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Coal bid sets up clash of mining heavyweights

It is a tantalising prospect for deal junkies: Sir Mick Davis going head-to-head with his arch rival Ivan Glasenberg in a takeover fight.

And one that has become a possibility with news that X2 Resources, the private equity vehicle set up by Sir Mick, is in discussions with Rio Tinto about a possible bid for its Hunter Valley coal business in Australia.

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There is no love lost between Sir Mick and Mr Glasenberg, two of the biggest names in the mining world. Their relationship soured three years ago when Glencore reworked its friendly merger with Xstrata into a full-blown takeover that ousted Sir Mick as chief executive.

Since then Sir Mick has come back leaner and, arguably, hungrier. He’s raised $5.6bn from investors to buy mining assets for X2, with additional debt backing from at least one leading bank. His notoriously large frame, which inspired part of his nickname, has slimmed down. But standing between Sir Mick and his first deal is the hyper-competitive man who removed him from his last job.

It is no exaggeration to say that Glencore’s executives, including Mr Glasenberg, see themselves as the natural owner of Rio’s coal business in New South Wales. After all Glencore’s collection of mines in the Hunter Valley are right next door to Rio’s, offering the prospect of significant synergies if the two businesses could be merged or brought together.

In a moribund thermal coal market, where prices have halved since 2011, that’s highly valuable. To that end, Glencore has held talks with Rio over the potential for joint ventures, but the two sides have never been able to reach a deal in part because of different views on price. Thermal coal is used to generate electricity in power stations.

In a report published last year, analysts at Credit Suisse calculated there could be saving of $500m from combining the two businesses. The “synergies” would come from mining, rail and port efficiencies, consolidating haulage providers and back-office functions.

It would also allow Glencore to blend different types of coal to create tailor-made products for the Japanese market.

While Japan is no longer the largest importer of seaborne thermal coal it remains the biggest buyer of premium material, a large chunk of which comes from Australia and mines in the Hunter Valley.

Japanese utilities value a reliable source of high-quality supply and are prepared to pay over and above the market price to lock in supplies.
Many Japanese power stations are now configured to burn only high grade Australian coal due to strict environmental regulations. Demand is expected to hold at about 80m tonnes a year unless its nuclear power plants shut after Fukushima are brought back online.

Of course, a bid battle between X2 and Glencore is by no means assured. Rio may hold out for a price that is too rich for Sir Mick. But if they can agree a deal, Mr Glasenberg may find it difficult to remain on the sidelines. Few who know the two mining heavyweights would expect either man to back down easily. Analysts value Rio’s Australian thermal coal assets at up to $2bn.

The Commodities Note is an online commentary on the industry from the Financial Times



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