Glencore Would Gain Rio Iron in Merger, Combine Australian Coal

A merger between Glencore Plc and Rio Tinto Group would combine Glencore’s vast commodity-trading operations with Rio’s giant portfolio of iron ore projects that feed Chinese demand for construction materials.

“It would create the biggest and most diversified mining company on the planet,” Paul Gait, an analyst at Sanford C. Bernstein Ltd., said in a note to investors today. “A Rio Tinto-Glencore combination would create market-leading positions in iron ore, copper, nickel, zinc and coal as well as significant optionality around a number of lesser metals and minerals.”

With significant operations in copper, nickel and coal, the only major commodity Glencore doesn’t figure prominently in is iron ore. Rio is the world’s second-largest exporter of the metal, controlling significant operations in the Pilbara region of Western Australia. It sold about $26 billion of iron ore last year, accounting for 47 percent of its revenues.

Rio is also seeking to develop the $20 billion Simandou project in Guinea, the largest untapped iron-ore deposit.

“We see scope for a potential tie-up to deliver genuine value,” HSBC Holdings Plc analysts Ash Lazenby and Andrew Keen wrote in a report today, adding that a preliminary estimate of cost savings is in the “low-single-digit billions of dollars.” The marketing of iron ore as well as the sharing of ports and rail at Australian coal operations are the most obvious synergies, HSBC wrote.

Combining coal operations on Australia’s east coast could save $500 million, Credit Suisse Group AG said in February. Glencore, the world’s biggest exporter of power-station coal, owns the Ravensworth, Mount Owen and Liddell coal operations in the Hunter Valley. Rio’s interest in the region is via its Coal & Allied unit, which runs three mines.

Oyu Tolgoi

Another big overlap would be in copper.

Glencore produced 1.5 million metric tons of the metal last year from mines in the Democratic Republic of Congo, Zambia and South America. Rio Tinto mined 632,000 tons from Chile to Indonesia.

Rio is also seeking to expand the Oyu Tolgoi copper mine in Mongolia. Oyu Tolgoi, located about 80 kilometers (50 miles) north of the Chinese border, is forecast to contribute about a third of Mongolia’s economy when in full operation and will be the world’s third-biggest copper mine.

Glencore Chief Executive Officer Ivan Glasenberg may be less keen on Rio’s diamond mines in Australia and Canada. The CEO said last month that the company doesn’t trade diamonds and will only look at assets that the company trades and markets.

Rio, whose Argyle mine in Australia is one of the world’s biggest, sought to exit the diamond industry but failed to find a buyer for its mines.

Peter Grauer, the chairman of Bloomberg LP, the parent of Bloomberg News, is a non-executive director of Glencore.

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