BHP, RIO JV delay ignites talk of plan B

While still focused on pushing the $116bn iron ore JV through the companies have been talking more about a recent agreement made with Western Australia that analysts have dubbed plan B.

MELBOURNE (Reuters) - 

Analysts call it Plan B -- the fallback option for BHP Billiton (BHP.AX: Quote)(BLT.L: Quote) and Rio Tinto (RIO.AX: Quote)(RIO.L: Quote) if competition regulators block their $116 billion iron ore production joint venture.

While the companies say they are focused on the joint venture, that has not stopped BHP's top executives from touting the benefits of an agreement BHP and Rio Tinto reached with the state of Western Australia in June to lift restrictions on them sharing rail and port facilities and blending iron ore.

The key question is how closely that new flexibility, or Plan B, can match the deal's holy grail, the $10 billion in savings that BHP and Rio expect to achieve by combining their iron ore operations in Western Australia's Pilbara region.

Further delays by global competition regulators in assessing the proposed joint venture have fuelled talk about gains the companies could make without it.

In the best case, they could snare a large portion of the savings, but it won't be as easy as under a joint venture because rail access, port access or iron ore blending terms would all need to be negotiated piecemeal.

"Is it going to be a complete disaster if the joint venture falls over? Not really," said RBS analyst Warren Edney.

But don't ask BHP or Rio about the benefits of Plan B. They remain intent on receiving approval from regulators in Australia, Europe, Japan and elsewhere for their joint venture plan, seven months after it was submitted.

"We're fully committed to the joint venture," was all that BHP Billiton spokeswoman Amanda Buckley would say.

BHP BENEFITS

In meetings late last week, BHP Chief Executive Marius Kloppers and Chief Financial Officer Alex Vanselow told sell-side analysts in Melbourne and London that substantial savings could be achieved through sharing infrastructure and blending -- mixing their ore before export to provide the most saleable product.

"The new state agreement with Western Australia delivers the flexibility required for future growth with or without an iron ore joint venture," Morgan Stanley analyst Craig Campbell said in a note after the meeting with Kloppers.

BHP declined to release any comments that Kloppers or Vanselow made to analysts in the private meetings.

BHP said in June that "the resulting flexibility to blend product and share infrastructure would facilitate the capture of synergies which are the main driver for the production joint venture proposal."

Rio Tinto declined to comment on Tuesday on the savings possible from the new flexibility allowed by the state.

For BHP, the big benefit would be in avoiding or delaying spending on a port expansion, if it could get its new iron ore production to port using Rio Tinto's rail lines.

It would also save BHP having to pay up to $5.8 billion up front to Rio Tinto to equalise its stake in the iron ore production joint venture.

Analysts said Kloppers also highlighted that Australia's proposed mineral resources rent tax will not impact the iron ore asset base and joint venture and the joint venture will not affect BHP's liability under the new tax.

Plan B looks more realistic every day that regulators hold up a decision on the joint venture.

On Monday, Japan extended its anti-trust review of the joint venture, seeking more information from the two miners, while Australia's competition commission extended its review indefinitely last week.

Analysts still see regulators in Europe as the biggest obstacles to the deal as steel producers there are heavily opposed to a tie-up between the world's second- and third-largest iron ore miners.

They fear the two together, producing more than 350 million tonnes a year of iron ore to overtake Brazil's Vale (VALE5.SA: Quote) and handling a third of global seaborne trade in iron ore, would have too much control over prices.

The EU has not set a date for finalising its review. BHP and Rio have said they hope to get the approvals they need by the end of 2010. (Editing by Lincoln Feast)

© Thomson Reuters 2010 All rights reserved

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