TheChek News Flow

Rio Tinto and Glencore held talks about combining their businesses

Aborted discussions highlight how mining executives are contemplating big deals amid energy transition

Rio Tinto and Glencore held talks last year about combining part or all of their businesses, in an indication of how the push by mining companies to secure metals needed for the energy transition has focused executives on large-scale deals.

The London-listed companies engaged in early-stage talks as recently as October, according to people familiar with the matter, but the discussions did not progress to a deal.

A full-blown merger between Rio and Glencore — which have market capitalisations of $103bn and $55bn, respectively — would rank among the largest-ever transactions in the mining industry.

The talks between the two companies followed BHP’s failed £39bn bid for Anglo American last year, which prompted rivals to review strategic options.

BHP was interested in Anglo’s copper mines, among other assets, because the metal is used in renewable energy projects and electric vehicles.

Glencore and Rio declined to comment. Bloomberg first reported the companies had discussed combining their businesses.

Rio has been looking to boost its exposure to commodities including lithium and copper to offset weakness in the iron ore market as demand from China slows.

Glencore owns stakes in two significant copper mines — Collahuasi in Chile and Antamina in Peru — that would boost its production of the metal by almost 1mn tonnes a year and offer substantial expansion capacity, according to analysts.

A potential deal with Glencore would be complicated by the Swiss-based company’s heavy exposure to thermal coal, a commodity Rio has abandoned in recent years.

Matthew Haupt, a portfolio manager at Wilson Asset Management, which owns shares in Rio, said the deal “didn’t make a lot of sense” given Rio’s efforts to get out of coal and invest in renewable energy to power its operations.

Glencore, which has a large commodity trading business and mining operations, has been debating the future of its coal business.

The company said in 2023 it would spin out its coal mines into a separate listed business but changed its mind last year and decided to retain them. 

Glyn Lawcock, an analyst with investment bank Barrenjoey, said coal assets could be spun out as a separate company as part of any agreement. He added there was little overlap between the two companies, meaning there were few synergy benefits from a merger and a deal would need to be justified by asset diversification and creating more scale.

Ray David, a portfolio manager at Blackwattle Investment Partners, which owns Rio’s UK-listed shares, said Rio could fund an acquisition of Glencore by issuing shares in Australia, which would rebalance Rio’s share structure and close the value gap between its Australian and London listings.

Activist investors, including Blackwattle, have urged Rio to move its primary listing to Sydney — where its stock trades at a premium — to simplify share-based deals.

Rio’s Australia-quoted shares fell 1.8 per cent in early trading in Sydney on Friday, before climbing back to be down 0.5 per cent.

Demand for commodities required to decarbonise the global economy — such as copper, lithium and aluminium — has triggered a flurry of dealmaking activity in the mining industry over the past year.

Rio last year announced a $7bn deal to acquire Arcadium Lithium to increases its presence in metals used in batteries for electric vehicles. People close to the company said it was still digesting that transaction. 

Rio previously rejected a takeover bid by Glencore in 2014.

Lawcock said the reaction from some Rio investors in Australia was one of unease given Glencore’s reputation for smart dealmaking.

“Shareholders have said I don’t want any of my companies sitting across the table from Glencore,” he said.

Blackwattle’s David said the fact talks had ended showed Rio remained cautious in a consolidating market.

“I suspect Glencore wants a high premium,” he said. “It is a positive sign [that talks ceased] as it shows Rio is being disciplined and aware of not destroying shareholder value. It would be easy to panic.”

Firms intended to backstop frontline insurers raised rates and increased recovery thresholds after losses on prior blazes

Gaps in California’s insurance system could lead to serious failures in coverage for the Los Angeles firestorms, while leaving a key segment of the industry — reinsurance companies meant to spread out the most concentrated risk — virtually unscathed.

Reinsurers, which provide insurance to frontline insurance companies, could ultimately absorb less than 3 per cent of insured losses from the blazes, Citi analysts said.

California’s governor Gavin Newsom has said the fires, which have damaged or destroyed 12,000 buildings, could be the costliest disaster in US history, with early estimates suggesting insured losses could exceed $20bn.

