Glencore to rival China player in coal bid

Johannesburg - Glencore Plc’s [JSE:GLN] Ivan Glasenberg is looking to trump China’s Yanzhou Coal Mining Company with a rival bid for Rio Tinto Group coal assets in Australia.

The company’s chief executive officer submitted a proposal to buy Rio’s Coal & Allied coal unit in New South Wales for $2.55bn (R33.02bn), the Baar, Switzerland-based producer and trader said Friday in a statement.

If successful, the company would also seek to buy Mitsubishi Corporation’s stakes in two coal ventures for $920m (R11.9bn) in the same area.

The moves threaten to squeeze out a rival bid by China’s Yanzhou’s Yancoal Australia unit, which in January offered $2.45bn (R31.73bn) for Rio’s Coal & Allied unit. That offer includes an initial $1.95bn (R25.25bn) cash payment and $500m (R6.5bn) in annual installments of $100m (R1.3bn) following completion.

“They’re trying to improve the offer slightly by offering a tiny premium,” Sergey Donskoy, an analyst with Societe Generale SA, said of the Glencore offer. That, plus the fact that the Glencore offer is fully funded, meaning it won’t need to negotiate special bank financing , gives it a slight advantage over Yanzhou, he said by phone from London. “Will this be enough to sway Rio? I frankly can’t tell.”

In a statement Friday, Rio said its board and management will give the Glencore proposal “appropriate consideration and respond in due course.”

‘China Relationships’

It will be up to Yancoal to consider lifting its bid, Hunter Hillcoat, an analyst at Investec Securities in London, said in a research note. “We cannot see Rio refusing unless it feels it will hurt its cozy China relationships.”

Glencore’s bid for the coal assets comes just weeks after it expressed interest in a combination with grain trader Bunge Limited as Glasenberg steps up expansion efforts following a painful commodities downturn, in which it was forced to sell assets and cut costs.

While Glencore was publicly rebuffed by the US grain-trading giant, Glasenberg signalled he wouldn’t waver in his ambition to expand in agriculture. He has also never doubted coal as an asset, Donskoy noted, despite its volatility.

If the Rio deal goes through, Glencore would sell at least $1.5bn (R19.43bn) in assets to mitigate the cost, it said in Friday’s statement.

That’s likely a key part of the deal for Glasenberg and the rest of his team at Glencore who are traders at heart, Donskoy said. “They are as much interested in trading volumes that would accrue as they are interested in the mine volumes.”

The Rio coal operations are adjacent to existing Glencore mines in Australia’s Hunter Valley, and would take Glencore’s production capacity in the area to 81 million metric tonnes a year.

In 2014, Glencore and Rio considered merging their coal businesses. At the time, Credit Suisse estimated it would save the two companies more than $500m (R6.5bn).

“Rio wants out of thermal coal, so this could create a win win for both,” Jeremy Sussman, an analyst at Clarksons Platou Securities Incorporated, said by email.

Glencore’s American depository receipts (ADR) fell 1.2% at 15:23 in New York. The ADRs have increased 9.8% year.

“There is no certainty that any transaction will be concluded,” Glencore said Friday, adding that the deal would be funded from existing cash and committed facilities. “Glencore will only be bound once a binding share purchase agreement is concluded with Rio Tinto.”

The commodity trader has already returned to deal making. In December, it teamed up with shareholder Qatar Investment Authority to buy almost 20% of Russian oil producer Rosneft. Glencore also agreed to a $960m (R12.4bn) Congo mining deal in February.

The Yanzhou unit has the right to present a counter offer. Glencore’s proposal expires if a binding purchase agreement hasn’t been executed by June 26.

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