Sources say that Rio Tinto will ask for more time to consider the Glencore deal.

Three people with knowledge of the talks said that Rio Tinto and Glencore will announce a delay in the merger talks before a UK regulatory deadline this Thursday. This is to give Rio more time to evaluate the merits of the deal.

Rio Tinto may walk away from the deal, despite pushback by some investors, including those in Australia. These investors want to be "assured" that a deal will generate value, and are opposed to Rio Tinto paying an extra premium.

In January, both companies announced that they were in the early stages of a merger. This could result in the creation of the largest mining company in the world with a combined value market of almost $207 billion. It would also provide access to large quantities copper, which is in high demand in the energy transition.

According to UK takeover regulations, a bidder can announce their intention to make a firm offer within 28 days of being identified, or they can walk away from the deal, or ask for an extension. The current deadline for submissions is February 5, 2019.

According to a source familiar with the situation, Glencore is happy to extend an existing contract to Rio Tinto.

Rio Tinto's and Glencore's spokespeople have declined to make any comments ahead of the deadline on Thursday.

Investors at Rio Tinto are concerned that Glencore wants a high premium for some of its copper projects, which are in a very preliminary stage. Also, they questioned what value Glencore's?marketing arm would bring.

The market volatility, which includes wild swings of commodity prices as well as a surge in copper, has added to valuation headaches.

One source said, "With copper priced at $14,000 Rio has a lot to think about."

As the talks are confidential, the three people who were familiar with them declined to name themselves.

Shareholders are sceptical about their shares

Investors in Australia have said they are not happy with any deal involving a premium for a company who has had operational problems. They also say that they do not know how such a tie up would prove value.

Hugh Dive, of Atlas Funds which owns shares in Rio but does not support a tie-up, said: "We expect a further extension this week to save face."

He said that aside from Glencore’s South American copper assets the rest was complicated and out of Rio’s interest. There were also incentives for Rio Tinto to overpay, as they were paying in scrips, because it wanted to dilute its stake of the state-owned Aluminium Corp of China, which is the largest UK shareholder.

Sources told us last year that Rio Tinto was exploring the possibility of an asset-for equity swap with Chinalco. This would reduce Chinalco's 11% stake and allow Rio to resume its buyback program?and pursue other strategic deals.

More than half of Rio Tinto's profits come from the lucrative iron ore mining industry in Australia.

Andy Forster is the portfolio manager of Argo Investments in Adelaide. He said: "You don't want to pay away all the upside."

The Financial Times reported Thursday that Rio Tinto wants to keep its chair and CEO, but Glencore is demanding a large premium.

When there are acquisitions of unequal sizes, the larger, usually the acquirer, will typically keep its management team. The market capitalisation of Glencore is about twice that of Rio Tinto.

TRADING AND GEOPOLISTICS

Sources said that while copper was the obvious reason for the deal, Glencore's commodities division, with its reputation for "capitalising" on market volatility, and wide network of trading contacts is also a factor.

Investors questioned, however, whether these traders could be encouraged to remain in a Rio Tinto Culture that had a much lower 'risk appetite.

Glencore, which is backed by the United States in this deal, said that it was in talks with a consortium to sell 40% of its copper and cobalt assets in the Democratic Republic of Congo. The assets are valued at $9 billion.

Reports indicate that any proposed tie-up may also require asset sales in order to gain regulatory approval from China, the top commodity buyer, who has longstanding concerns over market concentration and resource security. Reporting by Melanie Burton and Clara Denina, in Melbourne; Additional reporting by Amy Jo Crowley and Anousha Saoui in London; and Divyarajagopal in Toronto. Editing by SonaliPaul.

(source: Reuters)