Friday, October 15, 2010

Q+A-What's next for troubled RIO-BHP iron ore JV?

A $116 billion iron ore joint venture between Rio Tinto and BHP Billiton has suffered a blow after German regulators said they would block it, foreshadowing a rejection by the European Union Combining their vast Australian iron ore mining operations would surpass Brazil's Vale in size, producing a combined 385 million tonnes of ore initially and aimed at saving $10 billion in costs.
But Germany's competition watchdog said it would prohibit the deal and sources said regulators from the European Union, deemed the biggest hurdle to the venture, are set to say the merger could hurt competition.
A leak of Rio Tinto boardroom discussions earlier this month indicated the company was determined to walk away from the venture.

When the deal was hatched in 2009, Rio Tinto was deep in debt, iron ore prices were low and BHP Billiton was eager to expand further in the sector, where its production trails Rio Tinto. Rio Tinto has since cut its debt 36 percent, iron ore prices have rebounded. However, if Rio Tinto terminates the deal before Dec. 31 it must pay BHP Billiton a $275 million break fee.
Meanwhile, BHP Billiton has turned its attention to fertiliser with a $39 billion hostile offer for Potash Corp.
Rio Tinto and BHP Billiton say they have not lost hope in the deal, but analysts doubt the companies' determination while the Dec. 31 deadline also looms.
If the EU gives indications the deal could progress with minor changes to appease concerns among steel mills Rio Tinto and BHP Billiton would wield too much control over global iron ore, it has a chance, according to sources.
However, short of eliminating some of the key elements of the alliance, particularly blending of ores and port sharing, analysts are doubtful it would clear.
Rio Tinto has since formed a joint venture with China's Chinalco to develop the Simandou iron ore mine in Guinea, where it has already invested $680 million. Rio Tinto is also weighing up development of the big Orissa iron ore deposit in India in partnership with the government to feed India's growing market for ore. BHP Billiton has no presence in iron ore in India.
In June, the pair was granted permission by the Western Australian state government to share their iron ore ports and rail lines and to blend each other's ore to better tailor their output to customers' needs. Importantly, these amendments are not dependent on the joint venture proceeding.

Source: Reuters

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