BHP turns to investors for support in Rio deal
By Wayne Arnold
IHT.com, November 12, 2007SINGAPORE: Rejected by the board of the rival mining company Rio Tinto, BHP Billiton took the case for its $153 billion takeover offer to shareholders Monday, detailing what it said would eventually be $3.7 billion in annual savings and holding out the promise of $30 billion in payouts if the deal went ahead.
“We look for the same things in the same places all around the world,” the chief executive of BHP, Marius Kloppers, said in a presentation to investors. “The synergies and combination benefits of this proposal are compelling.”
BHP stopped short of making a hostile bid for Rio, saying it was only seeking to generate shareholders’ “support for discussions between the two companies.”
Last week, Rio’s board rejected BHP’s offer of three BHP shares for every Rio share, an offer that valued Rio Tinto at roughly $153 billion. On Monday, Rio reiterated its rejection, saying BHP’s release Monday contained nothing it had not already included in a Nov. 1 letter to the Rio Tinto chairman, Paul Skinner.
But the prospect of a merger between the two companies, which would create a $350 billion mining giant with control of more than one-third of the world’s iron ore market, has already created a stir among investors, customers, competitors, regulators and employees as they try to gauge what impact the merger might have on the already booming market for key commodities like iron ore, coal and copper.
Mining executives and analysts say the proposed BHP-Rio merger is merely a symptom of the China-led boom in commodities. While the prices they receive for their products are soaring, so are miners’ costs of expanding production. With labor in short supply and new mines getting harder to find, the quickest and often cheapest way to expand assets is through acquisition.
“It’s an endorsement of the length of the cycle and the strength of the iron ore market generally,” said Chris Catlow, chief financial officer at Fortescue Metals, an iron ore producer in Perth.
For industry giants like BHP, though, there are few companies large enough or with assets profitable enough to make a material improvement to its bottom line, analysts say. As a result, Rio Tinto shares rose Monday by almost 7 percent as investors speculated that BHP would either raise its bid or rival suitors might emerge. Rio Tinto is reportedly gearing up to defend itself from a hostile takeover, instructing its advisers to search for other potential buyers.
BHP said its offer valued Rio shares at a 28 percent premium to their price on the stock market Oct. 31, and would give Rio shareholders a 41 percent stake in the combined company.
BHP’s proposal seeks to allay several complaints that have become common to shareholders following a wave of recent Australian takeovers. By making an all-stock offer instead of cash or cash and shares, BHP appeared to be addressing concerns among fund managers that a wave of consolidations has reduced the stock available for them to buy.
Growing pools of pension fund savings in Australia have raised the amount of cash that asks to be invested. Combined with growing interest among global investors in stocks that give them exposure to the resources boom, these funds have helped send prices for mining companies soaring. Investors also complain that being bought out exposes them to tax liabilities.
Kloppers said the merger would enable shareholders of the merged company to enjoy further gains, including accelerated production and cost savings. He pointed to Guinea, which contains about one-third of the world’s bauxite reserves. Both companies have operations there, he said, which when combined would yield economies of scale and efficiency that would benefit shareholders and the people of Guinea.
The two companies also have iron ore mines peppered across the bleak Pilbara region of Western Australia, some along the same deposits. Yet they run separate rail lines to two separate ports, where the ore is processed and exported. Combining those operations, Kloppers said, would enable the combined company to produce more iron ore than both companies now produce from the same operations and do so more cheaply.
All told, BHP forecast $1.7 billion in annual savings within three years of the merger, and $3.7 billion per year in savings within seven years. BHP said it would also have enough cash left over after the merger to return $30 billion to shareholders in a share buyback.
Perhaps nowhere has the merger talk generated more buzz than among the employees in Rio Tinto’s mines. Many own Rio shares as part of their payment packages. Mining executives said BHP and Rio shared a similar corporate culture, so the prospect of combining may be less thorny than if, say, Vale do Rio Doce or Anglo American were to buy Rio. Most senior mining executives have attended the same universities, met at the same conferences and spent their careers working in areas where both companies operate, like the Pilbara.Nonetheless, the prospect of a merger will undoubtedly rankle those hoping to advance to the top operational slots, executives said. Kloppers said Monday that BHP would seek to draw on the best people for its management team if the merger succeeds, but many fear that cost savings and economies of scale will inevitably translate into layoffs.
