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Diamond Assets from BHP, Rio Tinto Could Build Strong No.3 Player
Nov 12, 2007 9:10 AM
By Avi Krawitz
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RAPAPORT... As the smallest units in each of BHP Billiton and Rio Tinto’s businesses, the diamond operations are unlikely to play a major role in the proposed merger between the two Australian mining giants.
Nevertheless, the pooled diamond operations would cement it as the third largest diamond producer in the world behind No.1 De Beers and No.2 ALROSA.
BHP and Rio Tinto together produced 31.5 million carats of diamonds in the 12 months ending September 30, 2007, with the bulk, 27.77 million carats worth, coming from Rio Tinto’s operations. Speculation has been rife that Rio was seeking to sell off its diamond unit after production dropped by 29 percent in the first nine months of 2007.
Rio has its flagship Argyle mine in Australia, a 60 percent stake in the Diavik operations in Canada, and a 78 percent share in Zimbabwe’s Murowa mine. BHP would bring its 80 percent share in the Ekati diamond mine in Canada to the table, plus exploration projects in Canada, Angola, and the Democratic Republic of the Congo.
BHP said in a report outlining BHP’s rejected takeover bid for Rio, that diamonds would contribute 4 percent of the merged company’s EBITDA (earnings before interest, tax, depreciation and amortization.)
The combined base metals group would make the biggest contribution to EBTDA, of 31 percent, although the iron ore operations is expected to have the biggest impact on the acquisition itself, particularly with regards to anti-trust and regulatory issues.
Speaking in a teleconference from London on Monday, BHP’s chief executive officer, Marius Kloppers, said the company had already started discussions with various regulators and that it “was prepared to answer any issues that may arise to show the value contained in the merger.
Kloppers outlined the rejected offer saying the deal would unlock significant value to shareholders of both companies. He said cost savings from the merger would impact EBITDA by $1.7 billion per annum from year three of the merger.
BHP unveiled the details of its offer in a bid to “get the story out and entice Rio Tinto to engage in discussions about the merger,” Kloppers said. Rio has declined meeting with BHP since the board considered BHP's offer significantly undervalued.
Under the proposal, Rio Tinto shareholders would receive three BHP shares for every Rio Tinto share held, giving them a 41 percent stake in the merged company. BHP sweetened the deal by promising to hand shareholders $30 billion via a share buyback if the deal goes through.
Rio shares continued to climb on Monday in London, rising 3.13 percent to 5,800 pence in early afternoon trade. The share price is up 32 percent since the November 8 offer was made. BHP shares have lost 6 percent since November 8 at 1,619-pence.
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Tags:
Alrosa, Angola, Argyle, Australia, BHP Billiton, De Beers, Diavik, Production, Rio Tinto, Zimbabwe
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