Glencore hopes to revive Rio Tinto's deal with coal prices turning

Three investors who met with the leaders of both companies in Australia this week said that Glencore CEO Gary "Nagle" hopes the recent rise in coal prices can help Rio Tinto return to the table for a new attempt at creating the largest mining company.

Both companies were in discussions?earlier in the year? to create a $240 billion company. The two were in talks earlier this year to create a $240?billion company.

The companies stated that discussions ended in February with no agreement due to disagreements over valuation. Rio Tinto and Glencore are not allowed to resume talks for six months under UK regulations.

The three investors, who spoke on condition of anonymity because the discussions were confidential, said that Glencore CEO Gary Nagle expressed optimism about the possibility of another chance to reach an agreement.

One investor who doesn't see the value of a merger said, "This definitely isn't going away."

Details of discussions with Australian investors were not previously reported.

Glencore and Rio Tinto have declined to comment.

After the end of the talks, Rio Tinto's CEO Simon Trott told the media that they had come to the conclusion that the value case was not strong enough.

GLENCORE COUNTS COAL PRICE INCREASE, IRON ORE DECLINE

Glencore shares have performed better than Rio Tintos' so far this year. This allows the Swiss-based commodity miner and trader to claim a bigger share of any combined company.

According to sources, Glencore believes that Rio's valuation was linked to the spot prices of commodities such as coal on the 7th of January, the day before the talks were made public.

Nagle stated that a more balanced view would have been to take into consideration projected prices, according to investors.

Since January 7, Glencore shares and coal prices have both risen 26%. Rio shares, however, have only risen 9% due to a drop in iron ore.

Glencore shares represent now about 35% in a Glencore and Rio Tinto tie-up. This is up from 31.5% at the time the talks were made public, and close to the 40% Glencore wanted as part of the deal that Rio rejected.

The sources claim that Glencore expects Rio Tinto to suffer a loss in its flagship iron ore business as the market shifts into surplus. Nagle believes that this would lead to a further shift in the relative values of the two companies, which in turn, could make a deal more feasible.

Some Australian investors thought it was strange that Rio would repurchase coal assets after selling them in order to boost its green credentials. Nagle said Australia was behind Europe in terms of ESG, a source told us.

VOCAL MINORITY AGAINST A DEAL

Sources said that while valuation was the primary obstacle to a deal five Australian funds sent a?joint letter to Rio Tinto's board of directors on January 20, expressing concerns about governance and corruption probes into Glencore business practices.

Glencore believed that Australia represented a small, but vocal minority of around 4%.

Sources have said that more than half of the profits from dual-listed Rio Tinto come from their Australian assets. As such, any merger would be a 'outsized effect on Australia, and government approval is required. A deal also requires the approval of 75% of votes cast and 50% of ASX shareholders who are present.

The first investor said that Glencore had underestimated Australia's bloc. However, he added that the company's "roadshow" was effective. He also stated that Glencore would be a good investment if listed Down Under.

Rio will require more than a short-term increase in share prices to influence them, according to another investor. He said that during their January talks, Glencore and Rio differed over the value of Glencore’s undeveloped Argentinian assets.

I don't think Rio will change its mind after six months, just because iron ore and coal have gone down.

(source: Reuters)