The Rising Influence of Rising Affluence

[DewDiligence]

BHP, Rio Tinto Tout Benefits of Australian JV

[What makes the JV workable from an antitrust standpoint is that each company will retain its own marketing business; thus, the companies will argue that the JV is essentially no different from having each of the parties buy its iron ore from a common third-party supplier.]

http://www.ft.com/cms/s/0/903840f2-550b-11de-b5d4-00144feabdc0.html

›By Peter Smith in Sydney
June 9 2009 17:53

As Don Argus ponders whether to step down as BHP Billiton chairman at the miner’s annual meeting in two months he can do so knowing the long-term goal of combining its Western Australia iron ore assets with those of Rio Tinto is closer to reality.

Rio and BHP already rank second and third respectively in the global trade for seaborne iron ore behind Vale but the new venture – covering the whole of both miners’ iron ore assets in Western Australia’s Pilbara region – will leapfrog their Brazilian rival.

Based on current estimates, the venture would produce about 325m tonnes of iron ore in 2009 – 130m tonnes from BHP and a further 195m tonnes from Rio, which already has several strategic partners in the Pilbara.

Vale is expected to ship about 220m tonnes of iron ore in 2009.

Analysts estimate that Rio and BHP could supply close to 75 per cent of China’s iron ore imports this year, helped by the closer proximity of Australia to China compared with Brazil.

Inevitably Japanese and Chinese steelmakers have lined up to oppose the BHP/Rio combination on the grounds it will restrict competition. The main obstacle, though, is antitrust clearance, particularly from European regulators, and Australian government approval.

Marius Kloppers, BHP chief executive, is confident, however, that the venture will clear those hurdles and come into being in the middle of next year. To address competition concerns, he stressed BHP and Rio had formed a “production joint venture” that would preserve each group’s marketing arrangements with respective customers.

The joint venture will also establish a separate “marketing” company that could sell up to 15 per cent of production on the spot market.

The venture will operate as a “cost centre” and deliver iron ore, in equal volumes, to ships designated by BHP and Rio via their marketing groups.

Combining the adjacent iron ore assets in the Pilbara was a central motivation of BHP’s failed take-over attempt of Rio last year and securing a deal is all the more remarkable considering Rio’s previous hostility to BHP.

To compensate Rio for its larger assets, BHP will pay its rival $5.8bn to lift its stake in the venture from 45 to 50 per cent, valuing the entity at $116bn. Assuming targeted revenue synergies are achieved, as well as cost and capital expenditure savings, that value rises to $126bn.

Glyn Lawcock, UBS mining analyst in Sydney, said the venture would be positive for both miners and importantly does not preclude BHP from a fresh Rio takeover bid.

He said: “From a strategic perspective ... the iron ore joint venture does not remove the potential for a full BHP bid for Rio at some point”.

Mr Argus first raised the prospect of BHP and Rio combining their iron ore assets hours after Jan du Plessis was elevated to the role of Rio chairman in April, but it was Mr Kloppers and Tom Albanese, Rio chief executive, who took on the heavy lifting and stitched together the deal over the next two months.

Under the terms of its deal with Chinalco, Rio was unable to “shop” its assets to other parties but it was not prevented from being able to “listen”.

The talks between BHP and Rio were advanced by Mr Kloppers when he sensed Rio’s deal with Chinalco was in danger.

He said: “This deal has been more than 10 years in the making ... it has been worth the wait.

“Combining these assets and associated infrastructure [rail and ports] which operate side by side [will deliver] very, very substantial production, development and financial synergies.”

Mr Kloppers said he did not expect a backlash from Chinese customers aggrieved after Chinalco’s attempt to inject a $19.5bn investment into Rio, which would also have included a 15 per cent stake in Rio’s Hamersley mining assets in the Pilbara, ended last week.

The new venture will be chaired by Sam Walsh, Rio’s head of iron ore, who was last week promoted to the Rio board, while Ian Ashby, BHP’s iron ore president, will be the venture’s first chief executive.

To underline both miners’ commitment to the venture, a mutual break fee of $276m has been agreed, payable in the event either party does not honour specified commitments.

BHP was advised by Goldman Sachs and Gresham, the Australian boutique, while Morgan Stanley acted for Rio.‹