BHP says Rio merger would hasten iron ore growth

In its first detailed statement on the proposed takever of Rio Tinto Ltd, mining giant BHP Billiton Ltd has asserted that combining the two companies would facilitate accelerated development of the Pilbara iron ore industry.

A briefing paper released by BHP highlighted WA's iron ore industry and the east coast coal industry as areas where a merged group would be able to achieve large efficiency gains.

BHP has estimated that a merger would deliver synergies worth US$3.7 billion (A$4.1 billion) over seven years through efficiencies and accelerated production volumes to meet growing customer demand.

Rio Tinto and BHP Billiton are the two largest iron ore producers in the Pilbara.

BHP said the efficiencies would come from "economies of scale, sharing infrastructure and removing duplication".

BHP said it would also be able to implement "faster and more efficient development of the combined iron ore resources in Western Australia".

Other sectors where it sees efficiency gains include its coal operations and the aluminium, base metals, diamonds and industrial minerals businesses.

"By combining the two development portfolios, optimising the development sequence and utilising the combined infrastructure, the development of new production can be brought forward and the long-term value and utilisation of the resources can be optimised."

A 40-page investor presentation also released today showed overlapping iron ore depoits in the Pilbara, which BHP said illustrated the efficiency gains that were possible. The two companies currently operate separate railways and ports to transport their iron ore to market.

It projected US$1.7 billion in nominal cost savings by year three through "removal of duplication as well as procurement and operating efficiency savings".

BHP also projected an annual $2 billion boost to EBITDA (earnings before interest, tax, depreciation and amortisation) in year seven "driven primarily by the acceleration of volumes to customers".

BHP said it would cost about $650 million over two years to implement the synergies, with the full cost savings to be achieved seven years after a merger.

BHP has also flagged returning $33 billion to shareholders through a share buyback if its proposed merger with Rio goes ahead.

BHP, the world's largest mining company, said today a combined group would have the financial flexibility to return significant capital to its shareholders.

The company flagged an initial share buyback, or other appropriate mechanism, of about $US30 billion ($A33.17 billion) after completion of the proposed merger.

It said the cash distribution would allow "the combined group to have an efficient balance sheet while maintaining flexibility for future investment".

BHP today revealed details of its proposal, saying it was "appropriate" to make the shareholders of both groups "aware" so that it can seek their support for discussions between the companies.

The miner said it "continues to seek to engage in discussions with Rio Tinto" about a potential merger, which would create the world's largest producer of coking coal, thermal coal, copper and aluminium.

"To date Rio Tinto has not agreed to these discussions," BHP Billiton said in a statement.

BHP Billiton said a merger was the "most logical and compelling consolidation opportunity for both companies".

BHP Billiton said it expected the regulatory focus to centre on the iron ore businesses, where a combined group would have a 27 per cent share of the market.

But it said it had spent "considerable time formulating its proposal to Rio Tinto and is highly confident that it can be successfully completed".

BHP Billiton said it had undertaken a thorough analysis of the anti-trust implications and was confident they presented no significant barriers to completing the proposed transaction.

BHP Billiton's three-for-one scrip deal, valued at $US153.2 billion ($A169.4 billion) based on October 31 closing share prices, has been knocked back by Rio Tinto as too cheap.

A Rio Tinto spokesperson said today the proposal "significantly undervalues Rio Tinto and its prospects".

"It remains way-out of the ball-park," a spokesperson said.

Analysts at ABN Amro say a bid closer to the $A150 mark was likely to be the "right price" for Rio Tinto, compared to $A138.30 under the proposal.

"It is likely that BHP would need to put something close to $150 on the table in order to get Rio," ABN Amro said in a client note.

"The deal makes sense as it would make the world's largest iron ore player, giving BHP significant pricing power as well as access to a suite of long life assets."

Rio Tinto shares hit a record intra-day high of $149.99 before pulling back to close at $139.72.

BHP Billiton was down 77 cents to $41.70.

Media reports in London suggest BHP Billiton is considering selling its $US30 billion ($A33.17 billion) petroleum division to help fund the transaction.