As far as sentiment can be measured today, Glencore is seen as a better-run business than Rio Tinto, a mining giant with a bad habit of self-harm.
That view is understandable given the heavy write-offs incurred with the Alcan aluminium acquisition and the Mozambique coal deal. Self-harm is also a charge being levied against Rio Tinto management over its iron ore “flooding” strategy.
A fresh shot in the iron ore debate was fired a few days ago by Glencore’s ultra-acquisitive chief executive, Ivan Glasenberg, who told an investor’s day briefing that “capital misallocation, not lack of demand” was the key issue for the mining industry.
He did not go as far as to name Rio Tinto, that job was done for him by analysts who lapped up his criticism of rival miners who expanded too rapidly in the resources boom and now find that they are over-producing.
Whether management at Rio Tinto likes it or not, the constant repetition by Glasenberg about mismanaged capital allocation and mineral over-production is scoring points with investors in Rio Tinto who worry about the wisdom of expanding iron ore output into a falling market.
Given past mistakes (Alcan and Mozambique) there is a deep-seated concern that the iron ore strategy could be a hat-trick of bloopers which will cost Rio Tinto shareholders dearly – a fact that is well understood by Glasenberg.
Over the next few months it’s a dead-certainty that the capital misallocation complaint will be heard repeatedly from Glencore until it sounds like the morning prayers wailing out from a loudspeaker at the corner mosque.
By mid-February, it could be showdown time in the (so far) phony war between Glencore and Rio Tinto though by then the battle will be more than half over because an awful lot of Rio Tinto shareholders will believe the Glencore siren-song.
What Rio Tinto’s chief executive, Sam Walsh, must soon recognise is that there is a propaganda war underway, and he is losing.
Since Walsh took the top job at Rio Tinto he has been busy portraying himself as a nice guy who collects milk jugs, and while he has cleaned up some of the mistakes by his predecessors he is the man behind the questionable iron ore flooding experiment that is weighing heavily on the company’s share price.
There are two problems with Walsh’s style. Firstly, nice guys rarely win in business, and secondly it is easy to pick apart the flooding strategy by pointing to the damage done by pumping more iron ore into an already over-full market.
In time, the nice guy might win, and in time the flood of iron ore will dissipate as high-cost material produced by rival miners is squeezed out of the market.
Time, unfortunately, is not on the side of Walsh or the company he currently runs. By mid-February, around the same time Rio Tinto files its profit report for calendar 2013 all legal impediments will have been cleared to allow Glencore to lob a fresh merger proposal into the Rio Tinto boardroom (the hand grenade analogy is deliberate).
It is the combination of the clock running down, the inevitability of a showdown, and the subtle but effective propaganda campaign of Glasenberg which is enabling Glencore to be seen as the winner, so far, despite there being obvious holes in his claims which Walsh should exploit.
Firstly, Glencore is as guilty as Rio Tinto of market flooding because that’s precisely what it has done in thermal coal to the point whereby it was forced to close its Australian mines for three weeks to allow a portion of excess supply to be absorbed by the market.
Secondly, the Glencore share price has under-performed Rio Tinto over the past six months despite a widespread belief among investors that it’s the other way around. On the London stock exchange since mid-year Glencore’s shares have fallen by 23% while Rio Tinto’s Australian-listed shares are down by 19%.
It’s not for Dryblower to tell Walsh how to do his job but here goes anyway, starting with a suggestion that he drop the Mr Nice Guy image, point out that Glasenberg is also guilty of capital misallocation in the thermal coal industry, and that Rio Tinto has been a better (less worse?) investment since mid-year.
In other words, stop pretending that Glencore has not declared war and that a showdown can be avoided – it can’t, Glasenberg is too committed on a course of action and the only way to slow him is to fight fire with fire.