China may require asset sales in the Rio Tinto-Glencore merge to win them over

Rio Tinto and Glencore's proposed merger could require asset sales in order to gain regulatory approval from China, the world's largest commodity buyer. China has long-standing concerns over market concentration and resource security. Last week, the two mining giants announced that they are in early merger discussions for the second time within the last 'two' years. 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 for an opportunity to sell assets to friendly companies, said the analysts. 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). Sources said that Chinalco was interested in Rio Tinto's Simandou copper mine in Mongolia and Oyu Tolgoi iron ore mines in Guinea.

Glyn Lawcock of Barrenjoey, Sydney, says that to close the Glencore deal, it is likely that assets in Africa will be sold, 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 any questions regarding the deal. Glencore and Rio Tinto refused to comment.

Glencore is not a newcomer. GLENCORE PREDECENT Glencore has been here before.

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 was worried 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 transition. Rio Tinto, Glencore and rival miners like BHP are focusing on the metal.

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 is becoming more and more politicised as its importance increases. The White House has referred to China's dominance of the supply chain as being a direct threat against national security. It remains to be seen what reaction it will have to major mineral asset sales to Chinese interest.

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. In 2018, U.S.-based chipmaker Qualcomm pulled out of a $44billion deal to purchase NXP Semiconductors after failing to receive approval from Chinese regulators. This was a reaction to the trade conflict between Washington and Beijing. Nvidia's failed takeover bid of Arm Ltd was also sunk by the inability to convince Chinese regulators. Beijing has, however, given its approval in previous resource deals as part of the bargain. Beijing demanded major changes in a tie up between Japan's Marubeni, and 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)