Instant View: Rio Tinto & BHP call off iron ore jv

SYDNEY (BestGrowthStock) – Miners BHP Billiton (BHP.AX: ) (BLT.L: ) and Rio Tinto (RIO.AX: ) (RIO.L: ) on Monday abandoned their proposed $116 billion iron-ore joint venture, a deal plagued by regulatory uncertainty and opposition from global steel-makers.

The decision has been widely expected after European regulators indicated they would block the deal.

KEY FACTS & BACKGROUND

* The venture would have combined the Australian ore operations of Rio Tinto, the world’s second-largest producer of the steel-making raw material, and BHP Billiton, the third-largest. Both companies’ operations are in northwest Australia’s Pilbara region.

* The venture would have delivered an estimated $10 billion in savings, but would have required Rio Tinto to sell 5 percent of its Australian iron ore business to BHP Billiton for $5.8 billion, a price many Rio Tinto investors now view as too cheap.

* The deal was announced in 2009 when Rio Tinto was heavily in debt and iron ore prices were less than half today’s prices.

* Regulators in Europe and Asia had questioned the deal, after a chorus of complaint from global steel-makers which said the joint venture could unduly influence iron ore prices.

* Abandonment of the joint venture leaves BHP Billiton focused squarely on its $39 billion bid for Potash Corp (POT.TO: ) and launch a counterbid for the Canadian fertilizer maker.

COMMENTARY:

JAMES BRUCE, PORTFOLIO MANAGER, PERPETUAL

“It certainly is a bigger blight on BHP’s management than Rio’s — their inability to consummate a deal for the second time. It comes down to what aspects the EU objected to and whether rail or port infrastructure could be shared and to what extent the EU would let that sharing occur.

“It’s likely that both companies will continue to invest heavily in the Pilbara. Both iron ore businesses will continue to generate significant cash flow and returns for shareholders in both companies. It would have been better in a combined joint venture but regardless, with iron ore prices where they are today, both businesses are earning very high levels of return.”

“Rio’s got more options with regards to infrastructure in the Pilbara and therefore the capital efficiency of any Rio Tinto expansions will be more efficient than the equivalent expansions for BHP.”

RIC RONGE, PORTFOLIO MANAGER, PENGANA CAPITAL

“BHP will be worse off rather than Rio. It is unlikely to have any bearing on the Potash deal though from a market perspective it will put more focus on the Potash deal.

“Both companies have a very disciplined capital management and are chasing organic growth. As for the JV, the writing was on the wall for quite some time with antitrust issues. There were headwinds and enough rumors to take away any surprises from investors.”

(Reporting by Sonali Paul and Miranda Maxwell in MELBOURNE; editing by Mark Bendeich in SYDNEY)

Instant View: Rio Tinto & BHP call off iron ore jv