From the Editor - BHP Billiton Makes a Bid for Rio Tinto
The two companies share similarities, yet they also have striking differences
in management philosophies. Both have aggressive young CEOs that have only been
in their respective positions for less than a year. BHP’s Marius Kloppers,
a South African, took the helm in October, a month before announcing the company’s
intentions for a megamerger. Likewise, Rio Tinto’s Tom Albanese, an American,
was named chief executive only a month before the company announced the Alcan
acquisition in June. The management style for the two companies is not so similar.
Throughout this commodities supercycle, BHP Billiton has taken a “half-full”
approach with demand projections to 2040 and 2050. While wanting to believe in
the supercycle, it seems Rio Tinto has taken a more conservative mind set (i.e.,
efficient operations will perform well in lean times and even better during high
times). Then, there is the biggest difference—the fact that Rio Tinto thinks
BHP Billiton’s offer is low. Rio Tinto rejected the initial proposal and
said it would continue to focus on the implementation of its “well-articulated
strategy, including integrating Alcan operations.”
This deal, if it’s allowed to move forward, could take months to complete.
Assuming anti trust regulators allow it, and BHP Billiton believes they will,
what impact would this mega-merger have on the mining business? The short answer
is: one company. One mining company would be the leading producer of copper and
aluminum. It would be the No. 2 iron ore producer. The combined company would
have overlapping operations in a number of major resource basins with significant
positions in coal, base metals, diamonds and industrial minerals. With $70 billion
in sales, one mining company would employ 115,000 worldwide. One company would
enjoy economies of scale. They would no longer be competing with each other for
ships, port time and railcars.
This mega mining company would be dealing with one large customer, China. If regulators
determine antitrust issues, the outcome could become interesting. One area for
concern would be Australian iron ore. Naturally, if the combined company had to
divest a property in this area, the Chinese would move quickly to acquire it.
That scenario could be considered for almost every commodity and, at this point
in time, regulators interested in free trade would probably not have a sympathetic
ear for China.
Depending on one’s perspective, there could also be a downside to the deal.
The combination would pool significant amounts of mining talent further stressing
a situation where technical expertise is already running scarce. They could, in
effect, set the pace for salaries across the board. One could argue that filling
management positions at competitive mining companies could become more difficult.
The new company would amass a mind-boggling amount of mining intellect. Mining
suppliers and service providers would be dealing with one large customer with
tremendous leverage when bargaining for lower prices.
Today, both companies have plans for building world class greenfield mining and
milling operations, which will require the development of significant amounts
of infrastructure. A combined BHP Billiton and Rio Tinto would have the financial
clout to develop and operate these mining complexes. If the takeover bid is allowed,
it will have significant implications for the future of mining.
Steve Fiscor, Editor-in-Chief,
E&MJ
As featured in Womp 07 Vol 8 - www.womp-int.com