Solid price rises for both BHP Billiton and Rio Tinto shares in Australia yesterday in the wake of an admission from Rio that the proposed iron ore joint venture was not looking good and media reports that it was finished.
BHP shares rose 2.6%, or $1.03 to $40.53, Rio shares were up 2.6%, or $1.99 at $78.99 in the wake of the media reports and then Rio’s statement which was issued out of London in the early hours of yesterday morning.
Also driving prices higher was market expectations the extra spending by the Bank of Japan would push up commodity prices and demand,
Reports in the Fairfax media said the joint venture was dead and quoted, verbatim, an exchange inside the company’s boardroom earlier this week between the chairman, Jan de Plessis and Australian born director, Sir Rod Eddington.
In its statement Rio said:
"The Rio Tinto Board has not made any final decisions about possible outcomes or next steps relating to the proposed Rio Tinto/BHP Billiton iron ore production joint venture in Western Australia.
"The Board held a meeting on Monday 4 October 2010 at which a range of issues were discussed including the joint venture."
Those were the first two paragraphs, the third revealed the confirmation that the joint venture had run into regulatory problems.
"The Board acknowledged recent communications from regulators that indicate potential obstacles to achieving clearance for the joint venture.
"This includes the recent receipt of interim reports from the Japan Fair Trade Commission and the Korea Fair Trade Commission, and ongoing discussions with the European Commission and the Australian Competition and Consumer Commission."
All BHP would say yesterday through a spokesperson was that the proposal was still in the regulatory process.
Rio could be forced to pay a $US275.5 million break fee if it walks away from its $US116 billion iron ore joint venture with BHP Billiton.
But if it can be shown that it was reacting to opposition from regulators, there’s doubt the fee will be enforced.
The Fairfax media reported last month that BHP and Rio were resigned to the fact that the regulators would block it, so the idea was dead.
Neither company has denied the tenor of the reports, and none of their public reaction has been strongly condemnatory of the reporting, which tends to confirm the fact that the $US116 billion deal is off.
Under the June, 2009 agreement to merge their iron ore operations in the Pilbara, BHP agreed to pay around $US5.8 billion to Rio as an equalisation payment to reflect the fact that Rio is the bigger of the two iron ore operators.
It was to have been finalised by the middle of this year, but has been delayed by regulators.
BHP and Rio asked the ACCC in this country to postpone release of its decision at least twice.
The Commission said on September 30 that it had all the information it needs to rule on the joint venture and the timing of the decision was up to the companies.
Chairman, Graeme Samuel was quoted as saying “We’ve been ready for some time, but they don’t want us to make a decision.,"
"We’ve got all the information we need.”
Steelmakers in Japan, the world’s second-largest producer, opposed the joint venture from the start, just as they opposed the BHP bid for Rio back in 2008 that was later abandoned when markets collapsed.
From China, to Europe, including the Japan Iron & Steel Federation, giants like ArcelorMittal, steelmakers have all said the joint venture will limit competition.
BHP and Rio did water down the original proposal to meet first round objections by saying they would continue selling their iron ore independently, rather than allowing the joint venture to sell as an ‘independent’ operator.
Now the market is telling both companies to get real and abandon the idea.
There have been stories for six months or more now that Rio was going cold on the idea as its financial position improved and earnings and cash flow rose and debt fell.
