Bhp, Rio Take A Battering As Stand-off Continues
The Age
Tuesday December 18, 2007
MINING heavyweights BHP Billiton and Rio Tinto were hammered along with the rest of the market as metal bulls grow increasingly nervous about the impact of the global credit crunch on commodity demand and prices.
But one thing remained the same - the premium in Rio's share price to the spurned 3-for-1 scrip offer from BHP.BHP fell $1.68 to $40.37, a fall of 3.99%, while Rio tumbled $5.39 or 3.92% to $131.85 - the equivalent of 3.26 BHP shares. That ratio - giving the Rio price an 8.8% premium to the value of the BHP proposal - has remained constant during the recent sharemarket crunch, as would be expected given the all-scrip nature of the bid.BHP's problem remains that Rio steadfastly refuses to entertain the 3-for-1 offer and has called on Britain's Takeover Panel to get BHP to "put up or shut up" by making an offer. A decision by the regulator is expected this week and is expected to give BHP six to eight weeks to consider its options.In a research note, broker ABN Amro said the waiting game had begun. "Investors still have potentially a couple of months to wait to find out if BHP will make a formal offer for Rio on a 3-for-1 basis, potentially sweeten the deal with more shares or cash, or walk away from it."The broker said that in rejecting the proposal, Rio needed to better annunciate its growth options as, on a project-value basis, it appeared that Rio shareholders would benefit from the merger. "If BHP were re-rated by the market to Rio's current valuation multiple, we calculate the shares would be trading higher than $70. Perhaps the sum of the two will be greater than the parts," the broker said.But it also said that a bid higher than 3-for-1 could still be earnings accretive for BHP.Rio, meanwhile, did its best yesterday to demonstrate that it was getting on with business by committing $923 million for its share of the expansion and life extension of the Kestrel coalmine in Queensland's Bowen Basin.Rio said the investment represented a strong vote of confidence in the Asian coal market. "Higher-quality metallurgical coal is vital to boost steel production needed to satisfy fast-growing demand driven by rapid urbanisation and rising incomes in Asian markets," Rio said. That would be soothing to Chinese steel makers, who fear a BHP takeover of Rio would give it pricing and supply power over metallurgical coal and iron.Rio's Australian-based managing director of strategy, Doug Ritchie, said the investment was one of a number of recent investment decisions aimed at "fulfilling Rio Tinto's unrivalled strategy and growth plans". BHP has other thoughts on that point.Rio's chief executive of energy, Preston Chiaro, said the Kestrel expansion would increase production to an average of 5.7 million tonnes of coal a year until 2031.LINK? For Rio's metals outlook, go to tinyurl.com/3x38rs
© 2007 The Age