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State demands, Rio-BHP show their hands

THE third attempt in a decade to merge the iron ore assets of BHP Billiton and Rio Tinto could resolve this issue for good, with Premier Colin Barnett seemingly prepared to negotiate over a long list of demands.

On Friday last week, BHP said it would pay $US5.8 billion to Rio Tinto to form a 50-50 joint venture of their Western Australian assets to extract synergies worth $10 billion.

The major obstacle would be as many as 14 state agreements struck over the past half century, which spell out the signatories' obligations.

In 1999, as resources minister for the Liberal state government, Mr Barnett opposed a similar deal, which had come as a surprise and eventually floundered.

Much has changed since then, including the expansion of iron ore production, the emergence of China as the state's biggest ore customer, and the arrival of new entrants in the field.

Mr Barnett, too, is in a different position, leading a government facing a significant revenue shortfall.

Two years ago, when there was a second attempt at a merger during BHP's failed takeover bid for Rio Tinto, then opposition backbencher Mr Barnett slammed the complacency of the Labor government.

At the time, Mr Barnett outlined a list of issues worth dealing with, including royalty concessions worth $300 million a year, the development of Pilbara communities, lease retention, monopolising the state's resources, upsetting relationships with customer nations, and the poor track record in promises of on-shore value-adding.

Mr Barnett has repeated much of this agenda in recent days.

"This is about the whole of the Pilbara region," he said this week on ABC radio.

"Well, the first thing I'll be seeking from them is exactly what they do intend in respect to jobs.

"And then we go onto the taxation issues, then we go onto the sharing of infrastructure.

"We go onto issues like allocation of berth space at Port Hedland, opportunities for smaller, medium size mines to develop.

"The royalty issue - I've said over the weekend, the days of selling iron ore basically half price to the two big companies, as far as I'm concerned are finished."

There is also a matter of a mooted $1 billion or so in stamp duty under provisions for transactions involving land-rich companies.

Sources within government suggest there is unanimity on extracting these concessions, especially with regard to BHP's poor track record on mine deaths, the closure of Ravensthorpe, and the fact that job losses for the merger are inevitable.

But some analysts warn the state has to be careful to get the balance right between squeezing the iron ore majors and signalling to other sectors, such as LNG, that the state is open for business.

"It is the perception of the state as a secure place for investment," said one source.

"Not one that is an easy touch, but (one that) doesn't change the rules precipitously."

The proposed joint venture would have about 20,000 employees and contractors and control almost 20 per cent of world production, or 350 million tonnes per annum.

The benefit to the companies would be more efficient use of assets, including rail and port operations, to mine, transport and blend ore.

After a bitter takeover battle during 2007-08, rival managers will now have to work together, with Rio Tinto Iron Ore chief Sam Walsh nominated as the chair of the joint venture and elevated to the Rio Tinto board, an appointment viewed as a step towards running the whole company. BHP WA iron ore head will become CEO of the joint venture.

There has been a mixed reaction to the merger proposal from industry.

Some fear an exacerbation of the tough commercial culture that has made life difficult for others in the region, including years of litigation against allowing third party access to their rail networks.

However, some see the mega-merger as redirecting foreign investment to boosting small new players, which need the cash or greenfield sites.

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