As merger rumours swirl, should I pounce on Glencore shares?

After reported early stage talks between two giant miners emerged, our writer has been revisiting the long-term investment case for Glencore shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Tanker coming in to dock in calm waters and a clear sunset

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

What might talk of a potential merger with Rio Tinto (LSE: RIO) mean for Glencore (LSE: GLEN) shares?

Bloomberg News reported on Thursday (16 January) that the two were in early stage discussions just over a decade after Rio rejected a takeover bid by Glencore. But the firms did not comment.

As I write this on Friday morning, Glencore shares are up around 3% in early trading, while Rio is up under 2%. So neither share has jumped in a way that suggests the City is yet giving too much credence to the prospect of a deal.

Should you invest £1,000 in HSBC right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if HSBC made the list?

See the 6 stocks

Potential deal logic

Mega-mergers are nothing new in mining. The industry’s huge fixed costs and massive capital investment requirements, combined with a boom and bust cycle for some commodities, means that strategic combinations that can build scale and cut out costs can be attractive.

Glencore’s strength in copper boosts its appeal right now, in my opinion. Demand for the metal is expected to grow strongly due to its use in renewable energy projects.

But would a deal make sense for the firms?

We saw a tie-up between BHP and Anglo American last year collapsing because of the deal structure – driven in large part by regulatory concerns in South Africa.

I think a Glencore-Rio merger could also run into sizeable regulatory challenges given how large the combined business would be. Add to that the egos involved in mining and I doubt it would be easy to thrash out a combination between the two firms with contrasting cultures.

So for now, I see the deal chatter as interesting to hear about but not yet relevant to the long-term investment case for either miner.

How deal premiums work (or not)

While some people buy shares in companies hoping for a takeover, I see that as speculation, not investing.

Buying such shares as the price moves up in expectation of a deal, only to see the price collapse after it falls through, is a real risk in such situations.

If Rio was to bid for its rival, maybe Glencore shares would be valued at a premium, to help persuade shareholders to vote for the deal. But in a straight merger, that seems less likely to happen.

More likely, Glencore shareholders would simply receive a certain number of shares in the new, merged firm in exchange for their old Glencore ones.

Are the shares a bargain, deal or no deal?

So, for me as an investor, the investment case for Glencore needs to stand on its own two feet, whatever happens to the deal rumours.

Created with Highcharts 11.4.3Glencore Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

I do like its copper assets and think they could be a substantial cash flow generator in the coming decade.

But the complex business has (like many miners) been very inconsistent in terms of financial results. Last year saw revenues fall and the business crashed to a $4.3bn post-tax loss following a mammoth profit the prior year.

That underlines the volatility of mining profits due to shifting commodity prices. Currently, metal prices are high and I reckon an uncertain global economic outlook could yet push them either way.

Until we reach a point where the metal price cycle gets much lower, I do not see Glencore shares as a long-term bargain for my portfolio so will not be investing.

Should you buy HSBC now?

Don’t make any big decisions yet.

Because Mark Rogers — The Motley Fool UK’s Director of Investing — has revealed 5 Shares for the Future of Energy.

And he believes they could bring spectacular returns over the next decade.

Since the war in Ukraine, nations everywhere are scrambling for energy independence, he says. Meanwhile, they’re hellbent on achieving net zero emissions. No guarantees, but history shows...

When such enormous changes hit a big industry, informed investors can potentially get rich.

So, with his new report, Mark’s aiming to put more investors in this enviable position.

Click the button below to find out how you can get your hands on the full report now, and as a thank you for your interest, we’ll send you one of the five picks — absolutely free!

Grab your FREE Energy recommendation now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

C Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Pound coins for sale — 51 pence?

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »