Sydney view: Rio calls Japanese bluff on mines

Anglo American brought an abrupt end on Friday night to what was shaping up as a real ding-dong battle between the world's two biggest mining groups for control of Australia's mining and forestry group North.

Anglo had gatecrashed Rio Tinto's hostile efforts to secure North about two weeks ago, trumping its smaller rival's $A2.8 billion offer with a $A3.1 billion bid of its own.

Rio's bid was motivated by its need to secure cost savings at its Hamersley iron ore operations in the Pilbara region of northern Western Australia.

It reckoned it could obtain cost savings of around $A400 million by adding North's share of the Robe River Iron Associates to its own operations, although some analysts said the savings could total $1 billion.

Anglo was simply motivated by a desire to expand out of South Africa and establish a broad presence in Australia, although there were no obvious synergies it could extract from buying North, as it does not have any other iron ore operations.

But it had help in high places - the Japanese trading houses, Nippon Steel, Mitsui and Sumitomo, which hold a 47 per cent interest in Robe River and are its big customer.

The prospect of Rio taking control of North and reducing the number of Australian suppliers from three to two was too much for the Japanese, who had already vehemently opposed the idea that Rio and BHP might merge their iron ore operations the previous year.

The Japanese quickly latched on to Anglo, promising all sorts of financial incentives and new iron ore and coal contracts if it would enter battle with Rio.

Anglo played its first card with a $A4.30 a share offer that was eagerly accepted by North, happy to have created an auction for itself even though the bids were still below the fair value ascribed by independent experts Grant Samuel & Associates.

The Japanese waved merrily from the sidelines.

"Rio Tinto on its way out of bid for North," crowed the Japanese steel industry newsletter the Tex Report from Tokyo.

"Should Rio start a takeover bid competition," it warned, "Rio, who is not welcome in contrast to white knight (Anglo), would have a lot to lose."

The newsletter went on to warn Rio that it would lose out on contracts for both iron ore and coal, and the Japanese would veto any moves to extract synergies through shared infrastructure in the Pilbara.

The only option for Rio's chairman, Robert Wilson, said the Japanese, was nothing but a "graceful withdrawal" from the battle for North.

Rio remained silent for about two weeks, weighing its options. In the end, it decided it had no choice but to pursue its prey.

It had already annoyed the Japanese anyway. If it could snare North, it could at least negotiate from a position of strength.

On Thursday it landed its killer blow - a $A4.75 offer for North that valued the company at $A3.5 billion. The Japanese were stunned. Rio had called their bluff; now it was up to the Japanese to put more money where their Tex Report was and make it worthwhile for Anglo to up its bid.

Anglo had boasted it would pay "whatever it takes" to beat off Rio, but the truth was that North was only ever worth around $A4 a share to the company. The Japanese incentives were worth a further 50c or 60c, but they needed to offer more, much more, to get Anglo to lift its bid.

On Friday night, Anglo quietly withdrew, saying to go any further would destroy value for its own shareholders.

The whole exercise has been a wonderful success for North, which has managed to extract a further $A800 million out of Rio.

Even Anglo can walk away with a profit of $A12 million from the shares it had quietly accumulated in March (less legal and merchant banking costs).

Now Rio and the three Japanese trading companies must get down to business. They are no longer supplier and customer - they are partners in the fourth-biggest iron ore operation in the world.

Today's Tex Report will make interesting reading.

* Giles Parkinson is deputy editor of the Australian Financial Review