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Entertaining discussion of RIO/GLEN idea here: https://youtu.be/KWmAN4nvJto?si=BEfMZBwlxvkvLZU8. (from about 4mins to 27mins)

No direct mention of Zanaga. Some discussion of the Collahuasi copper mine in Chile; GLEN has a 40-something% stake in this - a little like it does in Zanaga - but it’s a long-established (pre-dating GLEN involvement) working mine so perhaps not really a useful read-across.

Their comments on the apparent cheapness of GLEN are interesting, as is an observation on journo attribution in the recent Bloomberg story.

Their overall take on the RIO/GLEN story is a mixture of “no smoke without fire” and “too early to say”. Fair enough.

.."Ex, as both of us have noted from reading the IPO prospectus, Elphick is obsessed with securing NPV for the asset & seeks to build it into every aspect of the project he possibly can.."

I read Elphick’s intent as holding out for a price that’s based on an NPV as opposed to the traded price - because he believes (as do we!) that the traded price is materially too low relative to the potential economic value of the asset. But discount rates are set by buyers not sellers, and - as I have set out - a realistic discount rate will lead to a much lower valuation than that derived using the 10%-real in the presentation.

On “trashed”, if ZIOC were to disclose it had received an offer at (say) 40pps - a level that would be considered disappointing/bad by some posters here - it would nevertheless have a massively positive impact upon the traded sp.

“… we'd need to see full NPV to be able to recommend..' - no problem with ZIOC saying that, happens every day! What they can’t do is say they already have such an offer on the table. Usual language/construct used in exploratory casual chats is:

- “If we were to make you an offer it might be along the lines of XXX.”

- “If we were to receive an offer it would have to look like [this] for us to take it seriously”

etc

What you propose wouldn’t put anyone on the spot though, and it wouldn’t certainly wouldn’t “force” them to up any potential offer.

@NewKOTB is correct, in reality the board only has to notify shareholders of credible/proceedable offers. They have to be a little careful with this but it’s usually manageable.

I don’t see your point on “trashing”.

This board has an endearing attachment to the idea of NPV as some sort of definitive figure, but there’s no “standard” discount rate. ZIOC quoting an NPV in a presentation using a “10% real” discount rate doesn’t somehow fix that figure as a basis for consideration. As I said in earlier post I would expect a buyer would use a materially higher discount rate (think 20-30%). As there are different views on discount rates, any statement about “..not selling for less than NPV…” is basically meaningless.

If GLEN were to tender for shares in the open market they could try to have a discussion with their auditors about marking-up the rest of their stake (a la Woodford…), but it would be an uphill battle without 3rd party verification. If market pricing re-adjusted to the tendered level, and there was reasonable volume they could give it a go I guess. But the general principle is that you can’t create your own mark-to-market. With GLEN and ZIOC MCaps where they are, it would be immaterial to GLEN in any case…

“ I'm authorized to let you know that GLEN is prepared to make an offer…”

AuthoriSed by who?

Assuming authorised by GLEN, what you propose would make the SI(s) insiders and preclude them from offering themselves. The normal / expected process would be for ZIOC to announce the offer by GLEN thus starting the TC clock running. The SI(s) would then have a framework within which to respond.

ZIOC management will want to get any offer announced ASAP, as it is tantamount to firing the starting gun…

Something for the weekend…

450pps is apparently based upon the updated NPV for stage 1 of the project, and the current number of shares in issue: USD3.7bn / 1.22 / 676m = 446pps.

Zanaga’s presentations indicate that this NPV was derived using a “10% real discount rate”. Let’s assume that the nominal rate utilised was 10% + 3.2% (the contemporary IMF “World inflation rate”)

The stage 1 project has an indicated NPV of USD3.7bn, with capex of $1.9bn and a 30yr LOM at 12Mtpa. With a back-of-an-envelope spreadsheet I can replicate outcomes in the USD3.5bn-4bn range, with a discount rate at 13.2%. So I can reverse-engineer an NPV calc that range validates (at least) the USD3.7bn, and - by extension - the 446pps.

However, a rational investor would look for a far higher rate of return than 13.2%. And the same rational investor won’t pay 100% of the NPV, because that (by definition) would hand all of the economic returns to the seller.

So we need to apply a higher discount rate, and then an appropriate EV/NPV ratio. Taking these in turn:

My view is that a rational investor would likely look to utilise a nominal discount rate closer to 25%. Remember this rate reflects the return they are looking for in exchange for risking their valuable capital.

I would deconstruct the 25% as follows:

Risk-free rate: 5%

Equity risk premium: 5%

Country risk premium: 10%

Project risk premium: 5%

In contemplating the EV/NPV ratio I’d be guided by Edison’s widely-used benchmark of 52.4%

Plugging the revised discount rate into my back-of-an-envelope NPV calc, and applying the EV/NPV discount gives: USD1.1bn / 1.22 / 676m * 52.4% = 70pps

That’s a huge (9x!) premium to the traded price today, hence my repeated comments that a multi-bag is entirely possible on a clean take-out.

