BHP-RTP Iron Ore Joint Venture a Game Changer
- Admin
- December 7th, 2009
Yesterday, BHP Billiton ($BHP) and Rio Tinto ($RTP) announced that they had agreed upon terms of a previously announced joint venture of their iron ore operations. Barring any setbacks with regulatory approval, it should be completed by the second half of 2010. They must first seek approval from Australia, as well as the European Commission, but both companies expect there to be no problems with gaining approval on this tie up.
This is a game changer in the lucrative world of iron ore. Combining the operations of $BHP & $RTP, this is expected to save the companies an estimated $10 billion on production and shipping costs, as well as make them the #1 seaborne iron ore exporter in the world, surpassing Brazil's Vale ($VALE). China is upset over this, because as their largest customer, they fear they will gain additional leverage in pricing power over something which China desperately needs. The two companies are estimated to ship approximately 300 million tons of iron ore in 2009.
As part of the agreement, $BHP was to pay $5.8 billion to $RTP to make the venture a 50-50 split. Combining the operations, gives the venture an approximate $110 billion market cap, thus proving they can now really throw their weight around when it comes to deliver their product. "With the history of both companies' attempts to join together these two world-class iron ore operations in (western Australia) at various times, this deal has effectively been more than a decade in the making," $BHP Chief Executive Marius Kloppers said in a statement.
Barring any setback from the European Commission and the Australian Competition and Consumer Commission, which has expressed some concerns as European steel makers fear it will result in lower grade ore and higher prices, $BHP share's will start to see the premium they deserve, especially over RTP, as the world's foremost commodity producer. With the cleanest balance sheet among the majors, a sturdy dividend which will rise again next year and significant growth in their largest segments, $BHP's shares could see $100 by 3rd quarter 2010, barring any other economic setbacks.
Disclosure: Long $BHP
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