Glencore(LSE: GLEN) has a reputation of growing through acquisitions, although the global commodities powerhouse led by CEOIvan Glasenberg has been quiet recently.
Following the $5.9bn disposal of a Peruvian copper mine, Glencore spent $1.4bn acquiring West African oil explorer Caracal Energy earlier this year. However, despite the companys remaining firepower, Glencore has since not made any sizable acquisitions.
For this reason, its believed that something big is brewing. Indeed, for the astute, long-term investor, now is the time to buying companies with exposure to the commodity sector, as valuations have collapsed over the past few years.
No commodity has suffered more than iron ore. The price of the steelmaking ingredient has fallen by nearly 50% since the beginning of last year and miners with exposure to the sector are feeling the pain.Rio Tinto(LSE: RIO) (NYSE: RIO.US) andBHP Billiton(LSE: BLT) (NYSE: BBL.US) are two of the sectors biggest players and both have underperformed the market so far this year.
City analysts have estimated thata $1 drop in the average iron ore price, wipes out $135m of annual net profit after tax at BHP Billiton and $122m at Rio. Since the beginning of this year the price of iron ore has dropped by around $30 per tonne. So, these figures suggest that the falling price has cost BHP around $4bn in annual profit, while Rio has lost out on $3.7bn of annual profit.
Still,BHP and Rio have extremely low production costs, so they can weather the low iron ore price. Rio has previously stated that it is able to produce iron ore at an average price of $21 per tonne. Meanwhile, analysts believe that BHPs production breaks even at around $45 per tonne.
Glencore on the other hand, has almost no exposure to the iron ore market. The groupapproved a $900m mine project in Mauritania this year but thats it. Nevertheless, Glencores trading arm has been increasing its exposure to iron ore, raising suspicion that the company is ready to add exposure to the sector.
And this is why analysts have been speculating that Rio could become prey for Glencore. Rios valuation has fallen due to the low price of iron ore, presenting an attractive opportunity.
Rio is the larger company with a market capitalization of 59bn, compared to Glencores 47bn, but just like it did with Xstrata, Glencore is likely to use its stock as currency if a deal goes ahead.
If a deal does go through, its estimated that Glencore could free up a staggering $49bn in cash from the combined entities balance sheet. Shareholders would be richly rewarded.
Of course, Glencore could be looking at other alternative acquisition targets. BHPs spinco, a selection of unwantedaluminium, nickel, silver and coal assets,with a market value estimated at between $10bn and $15bn, could be an attractive acquisition for Glencore.
There has also been some speculation that Glencore could make an all-share offer forAnglo American(LSE: AAL) next year. The trouble is that Anglos portfolio contains many assets that would be unattractive for Glencore. Unattractive assets include Anglos platinum and diamond businesses. Around two thirds of Anglos projects produce only 20% of earnings.
Still, Anglo has an iron ore business with attractive profit margins, so maybe a break-up is on the horizon?
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.