What may speak of a possible merger with Rio Tinto (LSE: RIO) imply for Glencore (LSE: GLEN) shares?

Bloomberg Information reported on Thursday (16 January) that the 2 have been in early stage discussions simply over a decade after Rio rejected a takeover bid by Glencore. However the companies didn’t remark.

As I write this on Friday morning, Glencore shares are up round 3% in early buying and selling, whereas Rio is up underneath 2%. So neither share has jumped in a manner that implies the Metropolis is but giving an excessive amount of credence to the prospect of a deal.

Potential deal logic

Mega-mergers are nothing new in mining. The trade’s enormous mounted prices and large capital funding necessities, mixed with a growth and bust cycle for some commodities, implies that strategic combos that may construct scale and minimize out prices might be enticing.

Glencore’s energy in copper boosts its enchantment proper now, in my view. Demand for the steel is anticipated to develop strongly as a result of its use in renewable vitality initiatives.

However would a deal make sense for the companies?

We noticed a tie-up between BHP and Anglo American final yr collapsing due to the deal construction – pushed largely by regulatory issues in South Africa.

I feel a Glencore-Rio merger may additionally run into sizeable regulatory challenges given how giant the mixed enterprise can be. Add to that the egos concerned in mining and I doubt it could be straightforward to thrash out a mixture between the 2 companies with contrasting cultures.

So for now, I see the deal chatter as fascinating to listen to about however not but related to the long-term funding case for both miner.

How deal premiums work (or not)

Whereas some individuals purchase shares in firms hoping for a takeover, I see that as hypothesis, not investing.

Shopping for such shares because the price strikes up in expectation of a deal, solely to see the price collapse after it falls by means of, is an actual danger in such conditions.

If Rio was to bid for its rival, perhaps Glencore shares can be valued at a premium, to assist persuade shareholders to vote for the deal. However in a straight merger, that appears much less prone to occur.

Extra probably, Glencore shareholders would merely obtain a sure variety of shares within the new, merged agency in trade for his or her outdated Glencore ones.

Are the shares a discount, deal or no deal?

So, for me as an investor, the funding case for Glencore wants to face by itself two ft, no matter occurs to the deal rumours.

I do like its copper belongings and assume they may very well be a considerable money movement generator within the coming decade.

However the advanced enterprise has (like many miners) been very inconsistent when it comes to monetary outcomes. Final yr noticed revenues fall and the enterprise crashed to a $4.3bn post-tax loss following a mammoth revenue the prior yr.

That underlines the volatility of mining earnings as a result of shifting commodity costs. At present, steel costs are excessive and I reckon an unsure international financial outlook may but push them both manner.

Till we attain a degree the place the steel price cycle will get a lot decrease, I don’t see Glencore shares as a long-term discount for my portfolio so won’t be investing.