Rio Tinto and BHP Billiton have signed a binding agreement to combine their Western Australian iron ore operations into a multi-billion dollar joint venture and said they hope to have the deal wrapped up by the second half of next year.
The two also filed submissions with the European Commission and the Australian Competition and Consumer Commission seeking approval for the deal, an early step for a deal that still has a way to go with continuing opposition from steel makers in China, Asia and Europe.
BHP has agreed to pay Rio $US5.8 billion to bring its share of the joint venture up to an even 50%.
Rio and BHP announced the joint venture (which they said would boost the net present value of their iron ore operations by more than $US10 billion) on 5 June, the day Rio ditched its $US19.5 billion deal with Chinese group Chinalco in favour of a $US15.2 billion rights issue which has been completed.
The key regulatory approval needed is from the European Commission which will review the production joint venture under Article 101 (formerly Article 81).
That means that regulators would look at the combination as a joint venture, rather than a merger, to determine if it restricts competition by, for example, creating a cartel.
That could make it a bit easier to approve.
It is understood there will be no changes other than those allowed under the original June joint venture agreement.
The two companies said that taking into account all regulatory review processes and shareholder approvals, they expect completion of the JV in the second half of 2010.
Approvals by Japanese and Chinese regulators will have to be sought, with the latter having already been lobbied by local steel makers opposed to the linking up of the second and third ranked iron ore groups.
Approval by the European Union’s competition regulator is the biggest hurdle to the deal.
Approval in Australia is not expected to be a concern as the ACCC signed off on last year’s merger.
European steelmakers last month stepped up their opposition, claiming the JV would result in less iron ore at higher prices and lower quality.
They asked the European Commission to investigate the finalized pact.
European regulators last year expressed significant concern that a BHP Billiton-Rio Tinto merger would impede competition in iron ore markets.
But the companies argue this will be a joint venture, not a takeover/merger as was the basis of the 2008 application.
As well plans to allow the JV to market iron ore on its own (but with certain approvals needed by the partners) were abandoned several months ago.
The production JV will now deliver all its iron ore output to BHP Billiton and Rio Tinto to sell independently through their own marketing groups.
BHP dropped its hostile takeover attempt just more than a year ago amid a collapse in equity and commodity markets.
"The production joint venture encompasses all current and future Western Australian iron ore assets and liabilities and will be owned 50:50 by BHP Billiton and Rio Tinto," the companies said in their statement released on Saturday night.
"It will deliver substantial synergies resulting from combining the companies’ Western Australian iron ore operations, with the aim of producing more iron ore at lower cost.
"BHP Billiton and Rio Tinto believe the net present value of these unique production and development synergies will be in excess of US$10 billion (100 per cent basis).
As previously outlined, these synergies are anticipated to come from:
- Combining adjacent mines into single operations;
- Reducing costs through shorter rail hauls and more efficient allocations of port capacity;
- Blending opportunities which will maximise product recovery and provide further operating efficiencies;
- Optimising future growth opportunities through the development of consolidated, larger and more capital efficient expansion projects;
- Combining the management, procurement and general overhead activities into a single entity."
BHP Billiton CEO, Marius Kloppers, said, "We are very pleased to now have formal and binding agreements in place to develop this important joint venture.
"With the history of both companies’ attempts to join together these two world-class iron ore operations in Western Australia at various times, this deal has effectively been more than a decade in the making.
"It is an important milestone towards delivering substantial additional benefits to both sets of shareholders, and to the shareholders of our respective joint venture partners in the Pilbara."
Tom Albanese, chief executive of Rio Tinto, said in the statement, "Signing binding agreements brings us one step closer to unlocking the full production potential of our Pilbara iron ore assets and achieving substantial benefits for all our stakeholders.
"Completing the joint venture is a priority for Rio Tinto in 2010 and I look forward to realising this vision and capturing the synergies for our shareholders."
