Weekly Reports | 10:00 AM
Record commodity prices drive earnings upgrades and a possible mega mergers, while a litigation settlement in the gaming segment points to upside potential.
- Rio Tinto/Glencore: scale, scarcity and synergy as merger talk redraws the mining landscape
- With Light & Wonder's litigation risk cleared, catalysts re-emerge as focus returns to growth
- Gold prices and US defence contracts drive confidence into FY26 for Codan
By Danielle Ecuyer
Welcome to the first In Brief for 2026 as the year kicks of with a bang.
This week's quote comes from RJ Gallo, Deputy CIO for Fixed Income at Federated Hermes:
"The January press conference should be interesting, and the next few months will certainly be significant for Fed independence.
"Although the market reaction calmed during morning trading, we believe the strength of the early response signals potential future ramifications should the investigation rise to the point of an indictment of Federal Reserve leadership."
2026, the year of mega mining mergers?
Barrenjoey has looked at the possible combination of Rio Tinto ((RIO)) and Glencore with both mining majors announcing they are in initial stages of discussions around the possible combination of “some or all of their businesses”.
As highlighted by the analyst, both majors own and operate “world-class” assets across multiple segment including iron ore, copper, aluminium, zinc, coal, lithium, and commodity marketing.
Combining the two would create the world’s leader in mined copper, bauxite, seaborne iron ore, thermal coal, met coal and commodity marketing, the second largest in zinc, fourth in lithium and seventh in alumina with upside potential to expand both in copper and lithium.
Stand-alone Glencore is expected to double copper production by 2035 which is noted as one of the major catalysts for merging. Rio has currently offered copper equivalent to expand at a CAGR of 3% to 2030 with Glencore guiding to 9% or around 1.6Mtpa of copper by 2035 against 845kt in 2025.
Statements regarding “some or all of their businesses” as reported by Bloomberg infers to Barrenjoey the possible divestment or spin-off of the coal assets, although Rio also was reported as being open to the possibility of retaining Glencore’s coal assets.
Regarding possible synergies, the analyst estimates over US$8bn or 4% of the combined market capitalisation as possible while highlighting there are “limited” direct synergies given the lack of asset overlaps.
Removing centralised costs could generate around US$400m per annum pre-tax or circa US$3.2bn of value. Noting for the Anglo American-Teck merger synergies were guided to US$800m pa or circa US$6bn of value or some 8% of total combined market capitalisation with procurement at around 60%.
Anti-trust risks are viewed as negligible ex copper where the group could have a combined mining share of circa 7% which is lifted to around 18% when incorporating Glencore’s 3.6mtpa of copper metal and concentrate marketing. BHP Group ((BHP)) is considered the only company large enough to generate a competitive counter bid (but has indicated it has no appetite for it).
Under UK Takeover law Rio Tinto has until 5pm on February 5, 2025, to announce a firm intention to make an offer or walk away, unless extended. The miner has already stated it could be an all-share merger with Rio acquiring Glencore via a Scheme of Arrangement.
Based on forecast free cash flows and respective contributions, Rio would own 66% of the combined group inferring an offer of 0.0698 Rio shares for every Glencore share. This, however, as emphasised by the analyst, is prior to any premium being paid.
While acknowledging the logic of the potential deal, Barrenjoey has downgraded Rio Tinto to Neutral from Overweight due to recent share price strength and risks around the potential merger premium to get the deal over the line.
Equally, Rio is seen as likely to underperform BHP in the Australian market. Target price remains unchanged at $146.56.
Light & Wonder: focus shifts to earnings growth
Gaming company Light & Wonder ((LNW)) announced litigation with Aristocrat Leisure ((ALL)) has been resolved relating to copyright and trade secret claims made by the competitor in relation to its Dragon Train and Jewel of the Dragon games.
Compensation of -US$127.5m for Aristocrat regarding claims of “misappropriation and infringement” of intellectual property has been agreed. Canaccord Genuity view it as a significant de-risking event.
The analyst highlights US Dragon Train games had already been removed from gaming floors prior to the announcement. Australian Dragon Train games are not controlled by Light & Wonder and these machines may be re-skinned or re-profiled.
The compensation amount is considered “fair” and does not have negative impacts on the company’s growth outlook or underlying business trajectory.
Apart from the removal of a key potential risk event, Canaccord points to the FY25 result, tentatively penciled in for February 25th as a potential positive catalyst with consensus forecasts at the lower end of management’s guidance range at this stage.
Further upside surprise could come from inclusion in the ASX50 index, and ongoing market updates.
Share buybacks are estimated around US$300m which have been conducted during a period of price weakness.
The analyst does stress the capital employed on the US and Australian buyback programs does increase net debt even if the timing has been well executed.
Free cash flow generation will be a major point of focus for Canaccord.
The stock remains Buy rated with a $192 target price.
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