The mild hit to reinsurers highlights how they have quietly pared exposure to natural catastrophe risks in recent years, raising prices and increasing the level at which coverage kicks in. That pullback accelerated the retreat of major insurance carriers in California, industry experts said, leaving many homeowners without cover or turning to the state-backed insurer of last resort.

“Reinsurers backed away from taking on a lot of that [catastrophe] risk. So, the insurers naturally said, we want to step away,” said Andrew Engler, co-founder of Kettle, a wildfire-focused insurance technology business in California.

State Farm and Allstate, two of California’s largest providers of homeowners’ insurance, cited the cost of reinsurance, along with factors such as high construction costs, when they announced last year they would stop writing new policies in the state.

Insurers have long complained California law makes it challenging to raise premiums to match the losses they face. In December, insurance commissioner Ricardo Lara issued new rules aimed at making it easier to raise rates, including by allowing reinsurance costs to be passed on to customers.

But that regulation had not taken effect by January, and its future effect could be muted by a broader shift in the industry. As global insured losses have climbed in recent years, reinsurers’ share of those losses has fallen.

Last year, US reinsurance rates hit their highest level since at least 1990, according to a cost index published by Guy Carpenter, a Marsh McLennan-owned reinsurance broker.

Over the past 25 years, reinsurers assumed about 46 per cent of modelled catastrophe risk, but that exposure has been cut to 33 per cent since 2023, according to the reinsurance arm of broker Howden.

Reinsurers remain exposed to so-called peak perils such as earthquakes and hurricanes. But fires, which have become more costly and intense because of urban growth and climate change, are less likely to hit the higher threshold that triggers reinsurance payments.

Munich Re, the world’s biggest reinsurer which provides coverage to major US primary carriers, said in a 2020 investor presentation it had “reduced appetite” in reinsurance for so-called secondary perils such as wildfire.

The reinsurers’ retreat followed years of painful losses. Munich Re booked €500mn of wildfire losses in 2017, the year when the Tubbs fire swept through Northern California, and €430mn of losses in 2018, following two other major fires in the state.

Munich Re told the Financial Times: “We remain committed to providing natural catastrophe capacity across all markets, as long as we can achieve prices that adequately reflect the risk.”

In 2022, rising interest rates and inflation squeezed reinsurance capital supply, triggering a reset for the industry, when reinsurers negotiated tougher terms and higher prices with clients.

“The reset in 2023 was on the back of heavy loss activity in prior years,” one executive at a major reinsurer said.

Reinsurers raised prices in 2023 and 2024. Citi predicted January’s losses could drive a “significant” increase in reinsurance prices when many policies are renewed in early summer, ahead of the US hurricane season.

“If I’m a reinsurance company and I’ve got a very good relationship with State Farm nationally, then I might begrudgingly take on some Californian wildfire risk, as part of a diversified portfolio,” said James Shuck, Citi’s head of European insurance research. “But the fundamental problem is, it’s an uninsurable risk. There comes a point at which you have to raise prices by so much that it becomes uneconomic.”

ETF flows obliterate previous full-year record to hit $1.5tn

Buying frenzy peaked at end of year spurred by Donald Trump’s presidential victory

Global exchange traded fund flows hit a record $1.5tn last year with the buying frenzy accelerating after Donald Trump’s presidential victory in November.

The net inflows obliterated the previous full-year record of $1.2tn set in 2021 according to data from Morningstar, which includes most major investment markets except China and India. Total assets hit $13.8tn, a rise of $2.7tn during the year, and nearly five times the $2.9bn level of a decade ago.

Both equity and fixed income funds saw record inflows, with these two asset classes accounting for 95 per cent of flows between them, despite an industry focus on alternative assets such as bitcoin.

The record year is a reflection of the lure of rising markets, with many major equity benchmarks hitting record highs last year. It also highlights the ongoing switch away from the century-old mutual fund format to the lower cost and greater transparency, liquidity and convenience of ETFs. This is particularly true in the US where ETFs also have significant tax advantages.

“ETFs are going gangbusters,” said Syl Flood, senior product manager at Morningstar. “Inflation-adjusted returns on short-term bond products, especially for US investors, are back to where they were before rates started rising, so it’s back to Tina [there is no alternative] to equities.”

“ETFs seem to have a bit of a halo around them,” Flood added. “People want the ETF version of a strategy, if they can get it. The halo has been earned. ETFs have been great tools for helping investors reach their goals.”

