Taking out Glencore would fix a major problem for Rio Tinto, according to analysts from a British banking giant.
Rio on Friday announced it was in “preliminary discussions” for a potential merger with Glencore that could result in the creation of the world’s largest mining company valued at more than $300 billion.
Barclays believes one of Rio’s “key strategic weaknesses” is the lack of “large-scale, low-risk growth options” in its copper portfolio.
Miners across the globe are clamouring for more sources of copper given the metal is an essential input in much of the infrastructure that facilitates artificial intelligence, such as computer chips and data centres.
“It has near-term growth from Oyu Tolgoi ramping up out to 2029, but if Rio wants to grow its exposure to copper as a percentage of earnings before interest, taxes, depreciation and amortisation or absolute production levels materially and on a timeline shorter than 10 years, mergers and acquisitions is the only realistic solution, in our view,” Barclays stated in a note to clients over the weekend.
Rio is currently developing the Winu project in the East Pilbara, but Barclays reckons it is “too small” to quench Rio’s thirst for copper.
“We consider Winu to be too small for a company of the scale of Rio Tinto,” the bank stated.
“The Resolution project in the United States, if all goes to plan from a legal, technical and permitting point of view, could conceivably see final investment decision in 2030, first production in 2035 and full production by 2040.
“In contrast, Glencore’s Latin America-centric pipeline . . . (is) offering a more immediate route to lift copper exposure materially. Glencore’s recent copper-focused (presentation) in December last year was an advertisement of the benefits of owning Glencore to both institutional investors and other companies.”
But acquiring Glencore gives Rio exposure to a number of commodities it would consider unattractive, predominantly coal.
“Rio Tinto’s exit from coal in 2018 underscores its limited appetite for coal exposure, while zinc does not currently feature as a strategic priority within its portfolio,” Morgan Stanley told its clients over the weekend.
