BHP's Rio Bid: Happy Birthday

Sydney, Nov 4, 2008 (ABN Newswire) - It was a year ago this week that BHP went public with its three share offer for one for rival Rio Tinto, a ratio that was boosted in the formal offer in February to 3.4 to one.

The Offer was formally thrown into the ring on November 8.

On November 2, 2007, roughly a year ago, BHP shares were around $A45 each and Rio shares were around $A110.96. Six days later, BHP issued its indicative offer terms and Rio shares surged 30%.

Yesterday BHP shares jumped 6.8%, or $1.91 to $29.90 and Rio Tinto saw its shares rise 5.6%, or $4.40 to $82.



A lot has changed since then.

The 3.4 ratio in BHP's current offer values Rio at $101.60. Some of BHP's Melbourne cheer squad reckons the difference means the bid is in the bag (apart from what the European regulators think).

Yesterday's close for the two shares has a ratio of 2.74 times the BHP price of $29.90. That's a market saying the bid is dead.

It's recognition that the world economy is collapsing in on itself as the credit crunch becomes a credit freeze, which becomes a recession and ends the commodities boom.

Copper, iron ore, coal, nickel, and a host of other metals have fallen from record peaks: the collapse in the oil price from more than $US147 a barrel in July to around $US69 a barrel now, has been spectacular, as has the plunge in the gold price from more than $US1, 030 an ounce to $US735 yesterday, up from $US719 on Friday.

Copper has fallen from over $US4 a pound to less than $US2 a pound in the past six months.

Australian investors yesterday shrugged off the news that Vale (AKA CVRD) was cutting iron ore production by 10% or around 30 million tonnes immediately.

The market reaction in fact had a big whiff of other factors driving the trading as the shares rose in afternoon trading, just as they did a fortnight ago when there were all those rumours of a secret deal or talks between the two companies: that proved to be not true.

There were also stories around the over the weekend that the Japanese steel industry would urge European regulators to reject the proposed merger between the two companies.

The market shrugged off yesterday's news from Mount Gibson (see separate story) that it was having to sack people, sell iron ore at knock down prices and raise more than $160 million in emergency funds after the defaults by Chinese buyers.

From what Bloomberg reported yesterday, BHP is seemingly steaming onwards, ignoring the global and Chinese steel downturns.

Bloomberg reported that the company will maintain its iron ore production and investment program as Vale (or CVRD) says it was cutting output of iron ore, starting November 1.

"We are maintaining production and continue to invest in our growth options,'' Bloomberg quoted BHP spokesman, Samantha Evans as saying in a statement.

Vale produced 300 million tons of iron ore in 2007 and says a 20%-plus fall in global steel demand has forced the production cuts. It has also cut output of nickel (a big BHP mineral), ferroalloys (again BHP is a producer) and aluminium (another BHP and Rio metal).

Bloomberg said that Rio CEO, Tom Albanese says the company will examine projects that are at an early stage and those without financial commitments.

Bloomberg yesterday morning quoted Rio Tinto CEO, Tom Albanese as saying on a mining trip in Africa, that the slowdown in Chinese economic growth was quickening and demand in the world's largest user of metals won't rebound until 2009.

"It is decelerating more in the fourth quarter than we saw in the third quarter,'' Albanese said in an interview at the company's ilmenite mine in Madagascar.

"That is going to lead to a deferred pickup in cumulative demand for most of the things we produce during the course of 2009.''

"We want to tailor our expected delivery of those projects with when we see demand picking up,'' Albanese said."We'll prioritize spending towards the most robust projects.''

He said projects that are almost complete will start production while those at an "early stage'' and without financial commitments "will have to be given some latitude on the timing,'' he said.

Somehow the bravado of the BHP camp is at odds with the reality being shown by Vale, Rio and a host of other companies, in and outside resources, which are cutting, hacking and starting to slash to meet the impact of the recession in 2009.


 

AIR publishes a weekly magazine. Subscriptions are free at http://www.aireview.com.au