Mining mergers: Disappointment, disruption ... and discussions?

The failure of Rio Tinto and Glencore to agree on a proposed $240bn merger in February was, as one prominent bank described it, met with a “sigh of disappointment”.

“Too bad. GlenTinto would have been a neat company,” said Bank of America. “We, and we believe many market participants, saw the potential combination favourably and thought that a leading global metals and mining company would result.”

All — except perhaps Rio Tinto’s Australian shareholders. Though worth only 16% of the total share register, they rejoiced that the deal didn’t progress. Rio’s recently appointed CEO, Simon Trott, had passed an early test in nerve, they added. He could now get on with the serious work of cost-saving and divesting from noncore assets.

Yet the market thinks it’s a case of farewell but not goodbye for a Rio Tinto-Glencore combination. “Both parties have walked away with the view that this was a deal worth pursuing and that it would make strategic sense,” said analysts at Swiss bank UBS. “But not at any price,” they added.

Too true. Rio’s all-share offer was thought to be a 68%-32% split, whereas Glencore wanted 60%-40%. For a company heavily exposed to depressed thermal and metallurgical coal prices, and with a significant but yet-to-be-developed copper project pipeline, Glencore’s offer was too steep a price for Rio Tinto.

Too bad. GlenTinto would have been a neat company

—  Bank of America

But how do matters stand after the past two weeks, in which thermal coal prices have gained nearly 25%? The last time coal ex-Newcastle (Australia) averaged $130/t, about the spot price at the time of writing, the group’s coal division earned $3.2bn in ebitda — double 2025’s contribution from the fuel. Coal futures ex-Newcastle were as high as $150/t, suggesting there’s more to come from thermal coal. Meanwhile, there’s been an unrelated decline in the iron ore price, to which Rio’s earnings are strongly correlated.

In this scenario, Glencore CEO Gary Nagle thinks a new discussion is worth holding, according to a Reuters report citing three investors who’d had discussions with both companies this month. The deal can’t be revisited until August, owing to UK listing regulations which prevent Rio from approaching Glencore anew for six months. But some investors are already girding themselves for a new fight, saying they don’t see how Rio can change its mind in six months just because coal has gone up and iron ore has gone down.

This sets the stage for an interesting renewal of mega-merger dynamics, possibly in a much-changed world for commodities consisting of higher interest rates and high inflation, owing to geopolitical disruption in the Middle East — a context supporting Nagle’s view that larger miners can only benefit from more scale. “In our view, a merger with a large peer remains an option,” said analysts at Deutsche Bank on Glencore’s deal prospects.

At the coalface

Shares in Exxaro Resources are only a couple of rand shy of their five-year high, reached in 2022. That was shortly after Russia’s invasion of Ukraine, an event that sent thermal coal prices to highs of $450/t.

The South African export benchmark API prices are about 27% higher at the time of writing, amid the Iran oil crisis. Yet at $110/t, this is well off the panic of four years ago.

So why is Exxaro performing so well?

Three factors are behind it, says CEO Ben Magara. One is the finalisation of the R10.6bn acquisition of manganese assets in terms of Exxaro’s diversification strategy. Another is that the group changed its dividend cover to allow for improved payouts. (It declared a R10 per share dividend for the 2025 financial year.)

The third factor is that noncore assets were divested, while the firm’s Cennergi renewable energy business announced acquisitions and plans to grow further without huge cash outflows. Exxaro will rely on debt to fund 75% of the business, even after paying out the cash buffer of recent years.

“I think we have stabilised the business in the past year,” Magara tells the FM. “We have also been very clear in our operational delivery plans,” he adds.

Among these plans is an increase in export coal volumes to more than 8Mt, potentially capitalising on the improved export prices. It’s worth noting that Exxaro achieved an average export price of $86/t against $90/t API for the year — itself well down on last year’s $105/t average.

One major unknown, other than the future coal price, is the ability of the state to deliver. Exxaro supplies most of its coal to Eskom. It remains to be seen if Eskom will continue to buy Exxaro’s coal at the same rate if it experiences a major fall in demand. This could be caused by the closure of the Mozal aluminium smelter in Mozambique, a major buyer, and the possible permanent shuttering of the Glencore-Merafe Chrome venture’s ferrochrome smelters.

There’s also risk on the rail line. Magara notes an improvement in the performance of the Richards Bay line last year. An industry total of nearly 57Mt was delivered to Richards Bay, in another sign that Transnet is recovering operationally. But these are fragile gains.

Investec’s Nkateko Mathonsi says in a note to clients: “Coal line performance gains were particularly evident in the Mpumalanga region, where operational stability improved considerably. However, performance in the Waterberg region did not experience a similar uplift and continues to operate below capacity.”