Glencore with Anglo the name trotted out regularly.

But Glasenberg and Glencore with market value of $70 billion and an outperforming share price want bigger fish to fry.

Oyu Tolgoi: Vast copper resource in China’s backyard

A merger between Glencore and Rio Tinto would combine the world’s second and fourth largest miner and knock BHP Billiton off its throne. And the estimated $160 billion deal would add chunks to Glasenberg’s already gigantic bank account.

The Sydney Morning Herald quotes from a new interview with Bernstein’s London-based senior analyst Paul Gait, who revealed Glencore had made an approach a month before Rio publicly confirmed a meeting had taken place.

Gait puts forth the idea that Glasenberg “will waste little time” and his second attempt will come as soon as April – the earliest date allowed under British securities law:

“[The attempt] will involve an attack on Sam Walsh over dwindling hopes of substantial capital returns, as he tries to win the support of Rio’s biggest shareholder, Chinese giant Chinalco, by promising to sell key assets Oyu Tolgoi and Simandou.

“Is he coming back? In my view, yes,” Mr Gait said from London.

Mr Gait told The Australian Financial Review  Glencore’s shock announcement that it would shut down its Australian coal operations for three weeks was a strong indication Mr Glasenberg would try again for Rio.

He said Mr Glasenberg would be able to point to Glencore’s willingness to pull tonnes out of an oversupplied market in a direct challenge to Rio over its expansion in iron ore.

“To me this coal announcement is clearly Ivan playing games,” Mr Gait said. “It had the language of someone trying to make his credentials on managing the market as a CEO. It’s a shot across the bows to Rio.”

Rio Tinto CEO Sam Walsh

Like the Xstrata takeover which started cozy enough but towards the end of the more than 18 month process had definitely veered into hostile territory, Glasenberg would initially pitch the deal as an all-share, zero premium “merger of equals” according to Gait. And Glasenberg “wouldn’t go higher than a 10% 20% premium”.

Chinalco owns nearly 10% of Rio and Gait believes Glasenberg could win over the state-owned aluminum giant by handing over Rio’s stakes in the greenfield Simandou iron ore project in Guinea, West Africa and the embattled Oyu Tolgoi copper-gold project in Mongolia.

Simandou is a $20 billion, 95 million tonne a year project which won’t come on stream for at least a decade while Oyu Tolgoi’s $6 billion move underground, where 80% of the resource lies, is stuck in political and development hell.

For a GlenTinto they would present years of management and spending headaches, but for a Chinese enterprise playing the long game with the full backing of a government, they would be prized assets.

Simandou: Mountains of easy to mine high-grade ore

Glasenberg orchestrated a similar deal to appease the Chinese during the Xstrata takeover offering to give up its flagship Las Bambas project to ally fears over market dominance.

Expansion by Rio and others is taking most of the blame for the nearly 50% fall in the price of iron ore – responsible for the bulk of Rio’s profits – this year.

Gait said Glasenberg’s strategy would focus on Walsh’s management of Rio’s iron ore business which started when Walsh was the head of that division:

A lot of this [merger attempt] is, in a lot of ways, an ad hominem attack on the management of Rio Tinto, designed essentially to transfer the assets.

“In an all-share deal, which is what this is going to be, all you’re really discussing is who you want to manage these assets. That’s it.”

Gait’s pronouncement follows that of Ian Hannam, the once and future king of mining M&A, who earlier this week told a group of 20 hedge funds representatives that a merger is all but inevitable:

“If not today, this deal will happen sometime in the near future.”