Rio Tinto’s shares shot up on news that the miner has rejected a merger approach from smaller rival Glencore.
The move to create a mining and trading giant worth around 130 billion euros came back in July, but details are just now emerging.
A merger would have created the world’s biggest miner, supplanting BHP Billiton.
“The Rio Tinto board, after consultation with its financial and legal advisers, concluded unanimously that a combination was not in the best interests of Rio Tinto’s shareholders,” Rio Tinto said in a statement to the Australian stock exchange.
The share price rise, for Glencore as well as Rio Tinto, reflected the feeling among investors that a deal is still possible, and could benefit both companies.
Analysts at Citi estimate they could save close to 400 million euros just by combining their neighbouring coal operations in Australia.
Glencore, which last year bought rival Xstrata in the sector’s largest ever takeover, reportedly coverts Rio Tinto’s low-cost, high quality iron ore.
Iron ore would fill a gap in Glencore’s suite of commodities, where it already has strong positions in copper, nickel, zinc and coal.
However agreeing a merger price with shareholders could be a struggle. Analysts and bankers said Rio Tinto shareholders would want a massive premium.
In addition China – which through state owned Chinalco owns 9.8 percent of the company – would likely force a merged group to sell some copper and coal assets.
On top of that Rio’s conservative culture would clash with Glencore’s aggressively entrepreneurial style.
This all comes as Rio Tinto’s most profitable product, iron ore, slid toward a five-year low.
Rio has focused on slashing costs while expanding its iron ore output to what it calls “epic proportions”, not shying away from the fact that it is largely dependent on steel growth in China, which is slowing.
“The board believes that the continued successful execution of Rio Tinto’s strategy will allow Rio Tinto to increase free cash flow significantly in the near term and materially increase returns to shareholders,” Rio Tinto Chairman Jac Nasser said in a statement.
Glencore, which has criticised the top iron ore producers for driving down prices by ramping up production, had no immediate comment on its approach to Rio.
with Reuters
