2015: Year of the Mega Mergers

2014 was supposed to be the year of mergers and acquisitions for the mining industry. Instead, it was the year of deals that never were.

Glencore sent shockwaves through the mining world last year when the commodities conglomerate confirmed it had approached Rio Tinto Group about a possible merger. Ultimately, Rio Tinto shot down the proposal which would have created an industry giant with a combined market value in the range of $150 billion.

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A similar conclusion occurred with Newmont Mining and Barrick Gold. In April, the two companies had mutually agreed to terms on a blockbuster deal that would have been the largest merger the gold mining industry had ever seen. Clashing personalities, however, caused the deal to eventually collapse.  

“Some of the biggest deals, which created the most excitement and confidence, were the ones that also created the most disappointment when they failed,” said Robert Leitão, head of global financial advisory at Rothschild.

“There is a huge gap between the column inches and the number of completions”.

Because mergers and acquisitions are the bloodsport of the corporate world, we examine the two potential deals that will turn 2015 into the year of mega mergers.  

Rio Tinto & Glencore

It was heralded as the deal of the century. Rival mining companies Glencore PLC and Rio Tinto merging together to form the world’s biggest publicly traded mining company, dislodging BHP Billiton as the top.

“A Rio Tinto-Glencore combination would create market leading positions in iron ore, copper, nickel, zinc and coal as well as significant optionality around a number of lesser metals and minerals,” said Paul Gait, senior analyst for Wall Street brokerage Bernstein Research.

“Moreover, it would create the biggest and most diversified mining company on the planet. It would be a Glencore-Rio combination that would quickly become the ‘most own’ stock for anyone looking for mining exposure.”

The two would have formed a powerhouse, marrying Glencore’s commodities-trading strengths with Rio Tinto’s substantial iron-ore production

According to WSJ, discussions of a merger began  last summer when shareholders of the two companies started talking.

“Glencore Chief Executive Ivan Glasenberg, one of the company’s biggest shareholders, made a personal approach to Rio Tinto Chairman Jan du Plessis over the summer and had a conceptual conversation about a possible merger, a person familiar with the situation said. The conversation was sufficiently serious that Mr. du Plessis took it to the Rio Tinto board, the person said.”

Because U.K. takeover rules prohibit companies from making new deals within six months, we believe this deal gets completed later this summer. Glasenberg has an impressive history of buying assets at the bottom of the market, which includes Xstrata, Viterra and Caracal within the last three years.

Merger expert Ian Hannam, who helped orchestrate the merger of BHP Ltd and Billiton PLC in 2001, said the corporate marriage appears inevitable. "If not today, this deal will happen sometime in the near future," Bloomberg quoted Hannam.

With Glasenberg at the helm, anything is possible.

Barrick Gold & Newmont Mining

For years now, the world’s top two gold miners in terms of production have been in off-and-on talks to merge. In 2015, the two will finally unite.

According to Reuters, Newmont has expressed interest in restarting merger talks with Barrick, after CEO Gary Goldberg announced that he was open to resuming discussing despite no contact between the parties since April. The two parties haven’t spoken since publicly accusing each other of ruining a deal favored by many investors. The deal, now more than ever, makes sense for Barrick.

The Toronto-based gold producer reported a monster fourth quarter loss of $2.85 billion last year, as well as announcing it will be putting its Porgera and Cowal operations up for sale. 

Cowen and Co analyst, Adam Graf, said there could be some cost savings if Barrick and Newmont combine, but a big, flashy deal could leave investors worse off.

"I believe there are some synergies to be harvested in Nevada, but I think a mega-merger is not the best way to go about it," he said. Graf believes the companies are better suited to form a joint venture, or Barrick could sell its Goldstrike complex to Newmont.

However, JP Morgan’s John Bridges and his team believe the mega merger deal still makes sense.

“We continue to see the best outcome for Barrick and Newmont to be a consolidation of the companies Nevada operations. We still feel a combination creates value by accessing Nevada savings which we estimate are around $250m pa. This should make debt more manageable. An important question for Newmont is what deal can be concluded with the Indonesians over its insistence that miners build smelters to upgrade concentrates to metal within Indonesia. If Newmont’s cashflow expectations from its Indonesian mine Batu Hijau suffer a haircut, it could be more interested in the savings available from a deal with Barrick. A combination would allow the asset portfolio to be optimized or possibly spun out in one or more spincos. However, we fear spinning out less popular assets might not realize the hoped for value.”