BHP, Rio Tinto Form Joint Venture for Iron Ore Mining Operations in Pilbara, Australia

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Researched by Industrial Info Resources (Sugar Land, Texas)--The much-discussed joint venture agreement between BHP Billiton Limited (NYSE:BHP) (Melbourne, Australia) and Rio Tinto plc (NYSE:RTP) (London, England) to combine their iron ore mining operations in the Pilbara region of Western Australia has been signed.

Discussed for more than 10 years, an agreement was outlined in principle on June 5 this year by BHP and Rio Tinto to establish a production joint venture covering the iron ore assets of both companies in Western Australia. This followed a failed takeover bid by BHP for Rio Tinto.

In August this year, the two companies suggested that the agreement could be signed by December 5, 2009, and the final agreement indeed was signed on that day. BHP and Rio Tinto anticipate that the deal will be completed during the second half of next year. However, as both the companies are listed on stock markets in England and Australia, the deal still needs to be ratified by regulatory authorities, such as the European Commission and the Australian Competition and Consumer Commission.

Both companies have extensive mining operations in Western Australia, in particular the Pilbara region, an iron ore-rich area covering more than 500,000 square kilometers. BHP operates seven mines in the region, has two separate ports, and owns about 1,000 kilometers of rail network. Rio Tinto operates the Hamersley and Robe River complexes, and has a total of 11 mines, three shipping terminals, and the world's largest privately owned rail network in the region.

The companies are confident that by merging operations they will be able to attain benefits of up to $10 billion. They expect to achieve these savings through merging adjacent mine operations, allowing for shorter freight distances and more effective utilization of port facilities. The companies each will own 50% of the joint venture and will combine management activities to a single entity and consolidate future plans, leading to larger and more capital-efficient expansion projects. Together, the two companies will have a production capacity in excess of 350 million tons per year.

The merging of interests of the two companies in Western Australia has raised considerable concerns worldwide. BHP and Rio Tinto currently run second and third in terms of global iron ore production, behind the Brazilian mining company Vale S.A. (NYSE:VALE) (Rio de Janeiro, Brazil). Competitors and customers alike have voiced concerns over reduced competition in the industry and excessive dominance of the market.

Asian steel mills, especially in China, oppose the merger. China is a major market for both companies. Opponents believe that the merger could give the two companies too much market power. The European Confederation of Iron and Steel Industries (EUROFER) (Brussels, Belgium), whose members include such companies as ArcelorMittal (NYSE:MT) (Luxembourg) and Corus Group Limited (London), also has expressed concerns.

The BHP-Rio Tinto venture is under consideration by the ACCC, with a call for submissions by interested parties to be made by January 15, 2010. The ACCC proposes to announce its findings on February 24, 2010.

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