* Highlights
On Tuesday 7th April, Glencore reached the end of the "put-up or shut-up" period that had restricted it from coming back to make a renewed approach to take over Rio Tinto (following the announcement that the company had initiated informal merger discussions with Rio in July 2014). Unsurprisingly, there has been much discussion about the expiry of this restriction and whether Glencore would be straight back in for Rio once the restriction was lifted. We published a detailed piece in October last year (Rio Tinto & Glencore: Running The Numbers on Glentinto.) analysing what the combined company would look like as a whole, as well as examining each business unit in turn. With the put-up or shut-up now expired, and Glencore free to come back for Rio, we return to the subject of "Glentinto" and take a look at what has changed over the last six months, what the deal would look like now, whether the deal now makes sense for Glencore and whether we still like the deal.
* What has changed in the market since the start of the put-up or shut-up?
- Spot commodity prices: the iron ore price has fallen 40%, the copper price has fallen 11%, and the price ratio between the two (iron ore over copper) has fallen 33% to c.9.9x.
- Commodity price forecasts: 2017 consensus price forecasts have fallen 24% for iron ore, 6% for copper, 24% for thermal coal and 1% for zinc.
- Share prices: the Rio Tinto share price has fallen 5%, the Glencore share price has fallen 12%, and the price ratio between the two (Rio over Glencore) has increased 8%.
* What does the deal look like now?
- Under the same structural assumptions we made previously (a 20% premium paid using 75% paper), we still see the deal as accretive for Glencore shareholders at consensus commodity price expectations (i.e. US$80/t iron ore and US$6,389/t copper in 2018)
– though the deal is not as attractive as it was six months ago. As we said previously, whether the deal is accretive or dilutive is predominantly a function of the future commodity price assumptions made.
- At consensus commodity price expectations out to 2018, the deal is EPS accretive to Glencore shareholders in all years (35% in 2015, 14% in 2016, 2% in 2017 and 8% in 2018).
- However, holding spot copper prices flat out to 2018, the deal is dilutive to Glencore's 2018 EPS at anything less than a US$71/tonne iron ore price, and dilutive to Glencore's 2015 EPS at anything less than US$55/tonne iron ore