05/06/2009 - 15:46

Barnett concerned over BHP-Rio merger

05/06/2009 - 15:46

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Premier Colin Barnett is not convinced the merger between BHP Billiton and Rio Tinto's WA iron ore assets is in the best interests of the state, saying the miners could be seeking to avoid paying land taxes.

Barnett concerned over BHP-Rio merger

Premier Colin Barnett is not convinced the merger between BHP Billiton and Rio Tinto's WA iron ore assets is in the best interests of the state, saying the miners could be seeking to avoid paying land taxes.

Today the miners announced it will combine their iron ore producing assets in WA, excluding Rio's HIsmelt facility in Kwinana and other secondary processing projects, into a joint venture.

BHP will pay Rio Tinto $US5.8 billion ($A7.2 billion) to equalise its contribution to the JV to 50 per cent.

Synergies from the merger are expected to reach over $US10 billion ($A12 billion).

If the JV were to proceed, the combined iron ore entity will be worth $US100 billion ($A124 billion).

Mr Barnett today said he is largely unhappy with the proposed JV and warned the miners that both will have to clear many hurdles if the combined entity is to proceed.

"I have a concern about the iron ore resource of the Pilbara, the world's second largest iron ore resource, basically being in the hands of one company," he said.

"It will take some convincing that that is in the best interest of Western Australians going into the future."

Mr Barnett said while BHP and Rio have made a commercial decision based on the interests of their shareholders, the message from the premier was: "Do not forget who owns the iron ore resource."

He also expressed concern the miners may have carefully constructed this agreement to avoid paying state land taxes, a strong income stream for treasury under WA's land-rich provisions in the stamp act.

"It would seem to me at an initial glance that this arrangement has been structured in part to avoid paying stamp duty on setting up this joint venture."

"In a normal arrangement like this I would imagine stamp duty to be liable and that would be in the order of $1 billion dollars".

Possible hurdles for the merger include obtaining the necessary regulatory and government approvals.

"Internationally they would need the approval of the European Union and possibly the US Justice Department," Mr Barnett said.

"At a national level there would be a foreign investment review board approval required and perhaps an Australian Competition and Consumer Council approval.

Mr Barnett said the state agreements the companies operated under would have to be supported by the state government and the parliament.

"It is the state of Western Australia on behalf of Western Australia's people that owns the iron ore resource," he said.

"So anything that happens must happen with the agreements of the people and state of Western Australia.

"That is why if they want to physically in anyway merge...they will require significant changes to the iron ore agreements."

Meantime, China is not likely to be happy with the proposed iron ore merger with possible impacts to current iron ore price negotiations between the miners and the country.

China has not yet agreed to the average 37 per cent iron ore price cuts negotiated between Rio Tinto and Japan and South Korea, and is reportedly looking for a cut of between 40-45 per cent.

BHP chief executive Marius Kloppers believes there will be no impact on price negotiations with a "zero connection" between the talks and the merger.

China was a staunch critic of BHP's takeover bid for Rio Tinto with concerns that a merged entity would have too much control over iron ore supply and prices.

Today, Mr Kloppers said he has not ruled out launching another takeover of Rio.

BHP dropped its takeover bid for Rio Tinto late last year due to concerns over the latter's $US38 billion mountain of debt it incurred when it acquired Alcan in 2007.

However, Rio will substantially reduce its net debt position to around $US23 billion after today launching a $US15.2 billion rights issue. It also canned its $US19.5 billion deal with China's Chinalco.

BHP is currently restricted from launching a takeover bid for Rio until November 25.

Meantime Mr Kloppers said the "obligation" of making the first move fell on him given that Rio was tied to stringent conditions in its proposed Chinalco deal.

However the BHP boss did not specify what exactly prompted the move, only saying that certain events had unfolded over the past couple of months.

Both companies have been looking to merge their iron ore interests in the Pilbara for over a decade, and Mr Kloppers today said he had personally been involved with looking at the possibility for two years.

Additionally, the details of the merger will be worked through when a management team for the combined entity is chosen. The formation of the JV is expected to be completed mid-next year.

Rio Tinto Iron Ore chief executive Sam Walsh has been appointed as the chairman of the "non-executive owners' council" while BHP Billiton Iron Ore president Ian Ashby will be chief executive.

Mr Kloppers said the JV will not affect both miners' iron ore expansion plans in the Pilbara, with BHP to press ahead with its efforts to ramp up to Rapid Growth Project 5.

He said details on which expansions will be done in what manner will be mapped out by the management team.

The Chamber of Commerce and Industry WA said it will examine the detail of the proposed JV and assess what it will mean for local companies which are major suppliers and contractors to BHP's and Rio's Pilbara operations.

 

 

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