Rio Tinto and BHP Pursue Western Australia Joint Venture

In this illustration of Rio Tinto’s high-tech Operations Center, located in Perth, Western Australia, operators at
computer consoles will, at some time in the not-too-distant future, control automated mine equipment at the
company’s iron ore operations 1,500 km away. Rio Tinto and BHP Billiton recently announced plans to establish
a joint venture involving both companies’ iron ore assets in Western Australia..
Rio Tinto and BHP Billiton signed a non-binding agreement on June 5, 2009, to establish a production joint venture covering their iron ore assets in Western Australia. The joint venture would encompass all of the companies’ current and future Western Australian iron ore assets and liabilities and would be owned 50% each by BHP Billiton and Rio Tinto. Iron ore production would be delivered in equal volumes to the two companies and sold independently through their separate marketing groups. BHP Billiton would pay Rio Tinto $5.8 billion for equity type interests at financial close of the agreement to take its interest in the joint venture from 45% to 50%. Based on this calculation ($5.8 billion equals 5%), the full equity value of the joint venture would be $116 billion.

Pre-conditions for formation of the joint venture include receipt of regulatory and relevant governmental clearances and approval from the shareholders of both Rio Tinto and BHP Billiton. The non-binding agreement will terminate if binding agreements are not executed by December 5, 2009, or the conditions precedent are not satisfied by December 31, 2010. The companies expect formation of the joint to be completed around mid-2010.

Production and development synergies to be realized by the joint venture are estimated at more than $10 billion. Among these synergies will be the combining of adjacent mines into single operations; reducing costs through shorter rail hauls and more efficient allocations of port capacity; blending opportunities that will maximize product recovery and provide further operating efficiencies; optimizing future growth opportunities through the development of consolidated, larger and more capital-efficient expansion projects; and combining management, procurement, and general overhead activities into a single entity.

BHP Billiton CEO Marius Kloppers said, “The synergies in this combination are so substantial that both companies have been investigating ways to combine these operations for more than a decade. I am delighted that we have found a solution that works for both companies. This joint venture brings together world-class iron ore resources, infrastructure and people, unlocks large synergies, and is an outstanding outcome for all stakeholders.”

Announcement of the joint venture prompted expressions of concern relating to pricing power from regulators and steel producers in China, Japan and Europe, while Western Australia premier Colin Barnett voiced concern about possible losses of jobs and revenue to the state. However, these initial reactions did not appear to raise insuperable obstacles to formation of the joint venture.

For Rio Tinto, announcement of the iron ore joint venture agreement came on the heels of it abandoning a proposed deal with Aluminium Corp. of China (Chinalco) that would have seen the latter company acquiring a substantial stake in Rio Tinto and various Rio Tinto assets in exchange for $19.5 billion. Rio Tinto shareholders resisted that transaction as being too favorable to Chinalco.

As an alternative to the Chinalco deal and separate from the iron ore joint venture, Rio Tinto, with indebtedness in the neighborhood of $38 billion arising from its acquisition of Alcan, completed a rights issue in early July 2009, raising $15.2 billion as its existing shareholders took up entitlements to new Rio Tinto shares. Also, on July 6, Rio Tinto announced that it had signed an agreement to sell its Alcan Packaging Food Americas division to Bemis Co. for a total consideration of $1.2 billion, of which $200 million may be in the form of Bemis shares.

As featured in Womp 2009 Vol 06 -