“If BHP is successful, there will be a lot of people at Rio brushing up” their résumés, said John Wyche, a manager at Australian Mine Design & Development in Willoughby, Australia.
Kloppers said the company had foreseen potential scrutiny by antitrust authorities. “But we are confident in our ability to address any concerns they might have,” he said, predicting the company would be able to surmount any regulatory hurdles within a year.
The most scrutiny, he said, was likely to be placed on the impact of combining BHP’s and Rio’s iron ore operations. Some analysts have suggested the deal may be opposed by the Australian Competition and Consumer Commission.
Rio Tinto Group
From Wikipedia, the free encyclopediaType Public (ASX: RIO, LSE: RIO, NYSE: RTP)
Headquarters London, England, UK
Key people Paul Skinner, Chairman
Tom Albanese, CEO
Guy Elliot, Finance Director
Products Coal, Iron, Copper, Uranium, Gold, Diamonds
Revenue $25.440 billion (2006)
Operating income $8.974 billion (2006)
Net income $7.867 billion (2006)
Employees 32,000 (2004)
Rio Tinto is a multinational mining and resources group founded originally in 1873. The group is one of the world’s largest mining companies, with a pre-tax profit of approximately 10.2 billion US dollars in 2006 on consolidated turnover of 25.4 billion USD.
Since 1995, Rio Tinto has been a dual listed company. Rio Tinto Limited, formerly known as CRA, is listed on the Australian Securities Exchange, with Rio Tinto plc (formerly RTZ) listed on the London Stock Exchange as well as New York Stock Exchange (under ticker RTP). The two companies are managed as a single economic unit by a unified board, with a share in either company entitling the owner to the same voting rights and dividend payouts. RTZ shareholders made up 76.7% of the new unified entity, which is primarily managed from London.
Its current chief executive is Tom Albanese and the company board is chaired by Paul Skinner.
* 1 History
* 2 Resources
o 2.1 Iron ore
o 2.2 Copper
o 2.3 Energy
o 2.4 Industrial minerals
o 2.5 Aluminium
o 2.6 Diamonds
* 3 Other commodities
o 3.1 Technology
* 4 Criticisms
* 5 References
* 6 External links
Rio Tinto’s origins are in southern Spain, at the site of an [ancient mine] [] which supplied the Phoenicians, Ancient Greeks, Carthaginians and the Roman Empire. In 1873 N M Rothschild & Sons of London and de Rothschild Frères of Paris joined with other investors to acquire the Spanish government’s money-losing Rio Tinto mines. The new owners restructured the company and turned it into a profitable business. By 1905, the Rothschild interest in Rio Tinto amounted to more than 30 percent. Alfred Milner, 1st Viscount Milner served as chairmen for a period before World War One.
In 1962 the (British) Rio Tinto Company acquired a majority stake in Consolidated Zinc, an Australian company, and was renamed the Rio Tinto-Zinc Corporation (RTZ). The Australian company was renamed Conzinc Riotinto of Australia (CRA) but retained a separate corporate identity, with an increasing proportion of its shares being held by the Australian public.
The current dual listed company structure was created in 1995.
Rio Tinto is thought to be the first company listed on the ASX to have reached a share price of over $100. This is not true, the most famous case being the Poseidon bubble in 1969-70 when the discovery of nickel ore resulted in the Poseidon share price climbing from 80 cents to $280 before collapsing.
Recently it has agreed to buy Canadian aluminium company Alcan Inc. for $38.1 billion, in a move that creates the world’s biggest aluminium company. Rio will pay $101 per common share. Rio’s bid had been unanimously recommended by Alcan’s board, but remains subject to shareholder and regulator approval. Alcan’s Chief Executive Dick Evans would lead the new division which would be renamed Rio Tinto Alcan and its headquarters situated in Montreal.
On November 8, 2007, rival mining company BHP Billiton announced it was seeking to purchase Rio Tinto Group in an all share deal. This offer was rejected by the board of Rio Tinto as it “significantly undervalues” the company. It is unknown if BHP Billiton will attempt to purchase Rio Tinto through some form of hostile takeover.This made Rio Tinto’s share price soar to over $130.