Flows peaked at the end of the year with November and December the two biggest months — totalling $310bn in the US alone — after Trump’s re-election sparked hopes in some quarters of further stock market gains.

“Investors’ ‘risk on’ posture was evident throughout the year and was further amplified by the US presidential election in November,” Flood said.

“While markets closed the year with a whimper, ETF flows did not,” said Scott Chronert, global head of ETF research at Citi. “December marked the second-best flow month ever for US-listed ETFs. This was an impressive follow-up to the record-setting flow data we saw in November.”

The rise of ETFs was not purely a US phenomenon, however, with net inflows in the rest of the world hitting $377bn, according to Morningstar’s figures, comfortably above the previous peak of $292bn in 2021, with every major domicile reporting record numbers.

“South Korea had a blowout year, growing at a torrid 33 per cent rate for the second straight calendar year,” Flood said. Ireland, Europe’s largest ETF hub, grabbed the lion’s share of these non-US flows, however, at some $226bn.

The ETF industry also accelerated its transition away from its traditional focus on passive, index-tracking funds in 2024. Assets held by actively managed ETFs topped $1tn for the first time, rising 61 per cent during the year, even as US-domiciled active mutual funds continued to bleed money. Net flows more than doubled from 2023’s previous record, hitting $339bn. Actively managed ETFs now account for 7.8 per cent of industry assets, up from 6.2 per cent 12 months ago.

For once, JPMorgan’s wildly popular $37.1bn Equity Premium Income Fund (JEPI) was eclipsed in the active space, with iShares’ US Equity Factor Rotation Active ETF (DYNF) heading the leaderboard with $11.7bn of net inflows, taking its total assets to $13.7bn.

Matthew Bartolini, head of SPDR Americas research at SSGA, who only covers US ETF flows, counted record inflows in no less than 19 categories last year, ranging from growth and small cap ETFs to those focused on derivative income and collateralised loan obligations.  

In another sense the industry is becoming more concentrated, however. At a time when the US share of global stock market capitalisation has risen to its highest level since the early 1970s, just three ETFs focused on the same index — BlackRock’s iShares Core S&P 500 ETF (IVV), State Street Global Advisors’ SPDR S&P 500 ETF Trust (SPY) and Vanguard’s S&P 500 ETF (VOO) — accounted for $292bn, 19.5 per cent of the global flows, as they took their combined assets to an unprecedented $2.1tn. VOO alone took in an “astounding” $117bn, Flood said, a record single-year tally for any ETF, as investors chased the index’s 25 per cent annual gain.

The other winner from this trend was S&P Global Ratings, which “dominated flows among benchmark index providers”, with the $475bn of net new money subsumed by ETFs that track its indices taking its market share to 28 per cent, up five percentage points in five years.

Despite this, Invesco outshone BlackRock, Vanguard and SSGA in relative terms, with its assets rising 21 per cent during 2024. The Atlanta house largely piggybacked on enthusiasm for the tech-heavy Nasdaq index, with its QQQ Trust (QQQ) and Nasdaq 100 (QQQM) ETFs proving popular, alongside the S&P 500 Equal Weight ETF (RSP), its own take on the blue-chip index.

There were some losers amid the oceans of winners, however. Some niches were out of favour on the fixed income side, including inflation-protected bond funds and emerging market bond ETFs. The latter was tipped into the red by outflows in December “as fears of a more protectionist US fiscal framework led to a stronger dollar and weighed returns”, Bartolini said.

In equities, defensive sectors suffered $6.7bn of outflows from US-listed ETFs, the second-worst figure ever, he added, led by healthcare, which shipped $7.4bn.

This pessimism was in complete contrast to the technology sector, where $33bn of inflows accounted for 76 per cent of US sector flows in 2024, well above tech’s 37 per cent share of assets, something Bartolini attributed to “broad-based fervour” for artificial intelligence.

Europe’s carmakers risk hefty bill for carbon credits from Chinese rivals

Groups failing to meet EU climate targets face a choice of paying fines, discounting EVs, or buying credits

European carmakers led by Volkswagen could be forced to pay hundreds of millions of euros to Chinese electric vehicle rivals to buy carbon credits, as the auto sector tries to avoid potential fines for failing to meet 2025 pollution rules set by Brussels.

