Glencore and Rio's smartest move: merge then split

By Karen Kwok

Anglo American’s AAL merger with Teck Resources TECK has sparked a cottage industry of speculation about other M&A gambits. One of the more promising ideas is a combination between Glencore GLEN and Rio Tinto RIO, building on talks last year that didn't ultimately go anywhere. What could really grease the wheels, though, is a two-step process: a tie-up between the $54 billion Swiss miner and its $112 billion rival, followed by a breakup that splits the enlarged entity into energy transition metals and carbon-heavy businesses.

The main obstacle to a Glencore deal with Rio or anyone else is valuation. Weak coal prices have dragged on earnings, and net debt has climbed to $14.5 billion, well above the Swiss miner's $10 billion target. With less cash for buybacks and dividends, the shares are down 20% in the past year, the worst among major diversified miners.

The Anglo-Teck deal, though, could shift the balance. The tie-up is forecast to deliver $1.4 billion of extra EBITDA by 2030, largely by boosting production at the Collahuasi copper mine, where Glencore owns a 44% stake. That gives boss Gary Nagle a piece of the upside, and potentially makes Glencore more palatable to Rio’s new Chief Executive Simon Trott, who is rejigging a new strategy to reduce his company's historic reliance on iron ore.

Nagle has already done some legwork. He recently moved Glencore’s coal and South African ferroalloy operations into a standalone Australian subsidiary, which holds $2.9 billion of franking credits. These, along with the Chilean value Glencore could secure simply by doing nothing, could persuade Trott to offer a bigger chunk of the combined company than the 33% implied by the combination of the duo's current market values.

Combining Glencore’s coal and Rio’s iron ore operations would create a carbon-heavy unit generating $17 billion of EBITDA in 2026, according to Visible Alpha. At around five times EBITDA, in line with Australian-listed peers like Whitehaven Coal WHC and New Hope NHC, the unit could be worth $90 billion.

The remaining businesses, containing a mix of copper, aluminium, lithium and zinc, would be more appealing to investors focused on clean energy metals. At $18 billion of projected 2026 EBITDA and a multiple around 9 times - in line with Southern Copper SCCO, Antofagasta ANTO and Freeport-McMoRan FCX, the group would be worth $167 billion. Netting out $30 billion of combined debt, the total equity value hits $227 billion. That’s a 37% uplift to the two miners’ current market capitalisations. And it doesn't even factor in Glencore’s trading arm, expected to add $3.5 billion of EBITDA in 2026.

Combining one of the world's biggest miners with one of its biggest miner-traders would come with all manner of cultural and practical challenges. But the numbers behind a Rio-Glencore tie-up followed by a split look compelling. It would be strange if Trott hadn't noticed.

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CONTEXT NEWS

Shares of Rio Tinto and Glencore have been respectively flat and off 7% since January 16, the day before Bloomberg reported that Rio and Glencore had held talks about a combination. Those discussions, which took place in 2024, were as of January described as no longer active.