MAC: Mines and Communities

BHP and Rio Tinto face new hurdles over world's biggest mining merger

Published by MAC on 2009-11-16
Source: Industry Search and Reuters

Earlier this year, two of the world's three leading iron ore producers inked a deal to create what (by market capitalisation) would be the globe's largest mining venture.

BHP Billiton and Rio Tinto are still working on the joint venture deal, but the devil is in the detail - not least because China, its leading customer, is militantly opposed to anything that smacks of a cartel.

Meanwhile, BHP is apparently considering a revival of its bid to takeover its junior rival, a year after the failure of its first attempt.

However, the government of Western Australia, where both companies have their most important iron mines, is threatening to slap higher royalties on both companies, and says it won't "rubber stamp" any merger.

Speculation about BHP takeover of Rio Tinto continues

Industry Search (Australia and New Zealand)

10 November 2009

Resources giant BHP Billiton Ltd has a new window of opportunity to make a fresh bid for rival Rio Tinto Ltd, after it abandoned a takeover move last year.

BHP Billiton will again be able to consider a potential bid Rio Tinto from November 27, when a mandatory one-year waiting period under UK corporations law expires, and resources analysts are speculating on whether such a move could go ahead.

In February 2008, BHP Billiton sought to takeover Rio Tinto in a deal originally valued at $US147.4 billion.

The hostile bid eventually failed in November, after share prices plunged following a fall in commodity prices, causing the takeover to be valued at about $US66 billion.

There was speculation BHP Billiton pulled the pin on the hostile bid because it was being made at the height of the financial crisis, and it would inherit Rio Tinto's debt which was then about $US40 billion.

Asset sales needed to reduce debt were seen as difficult at the time and there was also concerns about the hurdles needed to be cleared to appease regulators.

"They (BHP Billiton) have had 12 months to look around and they haven't done another deal, they haven't spent their money," said Bell Potter Securities client adviser Chris Kimber.

"The market has rallied 60 per cent, so either they are really dumb, and missed out on lots of bargains, or they have just decided that this is the only one that they want.

"I think the reason BHP Billiton has done nothing is because they have found nothing that suits them as much as Rio does."

Kimber said he thought BHP Billiton would be most likely to strike in the period between November 27 and December 5 if any bid went ahead.

The December 5 date is key because that is the day BHP Billiton and Rio Tinto have targeted to reach a binding agreement on a $US116 billion ($A125.62 billion) tie up of their West Australian iron ore assets.

"My guess would be that they would want to bid straight away and put off signing the joint venture," Kimber said.

A spokeswoman for BHP Billiton said the company had a policy of not commenting on speculation regarding takeover moves.

But in a note to clients last week, Citigroup said a bid for Rio Tinto would still make the most sense for BHP Billiton because of potential synergies and growth options that could be extracted from a combination of their global assets.

If BHP Billiton and Rio Tinto did merge the resulting company would easily be the world's biggest resources business, and leapfrog Brazilian miner Vale as the biggest iron ore producer globally.

However, Citigroup said it expected BHP Billiton would wait for greater clarity on its iron ore joint venture with Rio Tinto before making any move.

"If a binding agreement cannot be reached, a renewed tilt at Rio could certainly be on the cards," Citigroup said.

It said if a bid did proceed now, it would could be in the form of 2.3-for-one share swap.

This is far below the previous bid of 3.4 of its shares for every one Rio Tinto share, which equates to a 2.68-for-one bid after adjusting for Rio's mid-year rights issue.

But such a price would still offer a 30 per cent upside to Rio Tinto shareholders.

Before any takeover before BHP Billiton and Rio Tinto went ahead global regulators would need to sign-off, and shareholders would also need to approve the deal.

In 2008, the bid had passed Australian and US competition regulators, but there was uncertainty over whether the European Union was seeking to counter concentration of the companies' iron ore market share.

BHP, Rio Iron ore tie-up at the mercy of Western Australia state looking for higher royalties


12 November 2009

SYDNEY - Western Australia state has raised the stakes in its demand for higher royalties from iron ore miners Rio Tinto and BHP Billiton, telling them that it would not rubber-stamp their planned iron ore merger.

Western Australia Premier Colin Barnett told the chiefs of both firms in a meeting this week he wanted to double their royalties to put them on par with other miners in the state, Australian newspapers said on Thursday.

"The major point I stressed is I want to see full royalties applied to both BHP and Rio projects," The Australian quoted Barnett as telling reporters on Wednesday, a day after meeting the Rio Tinto and BHP Billiton chief executives.

The Australian newspaper quoted Barnett as saying both CEOs "drew breath" when he made this remark but they made no concession.

Rio Tinto and BHP Billiton, the world's second and third largest iron ore miners respectively, announced in June a plan to merge their Australian iron ore operations, all based in the west, in a joint venture valued at the time at $116 billion.

The plan is already under fire from steel companies that rely on ore from both companies who fear it will create an Australian oligopoly capable of unfairly influencing pricing and supply.

The plan needs a series of government approvals, including new legislation in Western Australia state.

Under agreements dating back to the 1960s, both companies pay the state a royalty of rate 3.75%. This is half the royalties that other miners pay, Barnett was quoted as saying, in recognition of their contribution to early development of the state's iron ore industry, based in the desert Pilbara region.

"I don't believe that anyone can argue today that BHP and Rio, the world's largest mining companies, the world's wealthiest mining companies, should pay half the royalty rate of small Australian companies," Barnett was quoted as saying.

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