Glencore and Rio Tinto are at it again – and it seems the markets smell action

Here we go again. A combination of Rio Tinto and Glencore has been talked about for years and the duo held aborted negotiations at the end of 2024. With the global mining industry in deal-making mode – frenzies come along every 15 years or so – the idea of RioGlen or GlenTinto was due another whirl. On Friday, the two FTSE 100 companies said they were in “preliminary discussions” about a “possible combination of some or all of their businesses”. A full-blown tie-up would be worth about $260bn (£120bn), including debt.Many of the old challenges to a deal haven’t gone away. Glencore’s roots lie in trading commodities; Rio is a traditional pure miner, so the fit is culturally imperfect. Does Rio, which got out of coal as long ago as 2018 under investor pressure, really want to go back in by adding Glencore’s significant assets in that area? Reports suggested it is prepared to do so. But, if not, should coal be hived off beforehand? Should Glencore’s trading operation go with it?And, given that Rio is significantly larger, would a deal be a merger or a takeover? The latter implies an offer at a decent premium to Glencore’s recent share price, which Rio’s shareholders might find hard to swallow.Glencore’s shares rose by 9%, and Rio’s fell 2%, implying the market smells action of some form. First, Rio has a new chief executive, Simon Trott, who sounds keener on mega-deals than his predecessor, who was instinctively cautious (perhaps remembering Rio’s reckless top-of-the-market $38bn cash purchase of the aluminium group Alcan in 2007).Second, the deal-doing fun in mining land went up a gear when Anglo-American unveiled its $50bn merger with the Canadian group Teck Resources last year. The impetus for that one was exposure to copper, the in-demand metal for electrification of the world’s energy systems and vehicles. A generation ago, global miners craved iron ore to feed China’s demand for steel for construction; now the buzz is all about copper. Anglo and Teck could boast that 70% of their earnings come from the metal.A Rio-Glencore combo would have a third of its earnings from copper, calculates investment bank Jefferies, if coal were out of the picture. “The merged company would have world-class iron ore, aluminium and copper assets with significant growth in copper,” says its analyst. “If completed, it would also be the largest market cap and most liquid equity in the sector.”That sounds the type of profile the Glencore chief executive, Gary Nagle, likes. “It makes sense to create bigger companies,” he said last month. “Not just for the sake of size, but also to create material synergies, to create relevance, to attract talent, to attract capital.”Third, the deal-making mindset will only be encouraged by the thought that BHP, the sector’s biggest beast, may be itchy after making two bids for Anglo in 2024 and getting nowhere. So best to get in first – possibly – if BHP is also looking enviously at Glencore’s development projects in copper.Rio has four weeks to post an offer or shut up. Trott’s main challenge may be to persuade his own investors. The Anglo-Teck deal was done at a zero takeover premium, which probably won’t be possible with Glencore. The risk, as Rio’s own history demonstrates, is overpaying at a frothy moment.