New BHP-Rio link mooted

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28 Feb 2009

RIO TINTO should again look at the possibility of a joint venture with BHP Billiton in the Pilbara instead of its $US19.5 billion ($30 billion) investment deal with Chinalco, a broker says. Rio produces more iron ore in Western Australia than its rival, so the formation of a 50-50 joint venture could involve BHP paying $US6.5 billion for an 18 per cent interest in Rio's Hamersley Iron unit, said Olivia Ker, an analyst with Merrill Lynch.
BHP would in effect be buying 17.5 million tonnes of annual production from Rio.
The deal, in which they could share infrastructure, could provide more than $US2 billion in annual cost savings.
The European competition regulator last year expressed concerns about BHP's proposed merger with Rio due to increased concentration in the global iron ore market, which would have led to one less player in benchmark pricing negotiations.
But Ms Ker said those concerns could be allayed if BHP and Rio agreed to market their share of the iron ore separately.
Rio last year rejected a takeover bid from BHP, but several times in the past decade it has examined a Pilbara joint venture.
Rio has agreed to sell Chinalco 15 per cent of Hamersley for $US5.2 billion as part of its investment pact. Ms Ker said it was possible that figure undervalued the expansion opportunities available and the possibility of higher prices in the future.
Although the Chinalco deal would alleviate worries over Rio's $US18.9 billion of debt repayments due in the next two years, Ms Ker said it looked less compelling in the longer term, especially the potential for "undue influence" from China Inc.
She said the more attractive option could be a $US10 billion rights issue combined with a selective pruning of its portfolio, possibly including the iron ore joint venture with BHP.
But it was hard to see how the present board and management could remain in place if the Chinalco deal was voted down by shareholders, since it had been recommended unanimously.
Merrill Lynch was an adviser to BHP on its aborted takeover bid for Rio. Analysts from another one of BHP's former takeover advisers, Goldman Sachs JBWere, have also said a Pilbara iron ore joint venture would make sense.

Source: Sydney Morning Herald