Miners shift on state agreements

MINING giants BHP Billiton and Rio Tinto have scrapped plans for a single over-arching state agreement with the Western Australian government for their proposed $US116 billion iron ore joint venture in the Pilbara.

Instead, the miners have opted to seek amendments to the 15 existing state agreements that govern their iron ore operations, aimed at removing key bottlenecks that would prevent the joint venture achieving a targeted $US10 billion in synergies.

Critically, the revised approach is expected to deliver significant additional operational benefits to both companies, even if the increasingly uncertain joint venture does not proceed.

The existing agreements, many of which are three decades old, lay down the specific obligations and entitlements attached to access to the Pilbara’s premier iron ore reserves.

While most have been amended over the years, they retain a number of highly prescriptive conditions relating to how ore from specific areas can be mined, transported and shipped overseas.

Currently, ore can generally only be transported and exported using infrastructure specified in the state agreement governing each deposit. Similar restrictions apply to other matters such as water use and the mix of resident and fly-in/fly-out workers.

Given the number of these state agreements, BHP and Rio had initially hoped to replace them with a single over-arching agreement that would provide one basic set of regulations for all their operations, ensuring maximum operational flexibility and efficiency.

But it is understood that strategy has been abandoned due to the complexity of factoring in their myriad existing joint venture arrangements in the Pilbara, such as Rio’s Robe River business, which is 47 per cent owned by Japanese companies.

Instead, they are now understood to be seeking amendments to each individual agreement that will allow them to transport ore from any one of their mines, on any of their railways, to any of their ports. Such changes would also enable better sharing of other resources, such as water supplies and power.

On a stand-alone basis, amending the existing agreements would also enable both companies to fully optimise their existing port and rail assets.

Neither BHP nor Rio would comment, except to say they continued to work toward finalising the joint venture as planned.

However, an outcome by year’s end appears unlikely with the deal facing increasing scrutiny from international competition regulators.

Some anlysts also believe Rio should dump the plan unless BHP pays more than the agreed $US5.8 billion to compensate Rio for contributing more of the combined asset base.