Source: Sharecast
In the press release earlier confirming the merger, the miners said they expect a deal would take place by way of an acquisition of Glencore by Rio. Berenberg said this makes sense given that Rio’s market cap is $142bn and Glencore’s is $65bn.
"The structure of the deal is not clear, but as we explored in our outlook piece, Glencore, which has a compelling copper growth profile (outlined at its December capital markets day) and is trading cheaper than peers (eg on an EV/EBITDA basis or a P/NAV basis), has set itself up for either a share price re-rate if it executes on its copper growth plans, or to make itself an M&A target if it fails," it said.
"It would appear that Rio is willing to step in before the growth plans really take hold, in order to lay its hands on Glencore’s circa 830ktpa of copper production, with growth to circa 1.6mtpa possible into the long term."
Berenberg said that with copper being the key commodity which diversified mining companies are seeking to increase exposure to, Glencore’s copper business will likely be the core focus for Rio.
"We would not be surprised if Rio was to acquire Glencore solely for its copper: Glencore has already packaged its coal (both metallurgical and thermal) and ferroalloys business into a vehicle that could be divested; we think it is possible that the coal business could be spun out as a yieldco, both in order to offer an attractive decarbonisation commodity story within the merged entity (ie no coal) and also to increase its copper exposure on a proforma basis," it said.
"Rio has long since divested of its coal assets in a decarbonisation push."
The bank said it also thinks that Glencore’s zinc business could be sold, either to a Chinese buyer or a local Kazakh buyer, leaving it with peripheral industrial assets in the form of nickel and oil, which it said could be easily divested, and the marketing business.
How Rio views the marketing business will be interesting, Berenberg said, adding that it could either look to keep it and benefit from its fairly consistent circa $4bn EBITDA generation or divest it, likely listing it on a US exchange and achieving a multiple re-rate for a standalone trading business.
"However, we think that security of supply contracts for the marketing business would need to be retained," it said.
From a Rio perspective, Berenberg noted that new chief executive Simon Trott has laid out his strategy of simplification and cost cutting. It said that a merger could perhaps result in the departure of the aluminium business, although Berenberg reckons the lithium business (a recent acquisition) remains a core part of Rio’s long-term portfolio.
"Ultimately, we think that, in order to deliver a multiple re-rate, Rio needs to shrink its iron ore exposure and EBITDA contribution - it could do this by purely merging, or it could take one more step and spin out a minority stake in the iron ore business, again as a yieldco, thus still retaining the cash generation from this high-margin cash cow but reducing EBITDA exposure to make copper the major commodity and thus attain a premium multiple."