Under EU rules requiring carmakers to cut emissions, manufacturers lagging in the electric transition face the choice of paying billions of euros in fines, boosting EV sales by slashing prices or buying credits from less polluting competitors.

Europe is the fastest warming continent on earth, estimated at twice the global average since the 1980s, in large part because of its proximity to the melting Arctic where exposed dark ground amplifies the effect.

The European Commission plans to fine carmakers €95 per car for every gramme of CO₂ per km above a 93.6g limit, based on average emissions across a company’s vehicle sales in 2025. 

Many carmakers in the EU are looking to use the “pooling” option, where manufacturers average out the greenhouse gas emissions of their fleets with other companies that sell in the bloc.

Analysts estimate that some European groups may be forced to buy hundreds of millions of euros worth of carbon credits from Chinese rivals such as BYD, which has one of the largest pool of credits to sell thanks to high EV sales in the EU.

According to recent EU filings, Tesla expects to pool credits with companies including Stellantis, Ford and Toyota. The US EV maker has already made more than $2bn in the first nine months of last year from selling credits into emission pooling systems globally. In another pool, Mercedes-Benz has teamed up with Polestar and Volvo — both owned by China’s Geely.

Geely’s founder Li Shufu holds about 10 per cent of Mercedes, while Beijing owned BAIC holds another 10 per cent.

Mercedes said it continued to “invest billions into electric vehicles”. “However, the pace of the transformation of our industry is determined by market conditions and our customers,” it added.

VW and Renault, which analysts say look likely to struggle to meet targets through their own sales, have few pooling alternatives other than Chinese manufacturers MG-SAIC and BYD. Renault could potentially also pool with strategic partners Nissan and Mitsubishi.  

Pooling is controversial. Some executives warn that the arrangement will make the European industry less competitive by empowering rivals in China at a time when Brussels has imposed higher tariffs on Chinese EVs to protect the continent’s carmakers. 

Jens Gieseke, a centre-right lawmaker in the European parliament, said the EU had made a “mistake” in allowing pooling with US and Chinese carmakers as this could benefit European carmakers’ rivals.

Industry players are reluctant to put numbers on expected payments publicly, as carmakers trade credits behind closed doors in groupings based on a web of alliances linked to their equity stakes and brand tie-ups. 

The German state of Lower Saxony holds a 20 per cent stake in VW while Renault is 15 per cent government owned, making the groups’ pooling with Chinese carmakers a politically sensitive topic, according to UBS analyst Patrick Hummel.

He added that if VW chose to pool, it would probably need to do so with a number of Chinese companies, as BYD might not have enough EV sales in Europe to fill the German group’s gap alone. 

The German group would need to almost double its EV sales in just one year if it were to meet EU targets itself, according to UBS. The company does not have a new mass-model EV launch planned in 2025. Renault is hoping to boost its EV sales with the launch of a €25,000 model.

VW said it would aim to avoid the penalties through “its own efforts”, pointing to a series of fully-electric models that were launched last year. 

“Only in a second step would other measures such as pooling come into play, naturally weighing up costs and benefits,” the company said. “Every euro invested in possible penalties would be a poorly invested euro.” 

Renault has said that it was too early to decide on pooling, but added the arrangements with Chinese manufacturers risked weakening the European car industry further.

Brussels is under pressure from the sector to make emissions rules more flexible as sales of electric vehicles in Germany and France fell last year after governments pulled back purchase subsidies for EVs. 

The bloc’s climate commissioner Wopke Hoekstra met with car industry representatives on Wednesday and a “strategic dialogue” between officials and the sector is due to start this month.

SpaceX Starship rocket explodes after lift-off

Setback for Elon Musk-led company comes hours after successful maiden launch of rival Blue Origin’s New Glenn

A SpaceX Starship rocket has exploded after lift-off from Texas, in a setback for Elon Musk’s $350bn space technology company just hours after a successful launch by rival Blue Origin.

Starship experienced “a rapid unscheduled disassembly”, with initial data indicating a fire developed in the aft section, SpaceX said on Thursday.

However, the company did manage to execute a successful “catch” of the flight’s rocket booster on its return to Earth.

In a post on his social media platform X, Musk said the main rocket’s failure might have been due to an oxygen or fuel leak in the firewall of the ship’s engine.

