lencore's long hunt for Rio Tinto's coal mines slips away

LONDON – Glencore’s years-long pursuit for a bigger Australian coal business was delivered another setback on Monday after Rio Tinto Group passed on the company’s offer for a second time.

Now the mining giant run by a former coal trader is running out of time to come back with a better offer or lose out on a deal the company has chased since at least 2013. The mines are situated near Glencore’s own operations in the Hunter Valley, and the ability to work them together makes them an attractive prize.

“They wanted these assets for a long time,” said Paul Gait, an analyst at Sanford C. Bernstein in London. “Never say never, but they will be disappointed if they ultimately go to Yancoal.”

Rio stuck with Yancoal Australia for the operations in New South Wales because of the likelihood of a speedier completion, despite two last-minute bids from Glencore. Rio shareholders will meet in London on Tuesday and Australia on Thursday to approve the deal, giving Glencore little time to counter.

“At the moment it looks as though they are on the back foot,” Glyn Lawcock, a resources analyst at UBS Group AG in Sydney, said Tuesday.

A spokesman for Glencore declined to comment on the deal.

“This sale process has been in progress for a long period of time and we believe it is in the best interests of our shareholders to take the greater certainty of Yancoal’s strong proposal,” Rio’s CEO Jean-Sebastien Jacques said in a statement.

THE TWO OFFERS:
Glencore: $2.68-billion in cash, plus a coal-price linked royalty. The company also agreed to compensate for regulatory delays and pay a $225-million deposit, which would be forfeited if the deal doesn’t win regulatory approval.

Yancoal: $2.45-billion cash, $240-million in royalty payments and an increased break fee.

Yancoal Australia Ltd. shareholder Senrigan Capital Group has said it's concerned by the size of the financing needed for the deal, as well as the impact a planned equity raising would have on the value of stakes held by minority shareholders.

Glencore’s pursuit of coal contrasts with other major mining companies such as Rio, who have moved away from the dirtiest form of fuel. The Swiss commodity trader and biggest exporter of thermal coal, used mainly for power stations, has consistently said coal is essential to the needs of the developing world in the long term, thanks to growing demand in Asia.

Coal production dropped by a record amount in 2016, according to BP Plc’s annual review of global energy trends.

Glencore’s reluctance to enter a bidding war with Yancoal would suggest new discipline in mining since 2015, when heavy debts built up by expensive deals pushed the industry into a crisis.

“It’s starting to get into ranges of very full valuation,” Gait said. “There are more games in town than just this.”

Peter Grauer, the chairman of Bloomberg LP, is a senior independent nonexecutive director at Glencore.