Rio Tinto-BHP Billion JV Delayed – Analyst Blog

According to The Wall Street Journal, Rio Tinto’s (RTP) much-awaited $116 billion joint venture with BHP Billiton Ltd. (BHP) to produce iron ore in Australia is expected to be postponed. The joint venture is hanging on the approval of the Australian regulators, which was earlier expected to give its approval by the second half of fiscal 2010.

 

However, now the Australian government needs some time to set up the terms of the mineral tax in the country and hence the venture will be delayed.

 

The joint venture has become secondary for BHP Billiton as the company is at present concentrating on its buy-out offer for Canada’s Potash Corp. of Saskatchewan Inc. (POT), the world’s biggest fertilizer manufacturer, for $130 per share.

 

The $130 per share offer was once rejected by Potash’s shareholders as being grossly inadequate. They believe that a 16% premium over the August 16 closing price of $112.15 is an undervaluation in terms of the company’s global operating capacity and growing market demand. Thus, BHP will review its options and make further announcements in the fullness of time.

 

Rio Tinto is also on an investment spree to enhance production based on the gradual market recovery. Rio Tinto intends to infuse $230 million for further development of its Pilbara iron-ore mine and increase its production capacity to 230 million tons annually (mt/a) by early fiscal 2012. During the middle of September, Rio Tinto proposed to invest around $800 million to complete the underground block cave project at the Argyokle Diamond Mine in Australia and make it operational by 2013 with 9 mt/a.

 

After acquiring a 22.3% stake in Ivanhoe Mines Ltd. (IVN) in June 2010, Rio Tinto in September acquired an additional 5.3% stake by exercising its warrants. In August 2010, Rio Tinto also declared its $1.6 billion investment plan to develop the Hope Downs 4 iron ore project in Australia, which is expected to be operational by 2013 with an annual capacity of 15 million tons. Further, Rio Tinto signed a MoU with Aluminum Corporation of China Limited – Chinalco (ACH) for the development and operation of the Simandou iron ore project in Guinea for a total investment of $563 million.

 

However, we wish the Rio Tinto-BHP Billiton joint venture to happen as early as possible as it is expected to generate significant cost synergies and enhance production for both in the future.

 

We reiterate our Outperform recommendation on Rio Tinto, but are Neutral on BHP Billiton. Rio Tinto maintains its short-term “Strong Buy” rating, equivalent to a Zacks #1 Rank and the latter retains its Zacks #2 Rank (short term ”Buy” rating).