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 The miner said on Tuesday Glencore had contacted it about a
potential merger in July, adding that it turned Glencore down in
August and there had been no further contact between the companies
on a deal.
A merger would have created the world's biggest miner, supplanting
BHP Billiton.
"The Rio Tinto board, after consultation with its financial and
legal advisers, concluded unanimously that a combination was not in
the best interests of Rio Tinto's shareholders," Rio Tinto said in a
statement to the Australian stock exchange.
Rio's Australian shares jumped as much as 4.7 percent to a 9-day
high of A$60.28 in a weaker broader market after the company issued
the statement.
Rio revealed the approach after Bloomberg reported that Glencore had
talked to Rio's top shareholder, Chinese state-owned Aluminum Corp
of China (Chinalco) [ALUMI.UL], to gauge its interest in a deal.
 The report, citing people familiar with the situation, said talks
with Chinalco took place in recent weeks, and Glencore was also
testing the waters with other Rio shareholders, studying financial
and regulatory obstacles as it weighed its next steps.
Any bid for Rio would need China's blessing, as Chinalco owns 9.8
percent of the company. Chinalco is sitting on a big loss on its
stake, bought in February 2008 for 60 pounds a share, double Rio's
current London-listed price, as it sought to block a $127 billion
takeover bid from BHP Billiton.
A Chinalco spokesman in Beijing did not answer telephone calls on
Tuesday, which is a public holiday in China.
Glencore, which last year bought rival Xstrata in the sector's
largest ever takeover, has recently talked openly about wanting to
merge with Rio Tinto, coveting its low-cost, high quality iron ore,
bankers have said.
Iron ore would fill a gap in Glencore's suite of commodities, where
it already has strong positions in copper, nickel, zinc and coal.
But analysts and bankers saw major hurdles to a deal, saying Rio
Tinto shareholders would want a massive premium, China would likely
force a merged group to sell some copper and coal assets, and Rio's
conservative culture would clash with Glencore's aggressively
entrepreneurial DNA.
Rio Tinto shareholders said that given that most of the market sees
Rio Tinto as currently at least 30 percent undervalued, Glencore
would have to go hostile with any offer that fit with its own return
hurdles.
"I don't think Glencore would go hostile and try and take out Rio.
That would be a big bite," said Jason Beddow, managing director of
Argo Investments, the sixth-largest holder of Rio's Australian
shares.
IRON ORE PRICE
Citi analysts said the deal would be good for Glencore as it would
give it a dual-listed platform to match BHP, provide it instant
scale in iron ore, boost its trading business, and give
highly-geared Glencore access to Rio's balance sheet.
The two could save around $500 million just by combining their
neighboring coal operations in Australia, Citi estimated.
"Overall a deal would have been positive for Glencore and for the
sector given the long list of potential rationales, but a rejection
is not surprising given the difficulty in agreeing to a price when
Rio is trading on the lows of the iron ore price based on our house
view," Citi said in a note on Tuesday.
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Speculation has grown around a Glencore bid for Rio as prices of
iron ore, which made up 92 percent of Rio's first-half profit, have
slumped to five-year lows, as the top producers have flooded the
market with new supply.
Analysts at Bernstein calculate for every dollar fall in the price
of iron ore, Rio's assets lose $1.5 billion in value.
Rio has focused on slashing costs while expanding its iron ore
output to what it calls "epic proportions", not shying away from the
fact that it is largely dependent on steel growth in China, which is
slowing. "The board believes that the continued successful
execution of Rio Tinto's strategy will allow Rio Tinto to increase
free cash flow significantly in the near term and materially
increase returns to shareholders," Rio Tinto Chairman Jan du Plessis
said in a statement.
Glencore, which has criticized the top iron ore producers for
driving down prices by ramping up production, had no immediate
comment on its approach to Rio.
Glencore's shares rose as much as 3.9 percent in Hong Kong.
EYEING DEALS Unlike its bigger rivals, who have flagged
they are going to stay away from chasing acquisitions for the
foreseeable future following a string of soured deals, Glencore has
been looking for bargains amid the commodities slump.
Following its $46 billion merger with Xstrata last year, it bought
Chad-focused oil company Caracal Energy this year for about $1.3
billion and has been looking to buy BHP's troubled Nickel West
business.
With companies like Rio, BHP, Anglo American and Cliffs Natural
Resources looking to sell assets, there is plenty for Glencore to
choose from without having to pay up for Rio, said Ric Ronge, a
portfolio manager at Pengana Capital.
"Glencore, if it's got the appetite, can probably find a situation
where it can get a lot more bang for its buck in terms of finding
something that's more stressed and has a better fit with their
existing asset spread," Ronge said.
"Obviously they'd like iron ore, but the question is at what price?"
(story corrects name of Rio Tinto Chairman to Jan du Plessis from
Jac Nasser in paragraph 21)
(Reporting by Sonali Paul; Editing by Stephen Coates and Ed Davies)
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