3RD UPDATE: BHP Billiton, Rio Tinto End US$116 Billion Iron Ore Deal
October 18 2010 - 3:47AM
Dow Jones News
BHP Billiton Ltd. (BHP.AU) and Rio Tinto Ltd. (RIO.AU) Monday
terminated a planned US$116 billion iron ore deal that would have
secured them one third of the world's output.
The cancellation was widely expected in recent months. The
world's largest steel makers had opposed the deal on the grounds
that it would concentrate pricing power even further in the hands
of the top three iron ore miners.
"They've been writing the epitaph on this one for some time
already," said Andrew Gardner, an analyst at MF Global in
Sydney.
BHP and Rio, along with Brazil's Vale S.A. (VALE), account for
around two-thirds of the sea-borne trade in iron ore, a crucial
commodity for construction-led economies, particularly China.
China imports around 50 million tons of iron ore a month, and
the shorter shipping distance from Australia to China make Pilbara
iron ore a particularly important source of feedstock for the
country's steel makers.
"I am disappointed that ultimately the regulators did not agree
with us," Rio Tinto Chief Executive Tom Albanese said in a
statement.
The end of the deal shifts attention to what alternatives the
miners have to maximise their earnings from their operations in the
Pilbara, a remote part of Australia's northwest where ore must be
carted for hundreds of kilometres on dedicated trains to reach
ports.
An agreement struck with Western Australia's state government in
June, allowing Rio Tinto and BHP to share infrastructure and blend
their iron ore together, is likely to form the core of any future
cooperation between the companies.
"There could be some benefits from that," said Paul Xiradis,
Chief Executive of fund manager Ausbil Dexia and a top-10
shareholder in both companies' Australian listings.
Glyn Lawcock, an analyst at UBS in Sydney, said the main benefit
of the joint venture--combining Rio Tinto's better infrastructure
with BHP's more productive mines--could be extracted from much less
formal cooperation.
"You get a good front end from Rio and a good back end from BHP
and together you've got a supermodel," Lawcock said. Around US$5.6
billion of an envisaged $11.5 billion synergy benefits could be
extracted, he said in a note last month.
The coal miners along Australia's eastern coast mostly share
rail and port facilities, a model in stark contrast to the Pilbara
where Rio and BHP, alongside fast-growing challenger Fortescue
Metals Group Ltd. (FMG.AU), operate four ports and three separate
rail lines totalling more than 2,200 kilometres.
Fortescue Chief Executive Andrew Forrest has engaged in
long-running legal battles against the larger miners to open up
their rail lines to third parties, with limited success.
Gardner said that Fortescue could be one of the major
beneficiaries of the collapse of the deal if it provided an impetus
for BHP and Rio to share infrastructure.
"It isn't just a Rio and BHP story anymore," he said, adding: "I
don't think anything's going to happen quickly."
Significant hurdles would still stand in the way of such an
agreement. "It's pretty clear that the regulators, and the steel
mills, would be likely to scrutinise closely any arrangement which
involves the companies working together in any significant way, so
we need to consider very carefully how any future arrangements
address those concerns," said a person close to the joint venture,
who did not want to be named.
"Sharing infrastructure and entering agreements is always a
little bit complicated," said Xiradis. "Look at this joint venture:
they couldn't get it approved by the relevant authorities."
Germany's Federal Cartel Office last week informed the two
companies that it intended to block the venture, and Rio Tinto said
the parties had also been advised the deal "would not be approved
in its current form" by E.U., Australian, Korean, and Japanese
competition regulators. A "state of play" meeting with E.U.
regulators Friday dealt the final blow to the proposal.
BHP Billiton Chief Executive Marius Kloppers said: "It became
clear that this transaction is unlikely to obtain the necessary
approvals to allow the deal to close and as a result, both parties
have reluctantly agreed to terminate the agreement."
BHP's board discussed the matter before agreeing to drop the
deal at the weekend, although Rio Tinto's executive directors
already had permission from the board to cancel the agreement.
A US$275.5 million break fee payable by any party seen to be not
negotiating in good faith or breaking off the deal will not be
paid, as both companies agreed mutually to walk away, BHP said.
The joint venture would have entitled each company to sell half
of the combined output from their Pilbara mines, with a US$5.8
billion fee paid to Rio Tinto to equalise the stakes. Analysts saw
that agreement, inked at a time when Rio Tinto was heavily indebted
from the financial crisis and its US$38.1 billion 2007 takeover of
Canada's Alcan, as giving Rio Tinto a poor return for its
stake.
-By David Fickling, Dow Jones Newswires; +61 2 8272 4689;
david.fickling@dowjones.com
(Rachel Pannett in Canberra contributed to this article.)