“Nothing so far suggests pushing next launch past next month,” he said.

The flight was the seventh test launch of a Starship, a 400ft rocket powered by Raptor engines that first reached space in November 2023.

Videos posted on social media showed it spectacularly disintegrating in a shower of flames over the Turks and Caicos Islands in the Caribbean. SpaceX said the debris had fallen “into the Atlantic Ocean within the predefined hazard areas”.

The US Federal Aviation Administration was reported to have briefly slowed and diverted aircraft around the area where the debris was falling after issuing a warning to pilots. Flight-tracking websites noted commercial flights in the area diverting after the explosion.

SpaceX said the failure “served as a reminder that development testing by definition is unpredictable”.

The incident came shortly after the successful maiden launch of Blue Origin’s New Glenn rocket, backed by Amazon founder Jeff Bezos, who is challenging Musk in the satellite launch market. The launch of New Glenn came five years later than originally planned.

Earlier on Thursday, Bezos wished Musk and SpaceX luck in a post on X.

SpaceX became the world’s most valuable private start-up a month ago, receiving a $350bn valuation in an employee stock sale. That marked a significant jump from the company’s $210bn valuation just six months earlier.

Investors rushed to back SpaceX in part because of Musk’s proximity to the incoming president, according to people with knowledge of that deal, leading to a “Trump bump” in the valuation of various Musk entities.

SpaceX has led the race to commercialise space flight, making strides towards Musk’s ultimate ambition to develop reusable rockets and make the human race “multiplanetary”.

The company, founded in 2002, became the first private company to transport people to the International Space Station in 2020. Last year, SpaceX was called upon to return stranded astronauts from the station. 

Engine Capital’s move on UK-listed multinational is latest effort to target sprawling conglomerate structure

US activist investor Engine Capital is calling for UK-listed Smiths Group to follow other conglomerates and explore the break-up of a multinational with products and services spanning aerospace, communications, energy and security.

In a letter sent to Smiths’ board seen by the Financial Times, New York-based Engine, which holds roughly 2 per cent of the company, argued it should launch a strategic review of its four businesses, or sell the group entirely.

“We believe that Smiths has significant value that is currently unrealized due to its conglomerate structure,” wrote Engine managing partner Arnaud Ajdler and partner Brad Favreau. “It is time for the Board to announce a strategic alternatives process.”

The Engine stake in Smiths includes about 1 per cent in equity and another 1 per cent in swaps.

The activist’s move comes less than a year after Smiths chief executive Paul Keel, who had defended the FTSE 100 conglomerate’s structure, departed for a US company half its size. Smiths this week also announced the retirement of its chief financial officer.

Ajdler and Favreau argued that Smiths was trading at a significant discount to a sum-of-its-parts valuation, and that it should follow other peers and break up. Smith could be worth a 60 per cent premium to the current share price in a sale, they predicted.

Engine’s push is part of a broader trend among industrial businesses as conglomerate structures fall out of favour. The likes of Johnson Controls and 3M have split or spun off businesses, and General Electric last year completed a split into three units. 

US industrial conglomerate Honeywell said last month it would consider spinning off its aerospace division after US activist investor Elliott took a $5bn stake and pushed it to split.

“With several break-ups that have created tremendous value for investors in the industrial sector, we see a significant and timely opportunity for the Board to unlock meaningful value for shareholders by optimizing Smiths’ corporate structure,” Ajdler and Favreau wrote.

Engine Capital, founded by Ajdler 12 years ago and now with roughly $1.2bn in assets under management, has achieved considerable success with its campaigns.

Last month, it replaced the entire board at software company Dye & Durham in a proxy contest that included removing the chief executive. It has recently targeted freelancing marketplace Upwork and infrastructure consultancy Aecom.

Smiths did not immediately respond to a request for comment sent outside its business hours.

Critical minerals are the new oil: Everyone needs them, but not every country has them. That’s led some to search for them in some pretty wild places. And few places are as outlandish as the ocean deep.

But deep-sea mining appears poised to get a boost from the incoming Trump administration, according to The Wall Street Journal. A string of nominees all previously said that they support the practice, which usually involves vacuuming egg-like rocks known as nodules from the ocean floor.

