When you're trying to pull off a $200 billion mining merger, coal becomes the awkward houseguest nobody quite knows what to do with. That's the situation facing Rio Tinto Plc (RIO) and Glencore Plc (GLCNF) as they work through one of the most ambitious combinations in mining history.

The two giants are exploring a potential spinoff of coal assets as they try to blend vastly different portfolios and investor bases. One option gaining traction: carving out those coal operations into a separately listed Australian vehicle, sidestepping one of the thorniest obstacles to getting this deal done.

A Multibillion-Dollar Problem

Here's the scale we're talking about. According to the Australian Financial Review, Glencore's coal operations contribute approximately 8% of the combined group's $45.6 billion in EBITDA. On a standalone basis, that translates to tens of billions of dollars in value.

These aren't trivial assets. They span New South Wales and Queensland in Australia, plus operations scattered across central Africa and Latin America. The coal business is highly cash generative, which sounds great until you remember that institutional investors increasingly want nothing to do with thermal coal, no matter how profitable it might be.

The solution under discussion borrows from BHP Group Limited's (BHP) playbook. About a decade ago, BHP spun off non-core assets into South32 Ltd. (SOUHY), creating a cleaner corporate structure while preserving value for shareholders. Rio and Glencore could follow a similar path by listing coal assets on the Australian Securities Exchange.

This structure would let the merged company retain economic exposure to coal while offering investors a tidier portfolio focused on critical metals. Alternative approaches are also on the table: a pre-merger spinoff, or Rio could selectively pursue just Glencore's copper business rather than swallowing the entire company.

Glencore has already laid some groundwork here. The company restructured its coal assets into a separate subsidiary last year, making a potential spinoff more straightforward. Reports suggest that other commodities like chrome, vanadium, and manganese might also get bundled into the spinoff, further streamlining any combination with Rio.

Copper Is the Real Story

While coal creates complications, copper is what's driving these companies back to the negotiating table after talks collapsed in late 2024.

"Some of the issues that were already there a year ago have become a lot more stark," Clara Ferreira Marques, Bloomberg's Asia-Pacific head of commodities, said on The Bloomberg Australia Podcast. "You look at the copper price, we're now over $13,000 a ton. That makes the case for adding copper to your portfolio not only compelling, but urgent."

She's not exaggerating. According to the International Energy Agency, copper demand could jump as much as 50% by 2040. The culprits are familiar: electrification, data centers, and the infrastructure needed for the energy transition. Supply growth, meanwhile, looks questionable at best, raising the specter of persistent structural deficits.

A merged Rio-Glencore entity would control roughly 7% of global copper output, instantly becoming the world's dominant producer. That's the prize both companies are chasing.

The Deal Structure and Timeline

Barrenjoey has floated a potential offer ratio of 0.0698 Rio shares per Glencore share, which would give Rio about 66% ownership of the combined entity. However, Glencore shareholders will likely push for a premium, pointing to the company's copper growth pipeline and valuable trading capabilities.

The advisory teams are heavy hitters. Macquarie Capital is serving as Rio's primary advisor, with JPMorgan and Allens providing additional support. Citi is understood to be advising Glencore on its side of the table.

The clock is ticking. Under UK takeover rules, Rio has until 5 pm on February 5 to either make a formal offer or walk away from the deal entirely.

Price Action: Rio Tinto shares were down 1.54% at $65.01 during premarket trading on Friday. The stock is trading near its 52-week high of $87.34. Glencore shares closed up 0.77% on Thursday.