But the notion that investors here may wake up one day to a suspension and subsequent take-out at 450pps is “fanciful” for the reasons set out in this post.

Enjoy…

Yes. Although some are better (or worse!) prospects than others. The “old world” of NPV-focus, lots of new projects etc is slowly being replaced by attention to dividend coverage. The funds with cash-covered dividends are a v different proposition to those where there isn’t sufficient cash generation. A time for selective bottom-fishing….

#2 of 2

"We can see the merits of combining the business, mainly centred around marketing synergies. However, given the above challenges, we do not, at this point, think that a merger deal is likely, and think that Rio would likely be reticent to pay a meaningful premium," Berenberg concluded.

RBC Capital Markets said despite Glencore once approaching Rio Tinto's key shareholder Chinalco in July 2014 for a potential merger, it still comes as a "surprise".

"We would not expect a straight merger to happen as we believe Rio shareholders would see it as favouring Glencore, but its possible there is a deal structure out there that could keep both sets of shareholders and management happy. The MA parlour games that we saw last year, will undoubtedly start again in earnest," analyst Ben Davis remarked.

Panmure Liberum also thinks a straightforward business combination seems "highly unlikely".

The broker noted the only asset overlap is copper, and it highlighted past mistakes in M&A, as well cultural differences.

Rio also has a lot on, the broker explained, while as asset transaction, even seems "like a stretch".

"We think most likely Glencore led and suggests a concern about the outlook and desire to partner up, share risk etc and that more M&A in the sector will happen," the broker added.

AJ Bell's Coatsworth said culturally, the two companies are "worlds apart".

"Rio Tinto has gone down the path of being an environmentally responsible miner, ditching coal years ago and trying to forge a reputation of being a cautious, more considered business."

"Glencore is all about making the big bucks, no matter what it takes. It has a reputation of being the bad boy of mining and a US attorney once declared that 'bribery was built into the corporate culture' at Glencore," he added.

By Jeremy Cutler, Alliance News reporter

Comments and questions to newsroom@alliancenews.com

Copyright 2025 Alliance News Ltd. All Rights Reserved.

A rounded assessment of RTZ/GLEN:

EXTRA: "Cautious" Rio Tinto and "bad boy" Glencore make unlikely pair

17th January 2025

(Alliance News) - A possible merger between Rio Tinto PLC and Glencore PLC was viewed as unlikely by analysts on Friday, given cultural differences, asset mix, and past M&A mistakes.

"The prospect of Glencore merging with Rio Tinto is like trying to force a square through a circle-shaped hole," commented Dan Coatsworth, investment analyst at AJ Bell.

"Fundamentally it wouldn't fit, and the only solution would be to trim off the sides such as getting rid of Glencore's coal assets. Even then, it would be like picking up two magnets and putting the like poles together, instantly repelling each other. This would not be a marriage made in heaven," he added.

Coatsworth was commenting after Bloomberg reported on Thursday after the London market close that the two mining firms have been discussing combining their businesses in what would represent the industry's largest-ever merger agreement.

Rio and Glencore recently have held early stage talks about a deal, according to Bloomberg sources, although it is unclear whether the talks are still live.

Rio Tinto is an Anglo-Australian multinational that is the world's second-largest metals and mining corporation after BHP Group Ltd. On Friday, Rio's shares were 1.1% higher at 4,985.87 pence each in London for a market value of GBP86.15 billion.

Glencore is a commodities trader and miner based in Barr, Switzerland. On Friday, shares were 2.6% higher at 379.75p in London for a market value of GBP46.75 billion. In Johannesburg, Glencore shares were 2.0% higher at ZAR86.80.

Combining the two businesses would potentially create a company to leapfrog longstanding industry leader BHP, which is worth about USD126 billion.

Berenberg listed a number of challenges to any potential deal.

First is Glencore's coal business, which it elected to keep in 2024 after upscaling it through the acquisition of Teck Resources Ltd's Canadian metallurgical coal business.

Berenberg noted Rio exited coal in 2018 and has made it clear that coal is not a focus for the group, so it would likely need to spin this out if a combination occurred.

Second, Glencore has operations in some higher geopolitical risk jurisdictions, such as Kazakhstan and the Democratic Republic of the Congo, which "we think may well be unpalatable to Rio's lower geopolitical risk strategy".

Third, the cultures of the two businesses are "quite different", with Rio a "significantly more conservative" entity than the more "aggressive, trader-like mentality" of Glencore.

Fourth, Berenberg noted multiple comments by Rio Chief Executive Jakob Stausholm in the past, including one which was that he sees limited value creation in large-scale M&A.

Fifth, Berenberg argued that Glencore's asset portfolio is less attractive than Rio's and sixth, a deal would likely attract some antitrust focus.

continued…

RTZ/GLEN not happening at this point, according to the FT:

“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. “

BTW the idea - promulgated by the usual suspect - that a minnow like ZIOC was given a heads-up is absolutely for the birds… Up there with the imaginary nonsense about options and delta-one hedging! But then the notion that shareholders here will wake up one morning to find ZIOC is being bought for 450pps is surely the most fanciful of all.

