Rio Tinto, BHP Billiton plan iron ore joint venture
World steel industry attacks the plan as noncompetitive
By Tom Stundza -- Purchasing, 6/5/2009 9:32:00 AM
Anglo-Australian miner Rio Tinto has scrapped its $19.5 billion deal with China's Chinalco, choosing instead to raise $15.2 billion in a stock sale and setting up an iron ore production joint venture in Western Australia with rival Australian miner BHP Billiton.
The World Steel Association immediately attacked the proposed alliance, saying the joint venture between two of the top three largest iron ore producers would stifle competition and boost prices paid by steelmakers. “We are calling on competition authorities to seriously examine the obvious implications for future pricing regimes and the competitive environment for iron ore,” says Ian Christmas, director general of the World Steel Association.
Rio Tinto turned to Chinalco (formally known as Aluminum Corp. of China) in February to help repair a balance sheet weighed down by $38.7 billion in debt. Under the now-scrapped deal, Chinalco would have invested $12.3 billion in joint investments in aluminum, copper and ore mining with Rio Tinto, and spent $7.2 billion on convertible bonds in the company to obtain an 18% share in Rio Tinto.
However, this proposed deal with Chinalco had sparked opposition within Australia amid concerns that a foreign state-backed enterprise would own a strategic stake in the country's biggest natural resource assets. And today, Rio Tinto’s chairman, Jan du Plessis, wrote shareholders the planned deal with Chinalco was now dead and his company would pay it a $195 million break-off fee.
Meanwhile, Rio Tinto and BHP Billiton have signed a nonbinding agreement to establish the 50/50 joint venture, which covers all current and future iron ore assets and liabilities.
“Both companies believe the net present value of these unique production and development synergies will be in excess of $10 billion,” BHP Billiton and Rio Tinto said in a joint statement. Also, BHP Billiton will pay Rio Tinto $5.8 billion to equalize its contribution to the joint venture at 50%.
China's steel industry group continues to argue about contract prices for iron ore prices negotiated by Rio Tinto with Japanese and South Korean mills that reduced iron ore prices by about one-third. setting up a possible clash with its Australian suppliers. But the Chinese group, whose 119 members represent 90% of output in China, the world's biggest steel producer, want a 40% reduction for the buying year that begins June 30.
Other major ore suppliers are BHP Billiton and Vale of Brazil.
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