The nodules consist of a range of minerals, depending on where they’re located. Mining companies can recover copper, nickel, cobalt, and other minerals all vital to the data centers and the energy transition.

But deep-sea mining is controversial. Life thousands of feet below sea level tends to be slow-growing and fragile. Even small disruptions to the ocean floor can persist for decades, and scientists are concerned that the sediment plumes from mining company vacuums will leave scars that, over human time scales, may never recover.

Removing nodules might threaten deep-sea life, too: Since light doesn’t reach the depths to drive photosynthesis, organisms depend on other sources of energy and oxygen, from geothermal vents to the nodules themselves.

Still, the value of those minerals and their presence in international waters has some countries salivating over the prospect. The International Seabed Authority, a UN organization, is tasked with regulating deep-sea mining in international waters, and it recently received a permit application from The Metals Company, a U.S. company that’s working with the Republic of Nauru, an impoverished island in the South Pacific. Other countries, including the U.K., Canada, and France, have called for a ban on the practice.

Given the deep-sea mining’s international focus, two Trump administration nominees stand out, Elise Stefanik and Marco Rubio. Stefanik is Trump’s pick for UN ambassador, and Rubio is expected to head the State Department. Ultimately, they’ll be the ones negotiating with other countries to determine how to regulate deep-sea mining.

Despite the favorable political environment, deep-sea mining still has some rough waters ahead of it. Battery manufacturers have begun to shy away from expensive minerals like nickel and cobalt. If the trend continues, it could depress demand and drag down prices, undermining the sector’s profitability.

FCA encourages Hargreaves Lansdown, Interactive Investor and AJ Bell to make shareholders aware of looming votes

The UK’s Financial Conduct Authority has been drawn into an increasingly fractious activist campaign targeting seven investment trusts as concerns mount over retail investors’ interests.

The FCA has contacted the largest retail investment sites over their communications with customers of seven investment trusts being targeted by the US activist hedge fund Saba Capital, according to people familiar with the situation. The regulator wants to ensure that shareholders are aware of upcoming votes on board memberships at the trusts.

Officials from the FCA have asked Hargreaves Lansdown, Interactive Investor and AJ Bell about how they are alerting customers who hold shares in the investment trusts on their platforms, according to the people aware of the communications.

Saba, which is run by activist investor Boaz Weinstein, has called for shareholders to vote on overthrowing the trusts’ boards, claiming that the boards have failed to hold their investment managers to account over poor performance.

The campaign could lead to one of the biggest shake-ups of the 150-year-old British investment trust industry, which has £266bn in assets under management.

Saba has proposed its own board candidates and is ultimately aiming to take on the investment management of the trusts, which are currently run by Baillie Gifford, Janus Henderson, Herald Investment Management and Manulife.

However the investment trust industry has raised concerns that retail investors might not turn out to vote, paving the way for Saba to take over. Saba has stakes ranging from 19 per cent to 29 per cent in each of the trusts, amounting to £1.5bn in total. Saba needs more than 50 per cent of votes in favour at each trust to win.

The FCA is closely monitoring the situation and staying in close contact with the investment platforms that handle communications with investors in the investment trusts, according to a person briefed on the matter.

However, the rules governing votes to remove and appoint directors of investment trusts are set by the Companies Act, rather than by FCA regulations, so the watchdog had decided that for now these were internal matters for the trusts, their boards and investors, the person added.

The Association of Investment Companies, the trade body for the sector, has written to the FCA raising concerns about the protection of shareholders’ interests.

“With so much at stake, the regulator can’t just rely on people doing the right thing,” said Richard Stone, chief executive of the AIC. “When significant changes to an investment trust are proposed, platforms should actively contact their clients to encourage voting.”

Stone called on the FCA to review how board independence is determined under its listing rules. He said Saba’s campaign to take control of both investment trusts’ boards and also become their asset manager raised potential conflicts of interest.

The seven trusts that Saba is targeting are Baillie Gifford US Growth; Edinburgh Worldwide Investment; Keystone Positive Change; European Smaller Companies; Henderson Opportunities; Herald Investment; and CQS Natural Resources Growth & Income.

Hargreaves Lansdown and AJ Bell said they had written to the trusts’ shareholders to encourage them to vote. Interactive Investor said it had also taken steps to enable customers to vote. The FCA declined to comment.