ZIOC is an interesting investment and may deliver multi-bag returns. But investors should keep their feet on the ground and not heed the nonsense posted regularly on LSE boards…

2024 results (unaudited etc) are in line with guidance / expectations.

This, alongside “Expect improved market conditions in 2025, with momentum building through the year” is excellent news for holders here.

Step back a bit and look across markets today. It’s a risk-off day with spreads blown out - especially for speculative (and rate-sensitive) names. Risk managers likely have the upper hand, with exposure limits being enforced etc. Bigger forces at play than the imaginary jousting between PI’s and MM’s that underpins most LSE discussion….

@alwayshoping said: “ As Aberdeenman explained...the company has already spent around $400 million dollars proving up a percentage of the total mine, so that is $400 million less that any acquirer would have to find if they were starting work on a virgin site to reach the figures that we have today.”

That is a textbook example of the sunk cost fallacy…

Here’s a thought experiment for you. Imagine there are two identical development-stage projects. Each of them requires a further $2bn in pre-production CapEx, and each will produce $40bn in lifetime revenues. The future cashflows and risks associated with each project are in fact identical. The only difference between the two projects is that the discoverers of project A spent just $10m in exploration costs (because they were good/lucky and drilled in the right places!). Whereas the discoverers of project B had to spend $500m to get to the same stage,

Will a rational investor today pay more for project B than they would for project A?

The sunk costs are sunk. Posters saying they are irrelevant are 100% correct. All that matters are the prospective costs and revenues.

It’s likely that those will both have changed - as a result of inflation and iron-ore market prices. Less obvious but very relevant is that the discount rate applied will need to be higher now (on a like for like basis) as it was always expressed in REAL not nominal terms. Prospective purchasers/investors will be all over this.

I hold with my previously expressed view that a multi-bag is entirely possible here, but some of the high figures constantly proposed by the usual suspects are nonsensical and should be disregarded.

@alwayshoping said: “…if we do get a complete buy out, then I think that we all believe that it should be at a price several multiples of just one billion.”

Not sure that everyone “believes”, perhaps fairer to say “hopes”.

It’s WAY too early to say that MK has been a good appointment…

Ok. I’ve been out for a long frosty sunny walk with my dog. We have analysed the situation. Conclusion is that ZIOC themselves are the actor looking to create pressure. Perhaps to try to flush out any counter-proposal(s) lurking in the undergrowth. It looks like a way of creating competitive tension. There are times when deadlines are useful. Whether real or not it’s worth trying…

So my best guess is that ZIOC have they SOMETHING ready to go, but are hopeful that it might be improved upon. They are trying to force someone’s hand by giving exaggerated notice that they’ll go with what they have on Feb 11th. If that someone wants to play, they need to do so ahead of Feb 11th.

My best guess only - DYOR.

@Ex: “Having CLEARLY flagged all the 'upcoming', I wonder whether ZIOC is free of NOMAD pressure to say 'we know of no reason' etc, if there's a sustained rise in the s/p over this period ?”

That’s an interesting potential explanation. I am doing my best to come up with reasons for the extended save-the-date, and will share tomorrow if I come up with anything.

One way of reading this is that the date was set a while ago, with the expectation that it would be announced with the customary week or less notice. Something/someone has bounced them into announcing it early. Perhaps they fear a leak? Or are in some way at risk of announcements by others? I’m going to ‘phone-a-friend who’s an M&A banker (different sector) tomorrow and ask him why such an early announcement may have become necessary. At this point, I don’t have a more cohesive hypothesis.

Faites vos jeux mesdames et messieurs...

Interesting that they've announced this with such a long lead time. Quite unusual to see 5+ weeks notice. Pressure must be building somewhere in the system, enough to prompt this - effectively a holding statement.

Rampers have a date to work with now. I anticipate the arrival of the usual crew(s)....

@Dip666 there are two mistaken assumptions in the ill-informed hypothesis that has been pushed so very hard by the usual crew: Firstly that GDXJ et al are REQUIRED to own every index component at the index weight. Secondly that this requirement will compel them to purchase shares in a price-insensitive manner.

The flawed conclusion teetering on these assumptions is that ETF buying will drive a rapid share price upgrade.

The reality is that (as long as they can meet their tracking error targets) the ETF managers have a degree of discretion with respect to portfolio composition and trade execution. They need and use this to minimise costs which are one of the principal sources of drift in realised returns.

My expectation is that we’ll wake up one morning to a set of TR1 notifications confirming that the various portfolios are now at their index weights. The required positions having been acquired and warehoused over a period with a broker acting on a principal basis (ie accepting the price risk).

Discussion of this topic is relentlessly mis-informed and overplayed by the usual pumpers. If one of the ETFs were to trade in the hypothesised way, any resultant price spike would be transient in any case. Index buyers don’t create durable dislocations in security prices. The loyal LTH’s here should disregard the noise and focus on operational news flow; it is underground execution that will drive price appreciation in the long run.