On Monday, news hit the wires that Best Ideas portfolio Rio Tinto (RIO) had rejected an merger overture from Glencore (GLEN). Glencore knows the most important thing in investing—scooping up valuable assets on the cheap. That’s exactly what it was doing when the firm made a merger proposal in July. We found out today that Rio Tinto rejected that proposal in August, and while the firms haven’t had talks since, according to reports, Glencore has subsequently approached ~10%-Rio-owner Chinalco (ACH) to further the combination.
We don’t include Rio Tinto in the Best Ideas portfolio because of such take-out upside, but we do admit that such news is icing on the proverbial “valuation thesis” cake. The likelihood for a deal between Glencore and Rio Tinto next year is meaningful in light of this news, though falling iron ore prices could sour the transaction multiples a bit (and potentially increase the risk so much that the transaction may not be pursued at all). We can’t forget that BHP (BHP) ended up dropping its pursuit of Rio Tinto in 2008 as commodity prices and the global economy waned. Vale (VALE) had also dropped its efforts to pursue Xstrata that year as a result of the credit crunch (Xstrata was subsequently purchased by Glencore in 2013).
A fewer number of mining interests making capacity decisions is generally favorable to commodity price stability, and price stability is welcome for most all commodity-producing entities. Greater leverage over buyers is another inevitable benefit with greater capacity control. We’re keeping an eye on the situation and generally are in favor of consolidation in the highly-volatile mining industry, assuming that any combination would get past regulators. Capital discipline is key for the mining giants, and many continue to cut spending in the wake of falling iron ore prices. We’re not making any changes to Rio Tinto’s weighting in the Best Ideas portfolio.