What will Ivan buy next? Take 2

The most intriguing idea put forward by Wall Street brokerage Bernstein Research quoted by FT is a merger between Glencore and Rio Tinto, which would combine the world’s second and fourth largest miner and knock BHP Billiton off its throne.

“All that [is] required is to hand the world’s best mining assets to the world’s best management,” Bernstein analyst Paul Gait argued.

The rationale is that such a tie-up would create a truly diversified company with unparalleled investment attraction.

SEE ALSO: What will Ivan buy next? Take 1

Rio Tinto with a market cap just shy of $100 billion is dependent on iron ore for 88% of its profits.

Glencore is a bit player in iron ore, but feeding Rio’s 300 million tonnes per year into Glencore’s trading operations would create a dominant force in what is the globe’s second biggest commodity trade after crude oil.

Not everyone thinks the creation of a GlenTinto is more than a thought bubble or even a medium-term prospect and Australia’s Financial Review spoke to a couple of fund managers who poked holes in the argument:

Pengana Capital fund manager Tim Schroeders said Rio is no doubt on Mr Glasenberg’s wish list but Swiss giant Glencore was unlikely to make a play.

“Where the two companies currently sit market cap wise, I doubt whether Glencore would be that aggressive,” Melbourne-based Mr Schroeders said.

Others were more blunt about the prospects of a merger ever happening:

“Let’s face it, they (Glencore) had to sell Las Bambas to do Xstrata (merger), what would they have to sell to do Rio?” one fund manager said.

“They couldn’t even pull off the nickel merger with Vale in Canada.”

Arnhem Investment Management’s Neil Boyd-Clark told the Financial Review it was important to note Glencore’s assets were of a lesser quality than Rio’s:

“Rio has some outstanding long-life, low-costs assets, so in an environment where commodity prices are coming under pressure it is likely to be the ­Glencores of the world that are struggling a bit more.”