MINING giants BHP Billiton and Rio Tinto say they are on track to nut out the finer points of their $US116 billion ($137.8bn) merger of their West Australian iron ore operations by the end of this year — but are still in the dark on how the EU will deal with it.

The miners now have full teams working on the deal in Melbourne, Perth
and London, but while they have had talks with the EU regulator, the
European Commission, they are yet to submit a formal notification to
the watchdog.

BHP chief executive Marius Kloppers recently said work on the deal to
create the world’s biggest mining operation, was continuing “almost
unabated” — despite Rio’s tense iron ore pricing talks this year that
led to the detention of Stern Hu and three other Rio iron ore employees
in Shanghai.

“We are currently in the process of drafting detailed agreements which
we hope to conclude later on this year, and we obviously are jointly
preparing for the various regulatory processes that need to be
completed,” Mr Kloppers said after the release of BHP’s full-year
profit.

“We are progressing as anticipated at this stage.”

It was the first time Mr Kloppers had confirmed the companies planned
to have a binding agreement in place for the deal, which is expected to
be finalised in the middle of next year, before the end of this year.

A spokesman for the European Commission told The Australian that the
regulator was yet to receive a formal notification from BHP and Rio
about the deal.

As a result, it could not say whether the deal would be scrutinised as
a full merger under EU jurisdiction, or as a co-operative joint venture.

BHP and Rio are hoping for the latter, which should be quicker and gives the EC less power to impose conditions.

After dropping last year’s hostile $135bn Rio bid because of global
market turmoil and expected problems in offloading assets the EC would
have required to be sold, BHP in June managed to convince the embattled
Rio to agree to merge the pair’s West Australian iron ore operations.

The deal added insult to injury for China, with Rio announcing it on
the same day it confirmed it had jilted Chinalco on a planned $US19.5bn
rescue package in favour of the world’s fifth-biggest rights issue.

Despite BHP and Rio keeping iron ore marketing separate and claiming
more iron ore will be brought to market, steelmakers around the world
have railed against the landmark agreement and are lobbying the EC to
block the deal.

They say an already concentrated market of three major suppliers –
Rio, BHP and Brazilian giant Vale — would be squeezed to two.

BHP and Rio have assembled separate teams to work on the definitive
joint venture agreement, getting regulation through, and on synergy
plans for the huge venture.

If successful, the merged iron ore operation will have few global rivals in terms of tonnes brought to market.

Through expansion over the next few years, it is expected to increase a
currently slender lead over its main competitor, Vale, by at least 20
per cent.

It will have an indicative market value of $US116bn — roughly the same
as Westpac and Commonwealth Bank, Australia’s second- and third-biggest
companies after BHP, combined.

There have been rumours progress on a definitive contract is being
hampered by disagreement between the traditional iron ore rivals.

Rio Tinto chief executive Tom Albanese moved to counter these last
month during the company’s first-half earnings call, and refused to
entertain alternative iron ore growth options.

“I don’t think we need to speculate on the what-ifs because we (BHP and
Rio) have a good relationship,” he said. “This is the time to just get
on with getting this joint venture completed.”

One unexpected potential obstacle to the deal has been West Australian
Premier Colin Barnett, who is determined to gain more royalties and
stamp duty from the deal.

Rio chief financial officer Guy Elliott last month said the joint
venture was not being viewed as a taxable transaction, despite BHP,
which has smaller operations, paying Rio up to $US5.8bn to bring its
stake up to 50 per cent.

Mr Barnett has other ideas.

“As I made it very clear to Marius Kloppers, as far as the state is
concerned that (the $US5.8bn transaction) is tantamount to a change in
ownership,” he told the state parliament in June.

“It is about ownership and the state will expect stamp duty to be
payable on that. If there is any doubt, we will look at making
amendments to the Stamp Act to make sure that is clear.”

Mr Barnett’s views had not softened, his spokesman said last week.

Source: The Australian

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