Swiss mining giant Glencore (LSE:GLEN) made a surprise $2.55-billion bid for a major piece of Australian thermal coal-rich ground controlled by Rio Tinto (ASX:RIO,LSE:RIO,NYSE:RIO) late on Friday (June 9).
The bid from Glencore trumps the offer made to Rio by China’s Yanzhou Coal Mining (HKEX:1171) by $100 million, and has opened the door for a bidding war over the company’s Coal & Allied Industries subsidiary. Glencore has given Rio until June 26 to accept its fully funded proposal.
Glencore has also offered to buy the minority stake in the subsidiary owned by Japan’s Mitsubishi (TSE:8058) for $920 million in cash if Rio chooses to move forward with the deal. To complete the sale, Glencore would sell at least $1.5 billion worth of assets, prioritizing coal operations. It would pay $2.05 billion upfront and $0.5 billion in instalments over five years.
“Coal & Allied’s three mines are located adjacent to two of Glencore’s existing operations, Bulga and Ravensworth, with three others very close by, Liddell, Mt Owen and the United/Wambo joint venture with Peabody. That provides opportunity to optimise mining, processing, transport and overhead,” noted Morgan Stanley (NYSE:MS).
“The fact that they are obviously choosing to grow that business while everyone else is running in the opposite direction — either they are geniuses or they are buying into stranded assets for the longer term, which will incur hefty costs,” Ben Davis, a mining analyst at Liberum Capital in London, told Bloomberg.
If the agreement goes through, Glencore’s combined portfolio would have a production capacity of 81 million tonnes per year of high-energy coal. The company has said it would focus on helping to meet Asian demand, and has already received regulatory approval for the deal from Japanese anti-trust authorities. Yanzhou subsidiary Yancoal has already been given the green light for its deal from Australian regulators.
“Global energy demand will be driven by developing economies in Asia and will be largely met by fossil fuels to 2030,” Glencore said in its annual sustainability report last month. “While it is clear that the relative share of renewable energy will grow, the absolute volume of fossil fuels will also grow due to overall growth of energy demand.”
For now it is uncertain which deal Rio will go with. However, as mentioned, it’s possible that Glencore’s move will spark a bidding war. “If Rio Tinto determines that the Glencore proposal is a superior proposal, Yancoal … will have a right to match or better that proposal,” Yanzhou said in a statement.
Through Yancoal, Yanzhou already operates several mines across Australia, while Glencore operates 18 open-cut and underground coal mines in the country. Glencore’s share price closed 2.05 percent higher on Monday (June 12), while Yanzhou’s closed 2.44 percent lower.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.