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BHP and Rio Tinto dip on iron ore joint venture concerns.

Issued at 2010-09-15



Shares in Rio Tinto and BHP Billiton have edged lower after they requested a delay in Australian approval of their proposed iron ore joint venture.

And analysts are wary that if the deal falls through, BHP may be tempted to raise its $39bn hostile offer for Potash Corporation to unsustainable levels to make sure that, at least, is successful.

 The Australian competition and consumer commission (ACCC) had already suspended its timetable in July, and has now agreed to further delays to allow the two companies more time to discuss the $116bn partnership with overseas regulators. Analysts at Ambrian commented:

Despite the ACCC review agreeing, in a relatively short timeframe, to sanction the BHP Billiton proposed acquisition of Rio Tinto in 2008 which would have brought these two assets together (with the probably divestment of Robe River – Xstrata was lined up to buy that) it appears the global financial crisis has materially changed the environment for the ACCC.

 To be specific, a number of iron ore suppliers delayed, cancelled or reduced plans to expand capacity, with Rio and Vale both cutting production. As a result there are fears the proposed Rio/BHP joint venture would substantially reduce competition and could have an effect on pricing. Ambrian added:

Whether or not the [joint venture] can be successfully concluded, without involving material divestment of assets, it wouldn't have changed our relative rankings on the companies as it would have delivered substantial profits to both groups' shareholders.

We continue to rank Rio Tinto (buy, £43 12 month price target) as our top pick amongst its UK diversified peer group and BHP Billiton (£21.80 12 month price target) remains a tentative hold.

Tentative, because we are becoming increasingly concerned that if the joint venture fails to clear the hurdles, BHP chief executive Marius Kloppers and his board may be driven to deliver a higher than can sensibly justified bid for Potash Corporation given it is the third deal proposal during his three or more years as chief executive (Rio approach in 2007, iron ore joint venture in 2009 and Potash Corporation in 2010).


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