China may require asset sales in the Rio Tinto-Glencore merge to win them over
The proposed tie-up of Rio?Tinto with Glencore may require asset sales in order to gain regulatory approval from China, the world's largest commodity buyer. China has long-standing concerns over resource security and market consolidation. Last week, the 'two mining giants' revealed that they are in early merger talks for the second year in a row. This could create the world’s largest mining company worth more than $200 billion.
Analysts and lawyers say that the size of their sales in China will require approval from Beijing as has been done with past mining mega-deals, such as Glencore’s purchase of Xstrata for $35 billion back in 2013.
Analysts and lawyers have told us that China's antitrust regulator will be concerned by a combined entity's concentration of copper production, marketing and iron ore marketing. Beijing could also be looking at the opportunity to force asset transfers to friendly companies, said analysts and lawyers. Rio Tinto was already exploring an asset for equity swap before the Glencore discussions were made public. The goal was to reduce the 11% stake held by its largest shareholder, the state-run Aluminium Corporation of China (Chinalco). Chinalco was interested in Rio Tinto's Simandou Iron Ore Mine in Guinea and Oyu Tolgoi Copper Mine in Mongolia, according to sources.
Glyn Lawcock of Barrenjoey, Sydney, says that assets in Africa will be the most likely candidates to sell in order to close the Glencore deal, as Latin America is less accepting of Chinese investments.
He said that China would see it as an opportunity for them to get their hands on assets.
China's Commerce Ministry, its Market Regulator and Chinalco didn't respond to questions about this deal. Glencore and Rio Tinto refused to comment.
Glencore was here before. Chinese regulators forced Glencore to sell its'stake' in the Las Bambas Copper Mine in Peru to Chinese investors in 2013 for almost $6 billion as a condition for approving its acquisition of Xstrata.
The Las Bambas agreement is still seen as a successful solution, and will be a playbook regulators could draw from," said a partner of an international law firm based in China.
Glencore agreed to supply Chinese customers with minimum quantities of copper concentrator at specific prices for a period of just over seven-years, as Beijing feared that the combined group would be able to exert too much control over the copper markets.
Copper is in high demand due to its role in artificial intelligence and the green transformation. As well as rival miners BHP and Rio Tinto, Glencore and Rio Tinto are focusing on copper.
Teck Resources CEO Jonathan Price stated in September that Chinese regulators would also examine a proposed $53 billion copper focused merger between Anglo American Resources and Teck Resources.
POLITICAL CHALLENGES
The metal's increasing importance has made it a political issue. The White?House referred to China's dominance of the supply chain as a threat to national safety. It remains to be seen what reaction it will have to sales of major mineral assets to Chinese interests.
According to Lawcock analysts at Barclays, a combined Rio Tinto and Glencore would sell about 17% global copper supply. However, Barclays analysts say that the share of mine production only amounts to 7.5%, which is unlikely to cause major antitrust concerns.
Politics has ruined?deals in the past. U.S. Chipmaker Qualcomm walked out of a $44 Billion deal in 2018 to purchase NXP Semiconductors after failing to receive approval from Chinese regulators. This was seen as a reaction to the trade conflict then going on between Washington and Beijing. Nvidia also failed to acquire Arm Ltd. after failing to convince Chinese regulators. Beijing has, however,?approved previous resource deals as part of an agreement. Beijing demanded major changes in a tie-up involving Japan's Marubeni with U.S. grain dealer Gavilon a year before the Las Bambas sale, citing concerns about food security.
Mark Kelly, CEO at advisory firm MKI Global Partners wrote that the deal would be long and complicated from a regulatory perspective. "Chinalco's presence on Rio's shareholders register complicates things further." Reporting by Lewis Jackson in Beijing, Amy Lv and Melanie Burton in Melbourne. Additional reporting by Anousha Saoui and Clara Denina from London. Editing by Veronica Brown and Tony Munroe.
(source: Reuters)
