BHP, Rio scrap iron ore alliance

BHP Billiton and Rio Tinto abandoned a plan to create the world's largest iron-ore exporter after opposition from regulators in Europe and Asia.

"It has become increasingly apparent that regulatory approvals of the joint venture are unlikely to be achieved," Melbourne-based BHP said yesterday. Rio confirmed it had dropped the plan to combine the two companies' Australian operations in a separate statement.

BHP and Rio, the world's largest and third-largest mining companies, would have saved at least US$10 billion ($13 billion) in costs by combining their mines, railroads and ports in the remote Pilbara region.

Gains in iron ore prices in the 16 months since the deal was proposed mean London-based Rio may benefit more than BHP from its collapse because it produces more of the steelmaking raw material, according to Pengana Capital.

"Rio has got more to gain from ending this deal because they have more infrastructure alternatives," said Tim Schroeders, who helps manage about US$1 billion at Pengana in Melbourne, including BHP and Rio shares.

The infrastructure "flexibility that Rio has was something that BHP wanted to leverage into in terms of fast-tracking expansions. Rio now holds the winning hand".

Anti-trust authorities in Germany and Japan last week said they opposed the deal. The European Commission was also likely to raise formal objections, two people familiar with the plan said last week. The companies were informed of the results of the commission's preliminary investigation on Saturday.

"The full value of the synergies on offer from a 50:50 joint venture was a prize well worth pursuing," Rio's chief executive said yesterday.

Some regulators wanted "substantial" remedies that were unacceptable, Rio said.

BHP's chief executive, Marius Kloppers, had agreed to pay Rio US$5.8 billion to form the venture. Neither company would pay the US$276 million break fee, they said.

The two companies agreed on the deal on June 5 last year, when Rio, battling high levels of debt, scrapped an investment from Aluminum of China in favour of raising US$21 billion from a share sale and the joint venture.

The deals allowed Rio to slash debt without selling bonds and stakes in its largest mines, defusing a backlash from shareholders and politicians.

"The imperative at the time of the deal, given Rio's balance sheet problems, is not really an issue at this point in time given the strong commodity price environment," Schroeders said.

The two companies have already agreed on a so-called Plan B, involving sharing infrastructure and blending ore, according to a report by Sanford C. Bernstein analyst Paul Galloway.

BHP probably has more to gain from such an arrangement, according to the report. BHP abandoned a US$66 billion hostile bid for Rio in 2008, citing Rio's high level of debt and economic uncertainty.

A Pilbara joint venture had been studied in 1999 and was a key driver behind BHP's hostile takeover bid for Rio, Citigroup said in a report in May last year.

- Bloomberg