[ferro-alloys.com] Glencore (LN:GLEN) is emerging from a period of consolidation with an enviable balance sheet and insulated cash flows, putting a major M&A tilt back on the table for the first time in years, according investment bank Jefferies.

Glencore has, like most other miners, been intensely conservative in its corporate ambition in recent years, instead focusing on consolidation through asset sales, general cuts and operational efficiencies. 

At the same time, the major has beefed up it’s marketing arm to reduce exposure to the cyclical risks of metal mining.

"Prior to its IPO in 2011, Glencore was a trading company with industrial assets," Jefferies analysts reminded investors in a note this week. "After its acquisition of Xstrata, Glencore became a capital intensive industrial company with a trading segment and high debt. 

"Our analysis indicates that Glencore is now taking action to grow its marketing EBIT and reduce its dependence on cyclical Industrial assets while maintaining leverage to commodities with structural demand tailwinds (copper, cobalt, vanadium, nickel). 

"This approach should partially protect Glencore from periods of cyclical weakness in the sector."

The firm said Glencore’s balance sheet, meanwhile, was at its healthiest since its public debut six years ago, shortly before metal prices fell away dramatically. 

"At current spot commodity prices, Glencore’s leverage should be lower than Rio Tinto’s (LN:RIO), BHP’s (AU:BHP) and Anglo American’s (LN:AAL) by [the end of] 2019," analysts said. 

Jefferies argued the combination of balance sheet strength and "cash flow resilience" through its marketing arm should earn the major a premium valuation against other major miners.

Glencore’s commodity exposure was also expected to boost its relative earnings, with the investment bank predicting a stronger period for base metals, Glencore’s strong suit, versus a lull in iron ore pricing to which other majors are more exposed.

What this could all be leading to is an opportunity for Glencore to bolt on other mining assets through M&A, with a second run at Rio – which it approached unsuccessfully in 2014 – its likely preferred choice. 

"We believe Glencore is positioning itself for large mining M&A once again, and Rio would still be a desirable target," Jefferies speculated. 

RBC, another investment bank, recently said Rio was undervalued at present and exposure to growth in aluminium made it an attractive investment opportunity.

However, the Jefferies warned any tie-up with Rio or any other major was likely to be "very difficult to execute" in the face of "regulatory hurdles and shareholder opposition". 

Stronger balance sheets across the sector, fatter margins, and conservative yet optimistic commodity price forecasts all point to an increase in deal volume into the second half of the year.

• [Editor:Wang Linyan]