The much awaited joint venture between BHP Billiton Ltd. (BHP) and Rio Tinto (RTP) to produce iron ore in Australia was mutually dissolved with no break fee. The joint venture, which was proposed in June, last year, came to an end after it was disapproved by some of the Australian regulators.
BHP Billiton 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 grossly undervalues Potash in terms of its global operating capacity and growing market demand. Thus, BHP Billiton 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 believe that the dissolution of the JV is a loss to both the companies as the venture was expected to generate significant cost synergies and enhance substantial production in the future.
Over the longer term, we reiterate our Neutral recommendation on BHP Billiton. However, the stock retains its short term Strong Buy rating (Zacks #1 Rank) based on the optimism of the Potash buy-out.
BHP BILLITN LTD (BHP): Free Stock Analysis Report
POTASH SASK (POT): Free Stock Analysis Report
RIO TINTO-ADR (RTP): Free Stock Analysis Report
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