Glasenberg’s Designs on Rio Tinto Hinge on China Inc.’s Approval

Oct. 7 (Bloomberg) — The road to realizing Ivan Glasenberg’s ambitions to create the world’s biggest mining company by merging Glencore Plc with Rio Tinto Group may run through Beijing.

With London-based Rio rejecting Glasenberg’s July approach, Glencore went directly to Rio’s biggest shareholder — state- owned Aluminum Corp. of China, widely known as Chinalco. While the company’s 9.8 percent stake is important in determining Rio’s future, the view of its ultimate owner, China’s government, is even more crucial.

China, the world’s biggest consumer of everything from iron ore to coal, has already flexed its muscle in dealmaking, as Glencore has witnessed firsthand. It has become a major player in influencing the outcomes of mergers through both its investments and its market power.

Glencore was required by China to sell its $5.85 billion Las Bambas copper mine as a condition of approving the company’s takeover of Xstrata Ltd. Chinalco’s 2008 raid on Rio Tinto was also pivotal in thwarting a takeover approach from BHP Billiton Ltd., the world’s biggest mining company.

“They’ve tried to go through the front door with Rio, and they’ve been knocked back,” Brenton Saunders, a Sydney-based analyst with BT Investment Management Ltd., which manages A$65 billion ($57 billion) and holds Rio shares, said by phone. “Now they’re trying to get on side with the major shareholders. They would have learned hard lessons through the Xstrata deal.”

Regulatory Obstacles

Glencore views Chinalco, which has lost about $5 billion on its stake in Rio, as potentially supportive of a change in control after the Chinese company failed to secure a board seat at Rio and has seen little progress on a joint iron-ore project in Guinea, according to a person familiar with the matter. Glencore is also gauging the views of other Rio shareholders, and studying the tactical, financial, and regulatory obstacles to the deal as it considers its next steps, according to people familiar with the matter.

Yuan Li, a Beijing-based spokesman at Chinalco, didn’t answer calls to his office line and mobile phone seeking comment today. Today’s the last day of China’s seven-day National Day holiday.

China Inc.

“It is very savvy of Glencore to approach the Chinese state-owned enterprise and maybe offer them something that Rio was unable or unwilling to deliver,” Evan Lucas, a markets strategist in Melbourne at IG Ltd., said by phone. “My major issue is what would China Inc. say to Rio’s iron ore assets going to a market trader who already has massive positions in coal, copper, zinc, nickel and other commodities?”

Chinalco paid 6,000 pence a share in 2008 for its Rio stake, roughly double the company’s current share price. The Chinese company isn’t eager to sell, and would demand a significant premium in order to sign off on a deal, one of the people said.

“The price that Glencore would have to get to I think is going to be a lot higher than what it’s currently working on,” Lucas said.

China’s competition regulator focused its review of the Xstrata takeover on the new company’s influence in the copper- concentrate market, according to Glasenberg, Glencore’s chief executive officer. With Glencore ranking as the world’s third- biggest producer of mined copper, adding the copper assets of Rio, which holds a stake in Chile’s Escondida mine, may prompt similar concerns.

A combined Glencore and Rio Tinto would also be even more dominant in coal, China’s main fuel.

Iron Ore

A merger would catapult the group past BHP to become the largest mining group, combining Glencore’s vast commodity- trading operations with Rio’s portfolio of iron-ore projects that feed demand for construction materials in China.

Rio hasn’t had further contact with Glencore over a potential deal since the company’s approach. Glencore won’t be interested in meeting investor demand for a premium and is focused on doing smaller deals, Bank of America Corp. wrote in a note today.

Another obstacle for Glasenberg may be the fallout from China’s corruption crackdown, which has touched Chinalco, the bank said. “It’s very unlikely that this high profile a deal could get done at the company right now,” it said. Francis De Rosa, a Glencore spokesman in Sydney, declined to comment.

Trained Accountant

For Glasenberg, 57, the time may be right to move toward a deal because of persistent weakness in the market for iron ore, which accounts for almost half of Rio’s revenue and is weighing on its share price. The cost of the steelmaking ingredient has plunged this year due to a glut from giant new mining projects and relatively sluggish economic performance in China, the world’s biggest single market.

Through a series of deals over the last decade, South African-born Glasenberg — an accountant by training — has transformed Glencore from a little-known commodity-trading house into a diversified global mining group. His largest deal so far, the $29 billion acquisition of Xstrata in 2012, turned Glencore into the world’s fourth-largest mining group at the time. With significant operations in copper, nickel and coal, the only major commodity it doesn’t figure prominently in is iron ore, which Rio offers in huge quantities.

“They don’t have significant exposure to iron ore,” Saunders of BT Investment said. “While it isn’t their favorite commodity, they could put their trading skill set to work and get a very big market share very quickly and get the best assets on the planet.”

–With assistance from Zijing Wu in Hong Kong, Matthew Campbell and Jesse Riseborough in London and Andrew Hobbs in Sydney.

To contact the reporters on this story: James Paton in Sydney at [e-mail]; Brett Foley in Melbourne at [e-mail] To contact the editors responsible for this story: Andrew Hobbs at [e-mail]; Jason Rogers at [e-mail]; Philip Lagerkranser at [e-mail] Keith Gosman