The group produces a number of mineral commodities in its various divisions:
Rio Tinto wholly owns Hamersley Iron, which owns and operates a number of mines in Western Australia either wholly or jointly with several partners. Its partners on some projects notably include several Chinese corporations.
Rio Tinto also owns 53% of Robe River Iron Associates and 59% of the Iron Ore Company of Canada. Iron made up 18% of revenue in 2003 and was responsible for 36% of the group’s profit. It is the world’s second-largest producer of iron ore. Future iron ore mines are being developed at Simandou in Guinea.
The copper division not only produces copper itself, but also a considerable quantity of gold from its mines in Australia, Indonesia, South Africa, Chile, and the United States, some as part of joint ventures. The group owns Kennecott Utah Copper Corporation. The copper group was responsible for 23% of turnover (of which 55% was copper and most of the remainder gold) and 32% of profits in 2003.
The company’s energy group includes coal mining operations in Australia (Rio Tinto Coal Australia) and North America, and Energy Resources of Australia, which operates the Ranger Uranium Mine near Kakadu National Park in Australia. The energy group also operates the Rossing uranium mine in Namibia. This group contributed 20% of turnover and 11% of profit.
The Industrial minerals group extracts talc, titanium dioxide, salt, borax, amongst several others. These operations are scattered across Australia, the United States, and Africa. This group contributed 15% of turnover and 11% of earnings.
Rio Tinto owns Comalco, which mines bauxite (aluminium ore) in Weipa, Queensland, operates alumina refineries in Gladstone, Queensland. It also operates two aluminium smelters in Australia at Bell Bay (Tasmania) and Boyne Island (Queensland, 59% interest), and one in New Zealand at Tiwai Point (79% interest). The group also operates the Anglesey Aluminium smelter at Holyhead in the United Kingdom. This group contributed 16% of turnover and 14% of adjusted earnings.
The company’s diamond operations are best known for the pink diamonds produced at the Argyle diamond mine in Western Australia, which produces over 90% of the world’s supply of these gems and around 30% of the world’s annual production of all natural diamonds. The company also owns 60% of and manages the Diavik Diamond Mine in Canada’s Northwest Territories, and the Murowa diamond mine in Zimbabwe.
Rio Tinto owns the Borax company that produces borax and is famous for the “20 Mule Team” trademark which it shares with the Dial Corporation.
Rio Tinto also produces bauxite, gold, titanium, lead, zinc, cobalt, nickel and uranium.
The company also has a technology group conducting research and development, notably including the HIsmelt iron smelting process, and an exploration group.
Environmental, political, safety and labour rights concerns have been raised against Rio Tinto by both environmental groups and unions, in particular the Construction, Forestry, Mining and Energy Union (CFMEU). The CFMEU ran a campaign against the company which tried to de-unionise its workforce after the introduction of the Howard Government’s Workplace Relations Act 1996.
Another has been Rio Tinto’s involvement in Papua New Guinea which triggered the Bougainville separatist crisis. While RTZ has put a lot of energy into cleaning up its tainted human-rights image from the aftermath of crises like the above, many critics feel the company has not substantially changed.
Rio Tinto has also won an award for ethicial behaviour, the Worldaware Award for Sustainable development. However, although this award was decided by an independent committee, it was, like some other WorldAware Awards, sponsored by another multinational corporation (in this case, the sponsor was Tate and Lyle). Rio Tinto has, in turn, sponsored its own WorldAware award, the Rio Tinto Award for Long-term Commitment, which was awarded to a variety of local and multinational players including in 1999 to Shell Pakistan.
1. ^ Rio Tinto, Alcan reach US$38.1-billion merger deal (English). CTV.ca (2007). Retrieved on 2007-08-08.
2. ^ “BHP makes £120bn Rio bid approach”, BBC News Online, BBC, 2007-11-08. Retrieved on 2007-11-08.
3. ^ Company profile
4. ^ See Lea, David (1999) Corporate and Public Responsibility, Stakeholder Theory and the Developing World, Business Ethics: A European Review, 8 (3): 151-162.
5. ^ http://www.decoin.org
6. ^ http://www.worldaware.org.uk/awards/awards1993/riotinto.html
7. ^ http://www.worldaware.org.uk/awards/awards1999/shell.html