Record-breaking Rio Tinto production figures raise pressure on BHP Billiton

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The Independent Online

Rio Tinto burnished its defence against the unwanted takeover from BHP Billiton yesterday by revealing record-breaking production figures across a range of commodities.

Heralding new highs in iron ore, bauxite, aluminium, alumina, refined gold and copper extracted during the last year, chief executive Tom Albanese said the mining giant was operating "at a record pace" and predicted "an acceleration of this growth in 2008." Like most announcements by the company since BHP first made its £65bn, all-share offer public in November, the update was interpreted through the lens of its takeover defence, with BHP's put-up-or-shut-up deadline looming just three weeks away.

Of most interest to investors were the iron ore production figures at its massive site at the Pilbara in Western Australia. Helped by the expansion of operations and infrastructure improvements, Rio produced 145 million tons of iron ore last year, or 9 per cent more than the year before. Tim Gerrard, an analyst at Austock, said the numbers reinforce the strength of Rio's iron ore business relative to BHP's smaller and less profitable operations there and supported the target's arguments that it is worth more than BHP has offered. Predicting that the mining industry's "super-cycle" of sustained high prices will continue, he said that "there is a case to be argued that Rio's iron ore assets may be valued, within three to four years, at the entire market capitalisation of the company."

Mr Gerrard said that BHP will probably have to increase its three-for-one share offer to 3.8 to 1, in addition to a 30 per cent takeover premium. Marius Kloppers, BHP's head, has thus far refused to budge from the initial terms offered. Mr Albanese has responded by resolutely declining to engage with his counterpart to discuss a deal that would create one of the world's biggest companies, calling the bid "dead in the water". The Takeover Panel's deadline for a formal offer is 6 February.

Most observers think that a deal will, eventually, materialise. Ivor Pether of Royal London Asset Management, an investor in both companies, said however that it to be a drawn-out process: "I would be very surprised if [BHP] walk away, but given all the regulatory hurdles they'll have, I don't think they'll need to come in at a level that will get a recommendation right now. What they will want is a recommendation six to nine months down the line, and that will be determined by the market conditions at the time. I imagine they'll put forward something that is pre-conditional."

Guy Elliott, Rio's finance director, said yesterday that "the ball is very much is BHP's court. In the meantime, we must get on with running our business." One idea that has been circulating amongst investors – most of whom have holdings in both companies – is that a preferred "middle way" could be a joint venture that would combine the two companies' operations at the Pilbara. Such a deal, discussed but abandoned in the late 1990s, would likely have an easier time passing regulatory muster while allowing the companies to benefit by synergies combining mining, rail and port infrastructure. A joint venture would also avoid what would likely be many months of uncertainty hanging over the share prices as regulators and politicians in several jurisdictions examined what would be one of the world's largest ever transactions.

Tight supplies and rising commodities prices are working against BHP's efforts to keep its offer level. Indeed, in the two months since first unveiling its offer, Rio's shares have consistently traded at about £10 per share above the implied offer price of £42 per share. News filtering out of the annual talks that Vale, Rio and BHP, the world's top three iron ore producers, are having with their Asian customers, led by China's leading steel producer, Baosteel, to set this year's benchmark iron ore price, indicate that a massive price-hike could be on the cards.

Currently, the benchmark price, under which the vast majority of iron ore is sold, for Australian iron ore delivered to China is around $85 to $90 per ton – less than half the current spot price of more than $190 per ton. As the world's biggest iron ore miner, Vale takes the lead in negotiating, arriving at a pricing deal before the Australians follow suit on similar terms. It is thought to have taken a very aggressive stance this year, demanding a benchmark price increase of up to 70 per cent. Mr Elliott declined to comment on specifics of the negotiations, but said that "the background and conditions that contribute to the formation of the benchmark price are very favourable." Mr Pether expected a rise of 35 per cent.