A sharp fall in the value of the Australian dollar Friday night and a rise in the value of the yen to an 18 month high have introduced a note of volatility into BHP Billiton's huge bid for rival Rio Tinto.
The fall came as reports surfaced in London of BHP getting a $US70 billion cash injection from the troubled Citigroup bank to give it the firepower to launch a cash and shares hostile offer, if it had to.
The London Sunday Times claimed at the weekend that a price of $US146 for Rio shares, a premium of 61% to the Rio price before the bid, might be a winner.
And the same paper claimed that BHP was thinking of selling its oil and gas business for more than $A65 billion to help fund the cash component of the offer. Chinese buyers were being approached, the report claimed. (http://business.timesonline.co.uk/tol/business/industry_sectors/natural_resources/
article2846610.ece).
But despite the leaks and spin, investors would do better to keep a close eye on what's happening in the US banking and finance markets where there's increasing nervousness about the health of some big players.
The big British bank, Barclays, was at the centre of more worries on Friday and is now working with its auditors to try and convince markets and investors that it is healthy.
The value of the Aussie dollar fell sharply Friday night from the Friday close here of 92.85 USc to just under 91 USc by the end of trading in New York.
The Aussie dollar shed ground against sterling and as a result of the changes the value of BHP's opening offer terms of three of its shares for every one Rio plunged to uneconomic levels.
The sharp rise in the value of the yen, a very sharp fall in US 10 year bond yields to around 4.22% and more instability in US stockmarkets and banks, were major factors in sending currency values reversing themselves in a few tense hours.
The yen ended 1.7% up against the US currency, which was virtually steady against the euro as traders worried about those denied reports that Barclays would take huge losses on subprime mortgages and other dodgy securities.
At one stage Friday night the Australian dollar shed 2% in value against the yen in five minutes. It finished down just over 4% on the night at 99 yen to the dollar from 104.60 in Sydney earlier in the day.
The impact of the currencies' big moves can be seen from comparing the closing price of BHP and Rio shares in Australia and London on Friday.
The harder heads in the stockmarket continued to be sceptical of the advantages of the huge $150 billion offer for Rio from BHP, selling down BHP shares in London and bidding up Rio scrip.
BHP shares fell in London Friday night our time after dropping 77c in Australian trading to $42.47: that was a fall of 5.62% last week.
In London BHP shares fell to 16.28 pounds, or $37.33, a big difference to the Australian close a few hours early of $42.47, but accounted for by the fall in the value of the Aussie dollar on Friday night against sterling.
Rio shares rose 6% in London to 56.24 pounds or $128.97, compared to the Australian close of $130.90.
The offer valued Rio shares at $127.41 at Friday's close in Sydney for BHP of $42.47.
But based on London closing values, after the big fall in the Aussie dollar, Rio shares were valued at $112.
Its early days but the sharp fall does illustrate the need for BHP to put some cash into the bid.
To that end the London end of the BHP spin team let it be known to local media that it had lined up a $US70 billion financing package.
But while the 'sources' suggested the money was firm, its source, Citigroup, doesn't inspire the highest level of confidence.
The huge US bank is struggling to keep the confidence of markets after billions of dollars of losses from dodgy investments in subprime mortgage investments and associated credit derivatives called CDOs.
Citigroup could lose another $US11 billion or around a quarter of the reported $US43 billion of subprime linked securities and loans on its books. As well, it has around $US8 billion in back up funding extended to a group of off balance sheet funding vehicles also invested in these dodgy securities.
Citigroup has lost its CEO and several other senior executives and you'd have to question its capability to raise $US70 billion in cash for BHP in the present constrained funding climate, unless the money was going to come from a big Sovereign Wealth Fund in China or the Middle East. Citigroup's biggest investor is a billionaire Saudi prince.
The cash though will bring some credibility to the paper offer, but BHP will have to reveal terms for a possible cash and share offer to put some stability into its own and the Rio share prices.
If the shares maintain current values, BHP could have to throw in up to $A30 a Rio share or more to make it real.
The combination of the two companies would create a $ 400 billion market value mining giant that would dominate the iron ore, copper, coal (coking and thermal) and the aluminium markets. It would have earnings of at least $22 billion (and more depending on cost savings) and annual revenue of $110 billion based on the latest accounts.
Despite the optimists among Australian analysts who see no competition problems, London-based analysts say the bid would be a lengthy process because of antitrust concerns.
A combination of the two companies would control 36% of the internationally traded iron ore market and would wield considerable pricing power over customers in the steel industry. This could provoke protests from Chinese steel makers, now the world's largest consumers of iron ore.
Trying to sell Chinese steel companies shareholdings in BHP or Rio mines will be problematic. Both Rio and BHP already have small shareholding deals with Chinese buyers but the big deals rema
