Glencore could make or break the dream of a Teck-Anglo American merger

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In the 21-page news release outlining the merger of Vancouver’s Teck Resources TECK-B-T and London’s Anglo American NGLOY, Glencore is not mentioned once. Yet the Swiss commodities giant will play a crucial role in determining whether the deal goes ahead and, if so, under which terms.

In the global mining industry, Glencore GLNCY is famous – make that infamous – as a merciless negotiator and will no doubt employ its leverage to the hilt. Anglo and Teck, beware.

Driving the creation of Anglo Teck, as the enlarged company is to be called, are two enormous copper mines high in the Andes of Northern Chile, Quebrada Blanca (QB) and Collahuasi. They are only 11 kilometres apart, and putting the two together in the name of “synergies” – business argot for cost-cutting – is driving the proposed marriage. The companies claim that melding those operations would boost collective operating income by US$1.4-billion a year.

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Operating QB and Collahuasi as one makes perfect strategic sense; the two mines had already been co-operating in small ways (they share an airport, and QB sells desalinated water to the Collahuasi mill). But the complex ownership structure of the mines means a full-fledged merger could get bogged down in negotiations – or worse.

QB is 60-per-cent owned by Teck, 30 per cent by Japan’s Sumitomo SMMYY and 10 per cent by Coldeco, Chile’s state-owned mining company. The much larger Collahuasi – its pit is 3.5 kilometres across and a kilometre deep – is 44-per-cent owned by Anglo, 44 per cent by Glencore and 12 per cent by Japan’s Mitsui MITSY. In other words, Anglo and Teck will have to make nice with four other shareholders of the mines to get their deal done, and one of them, Glencore, has as much power to determine Collahuasi’s future as Anglo.

Glencore, on its own and through Collahuasi, has for years been touting the benefits of combining the mines and has even shown slides to visitors to illustrate how that could create “opportunities for industrial strategies” (I saw this presentation in January at the mine site).

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Collahuasi’s idea is to build a conveyor belt to take its richer ore to QB’s mill, leaving QB’s own ore in the ground until it’s needed, perhaps decades down the road. Much of the rest of the infrastructure would be shared, including the Pacific port facilities, where the water is desalinated and ships are loaded with copper concentrate bound for refineries in Asia.

You would think that Glencore and Mitsui would be thrilled that their Collahuasi partner wants to merge the two mines. Anglo does all the heavy lifting, and Glencore and Mitsui share the synergies – money for nothing, merger for free.

It’s not that simple. The logical merger structure would see the two mines come under one company, perhaps a joint venture, that would be owned by all the shareholders, with Anglo Teck having the single biggest piece. Or not. Putting values on the individual equity stakes of all six partners is where the negotiations could bog down.

Each of the six would want to maximize their equity stakes in QB-Collahuasi to boost their share of the profits. But Teck is, in effect, being rescued by Anglo because QB, its biggest project, has gone billions of dollars over budget and suffered endless engineering problems and production delays. Also, QB’s ore grade is relatively low, making it harder for the mine to turn into a cash flow machine. The average grade, 0.52 per cent per tonne of ore mined, compares badly with Collahuasi’s 0.8 per cent.

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You can see where this is going. Glencore and Mitsui – especially Glencore, with its aggressive executive team, led by CEO Gary Nagle – will want to minimize the value of QB, all the better to boost its own equity stake in the new company that will hold both mines. The smaller the value assigned to QB, the higher the value assigned to Collahuasi. It’s that simple.

Of course, Glencore has to be wary of pushing its luck. If it argues that QB is worth zero, or close to it, Anglo and Teck could throw up their hands in despair and call off the whole deal. Merging QB and Collahuasi could make or break the entire merger. It is in Glencore’s best interest to own as much of the merged mines as possible; it is not in Glencore’s best interest to make demands so excessive that a mine merger it has wanted for years turns to dust in the Andean desert.