Editorial: BHP Billiton eyes Rio Tinto in mining’s biggest-ever deal

The mining industry’s merger mania returned to the very top of the food chain during the week ended Nov. 10, the 45th trading week of 2007.

* After months of rampant rumours, the world’s biggest miner, BHP Billiton, admitted on Nov. 8 that it had been approaching a disinterested Rio Tinto with an offer for a friendly takeover. Rio Tinto described the offer as three BHP Billiton shares for every Rio Tinto share.

The announcement had an electrifying effect on base metals miners’ shares, with Rio Tinto jumping 26% in London trading, adding an astonishing US$30 billion in market capitalization in just two hours.

With a little breathing room, BHP cobbled together over the weekend its official bid, on similar terms, which would see Rio Tinto shareholders owning 41% of the merged entity, which would have a market cap of about US$365 billion, making it the world’s fifth-biggest company by market capitalization.

For comparison, energy titan ExxonMobil, with its market cap of US$460 billion, was just eclipsed on Nov. 8 by PetroChina as the world’s most valuable public company, with the latter now boasting an overheated market cap of US$966 billion (a somewhat preposterous figure created by having only 2% of its shares now trading in Shanghai). The current global top five is rounded out by: General Electric, US$407 billion; China Mobile, US$392 billion; and Industrial & Commercial Bank of China, US$353 billion.

The lucrative iron ore market is the main impetus for the deal, but BHP Billiton appears disinclined to shed any assets it isn’t forced to by regulators, including its oil and gas division. BHP and Rio each have about 30-35% of the seaborne iron-ore market, and the merger would vault them past the world’s current largest producer, Companhia Vale do Rio Doce, and thus potentially raise antitrust issues.

* The normally predatory Barrick Gold may be taking a few cues lately from the likes of Teck Cominco and Goldcorp, and embracing the virtues of the friendly takeover. This week, coming on the heels of its friendly takeover offer for Arizona Star Resources, Barrick kissed and made up with NovaGold Resources, which the major had tried to acquire over a year ago in an unsuccessful hostile bid that became very rancorous, with much trash-talk between the two parties. Barrick and NovaGold are dropping all legal actions aimed at each other and will now be equal partners in the development of the large, but low-grade and remote Donlin Creek gold project in Alaska.

* The Canadian dollar briefly touched a modern-day high of US$1.1039 on Nov. 7 before pulling back sharply over the next few days — but still up about 25% on the year against the greenback and outpacing other major currencies. The loonie has gradually become a petrodollar during the current commodities boom, and now reliably tracks the oil price, which looked set to breach US$100 per barrel on Nov. 7 before tumbling to the mid-nineties in the ensuing days. Gold was also a stellar performer, hitting US$841.75 per oz. in mid-week before tumbling in tandem with oil and the loonie.

* The canny Art Ditto and George Forrest scored another major coup with the announcement of a merger between their companies, Katanga Mining and the U.K.-based Nikanor, to form a US$3.3-billion company that will have substantial copper and cobalt production in the Democratic Republic of the Congo. Crucially, the deal has the full support of the DRC’s mines ministry, which has been systematically reviewing the validity of foreigners’ mining assets in the country.

* Tahera Diamond logged another “taher-ible” quarter financially, which puts in doubt the continued operation of its Jericho diamond mine in Nunavut. Even after one-time writedowns of $73 million and $21 million for asset impairment and deferred exploration and development expenses, respectively, the company is still spending about two bucks to make a buck, despite this year’s solid operational improvements.

At this rate, Jericho looks set to become the first major failure in Canada’s nascent diamond mining industry. The mine is so remote, even selling off the mill for spare parts becomes an expensive task for whoever’s left to pick through the operation’s remains.

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