Rio Tinto shares ride the buyout rumour mill
September 7, 2007
By Eric Onstad
Johannesburg - Shares in Rio Tinto surged yesterday on talk that rival mining houses BHP Billiton and CVRD planned to buy and break it up, but analysts said the trio's dominance in the iron ore sector made such a move unlikely.
"The big problem is that the jewel in the crown of Rio and much of its value is the iron ore business, and you'd have to materially get rid of it or change it" due to monopoly issues, said a London analyst.
Rio Tinto shares surged as much as 6.4 percent in London as renewed speculation circulated that it was a takeover target.
Rio is the world's second-largest iron ore mining firm behind Brazil's CVRD.
The latest speculation is a variation of a rumour that swirled in the market in May, when Australian-based BHP was named as the only suitor and Rio denied it had been approached.
"I thought the BHP and Rio rumour was nonsense then, and I think this is even more nonsense," the analyst said. Talk of a short squeeze in Rio shares was providing a fertile environment for this sort of talk, he added.
The three firms together accounted for about 70 percent to 80 percent of the iron ore shipped by sea around the world, said a second analyst.
"If they tried to split Rio between BHP and CVRD, it doesn't matter how that is split, there will be antitrust issues, and Japanese steel makers will be up in arms. I just can't see it happening."
Rio said last month it would spend $350 million (R2.5 billion) more to boost projected output at its Hope Downs iron ore mine in Australia's Pilbara region by 36 percent.
Analysts predict that prices that mining companies charge steel mills for iron ore will rise as much as 20 percent or more in the next shipping year, which starts on April 1. This will be the sixth consecutive year of price hikes.
Also at issue, they said, was BHP's and Rio's tight hold on railway infrastructure in Western Australia's key iron ore fields, which so far has been closed to outsiders.
"If the companies merge, are acquired, taken over, I reckon it's almost a certainty that the Australian courts will rule that those railway lines be given access to third parties," said the second analyst.
Rio Tinto itself is in the midst of its $38.1 billion takeover of Canadian aluminium producer Alcan.
BHP did not need to acquire Rio since it had already made plans for good organic growth, the first analyst said.
"BHP Billiton already has a big aluminium business and decent growth in it. They've already got decent growth throughout their portfolio, pretty much."
The Rio speculation also sent BHP shares up 2.5 percent to £14.52 (R211.78).
Anglo American shares were up 1.6 percent at £28.85, making basic resources the top sectoral gainer in London and Rio the top European blue-chip gainer.
CVRD shares lost 1.87 percent to $50.14 in New York on Wednesday. - Reuters
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