Deal Imploding?

18 05 2010

It has been rumoured that in the wake of rising iron ore prices, delays in getting regulatory approvals and uncertainties related to the Australian super-tax, the Pilbara joint venture between Rio Tinto and BHP Billiton may be called off. The two companies have however publicly reiterated their commitment to the transaction yesterday although BHP Billiton said it would likely re-evaluate the deal if no agreement is reached by year-end.

The deal may no longer represent good value.

There is growing scepticism in analyst-circles on whether this deal will materialize. In an article published on April 14th, The Age reported that Rio Tinto shareholders were tipped to ditch the deal with BHP due to rising iron ore prices. In this context, the need to share the costs is less important, even though the estimated US $10 billion of savings arising from the transaction still appears significant despite savings.

Moreover, the compensation payment of US $5.8 billion granted to Rio Tinto in consideration of the more important quantity of iron ore contributed to the venture (about 5%) was established before iron ore prices increased, which is short-changing Rio Tinto according to analysts. This compensation payment could also be reduced as delays have allowed BHP Billiton to expand its production thus reducing the amount (to US $3.6 billion some predict) that it has to pay to make the joint venture a 50-50 undertaking. However, unless the payment is increased to at least US $6.4 billion, shareholders would likely vote down the deal, it has been reported by Australian Mining.

As you remember, initial discussions of a merger took place at a time when Rio Tinto was actively seeking to reduce the debt it incurred to make its cash acquisition of Alcan and shortly after the collapse of the Chinalco deal in the spring of 2009. Subsequently to the successful rights issue, improving economic environment and the establishment of a new pricing system more favourable to iron ore miners, the merger may not longer be a necessity for Rio Tinto.

Prospects for near-term progress (or lack thereof)

The deal still awaits approval of competition authorities in Australia, Europe, Japan and Korea. If no agreement is made by year-end Rio Tinto may be allowed to walk away without penalty, whereas if either party does so now, it will incur a US $275 million fee. Negotiations will drag…


Cyber Attacks on Mining Companies

21 04 2010

Australia’s ABC Television Four Corners program revealed that BHP Billiton, Rio Tinto and Fortescue Metals have been the target of Chinese cyber attacks. An attack against Rio Tinto coincided with Stern Hu’s arrest last July. BHP Billiton was attacked during its attempted takeover of Rio Tinto. As for Fortescue Metals, news of the attack are a bit surprising as the company has struck deals in terms favourable to China last year. While cyber attacks have happened in the past (think Google very recently), these cases cause concerns as they seem to target trade secrets.

The Four Corners’ Chinese Whispers report can be watched here.

Iron Ore: It’s in season

19 11 2009

Should you care to know, I was thrilled upon hearing that Vale wants to start iron ore contracts (2010/2011) negotiations this month. Thrilled because the last negotiations ended up being a succession of drama and political games. Who needs tv series when iron ore contract negotiations can do just as well?

There are a number of developments that have persisted or unfolded since the previous round of negotiations. Mr. Hu is still detained. Rio Tinto and BHP Billiton are struggling to make their Pilbara iron ore tie up bearable to regulatory authorities in Europe and elsewhere. In a bid to calm authorities on their monopolistic tendencies, they have decide not to market jointly 15 per cent of their Pilbara production. On its side of the Pilbara, Fortescue, which has started Q4 negotiations with China roughly a month ago (and with Japan and Korea this week), has unveiled the Solomon project which plans on for a new mine, new rail and new port to produce roughly 60 mtpa to 100 mtpa of iron ore. Western Australia ventures are also at risk of facing higher royalties.

At present time, I guess it makes sense for iron ore producers to secure prices at a time where recovery is gathering speed amid the persistent risks of a double-dip recession materializing. The tone of the negotiations may be different this time around. BHP Billiton highlighted this autumn that China realised that it had to play with the big boys. Whether this means that China will stop pleading in favour of a Chinese mechanism in iron ore contracts is unclear. The recent rise in spot prices is also a contributing factor to weakening the Chinese position in negotiations, it has been reported.

Rio Tinto and BHP Billiton Merging Operations- The Sequel

10 09 2009

Well it seems that I got scooped by The Australian. Now that the news is out, let’s add to it because I feel that the article that was published in the Australian newspaper forgets a few important things worth mentioning.

In short, it was reported on Tuesday that Rio Tinto and BHP Billiton were considering merging their diamond operations in Canada’s Northwest Territories as both the companies’ mines are adjacent. Should you be ready to unleash your enthusiasm at the prospect of Pilbara joint venture sequel, let me remind you that the benefits arising from this will be limited. The potential for synergies arises from the sharing of infrastructure, staff and the possibility of a marketing joint venture.

The Australian did not mention that Rio Tinto’s Diavik diamond mine in the Northwest Territories is an unincorporated joint venture with Harry Winston Diamond Corp. The latter has a 31% stake in Diavik following the sale of a 9% stake to Kinross Gold Corp in March 2009. Well Harry Winston Diamond Corp has a First Right of Refusal in the event of an acquisition of Diavik assets. I would assume that acquiring Harry Winston Diamond Corp would be a necessary first step to any deal involving BHP Billiton and Rio Tinto in the Northwest Territories.

From what I head heard in the past weeks, BHP Billiton was contemplating a $10 billion investment in Northwest Territories diamonds. Rio Tinto was rumoured to want to sell its diamond operations earlier this year as it sought to sell non-core assets to address its debt-problem. Could BHP Billiton just end up acquiring the Diavik mine as it’s probably a simpler route?

Done deal!

23 08 2009

Last week, I have mentioned that a part of Alcan Packaging had been sold to Bemis and that Amcor was still negotiating to acquire the remainder of the company. On Tuesday (08-18-2009), Amcor and Rio Tinto announced that they came to an agreement and that Amcor will be offering a bit more than $2 billion to acquire the remaining assets of Alcan Packaging. Amcor is financing the offer with debt and equity. This transaction makes Amcor the world’s biggest pharmaceutical and health care packaging business. U.S and EU regulators have yet to approve the transaction. Rio Tinto is still in the process of divesting what it considers as non-core assets. Alcan Engineered Products is also up for grabs.