The world's largest mining merger deal falls through: Copper asset valuation becomes a point of contention

Glencore and Rio Tinto’s merger to form the world’s largest mining group was officially called off on Thursday.

As background, rumors of a merger between Rio Tinto and Glencore date back to the 2008 financial crisis, but the two parties only began serious discussions in 2024. After intermittent communication, in January this year, the two companies confirmed they were in merger negotiations. Under UK takeover rules, Thursday (February 5) was the deadline for Rio Tinto to make a formal takeover offer.

In theory, both sides could have extended the negotiation period through discussions, but a direct breakup indicates that their differences have made negotiations no longer necessary.

The announcement released on Thursday also shows that Glencore, which owns major global industrial metals and coal businesses in copper, cobalt, and other sectors, appears to be very confident about the potential significant appreciation of the company’s value.

Unlike Rio Tinto’s simple statement that “an agreement that creates value for shareholders could not be reached,” Glencore detailed that in the proposed merger offer, Rio Tinto demanded that its Chairman and CEO continue to hold leadership positions in the new company, while also offering Glencore a minority stake, severely undervaluing Glencore’s relative intrinsic value contribution within the merged group, and not even offering a premium for control.

The Glencore board emphasized that the proposal did not fully reflect the value of Glencore’s copper business and its industry-leading growth project pipeline, nor did it reasonably allocate the potential significant synergies.

According to merger rules, the two companies are prohibited from discussing any mergers for the next six months. However, sources close to the negotiations revealed that although there are significant valuation disagreements, the possibility of continuing talks after the “cooling-off period” has not been ruled out.

This deal also highlights the ongoing competition in the mining sector for copper assets. With the surge in electrification and AI data center demands, copper’s importance has risen sharply.

Glencore is currently the sixth-largest copper producer globally, and the company is striving to double its copper capacity within 10 years to become the “world’s copper king”. Rio Tinto also has copper mining operations, and if merged with Glencore, it would surpass BHP to become the world’s largest copper producer, with an additional production growth potential of about 1 million tons.

Commodity Price Volatility Makes Valuation Difficult

Since mining stocks’ valuations are naturally influenced by fluctuations in commodity prices, objectively assessing the reasonableness of merger valuations is challenging.

In recent years, Glencore’s stock price has been dragged down by weak coal prices, while Rio Tinto’s stock has been boosted by recent increases in copper and iron ore prices. As a result, the relative valuation of the two companies has changed significantly.

However, after Glencore announced a strategic transformation and increased focus on copper mining last year, its stock price has outperformed Rio Tinto’s since the beginning of this year. Based on the last trading day before the January announcement, Rio Tinto’s market cap was $136.8 billion, reaching $156.7 billion by this Wednesday. During the same period, Glencore’s market cap rose from $66.1 billion to a peak of $82.2 billion.

(Source: Cailian Press)