Thursday, 17 April 2008

Mining a little deeper into BHP and Rio

I briefly blogged yesterday about the BHP Billiton play for Rio Tinto. Today both stocks surged up on speculation that BHP was about to increase its offer and the Chinese were contemplating a play on BHP. As a result the business commentators have resumed commentating on the bid. I include a couple of interesting articles here.

This article, while praising the strategy of BHP's boss so far, warns that if BHP doesn't move soon it will miss the boat. The Chinese are clearly planning something, if not outright control at least a blocking stake. BHP currently has the advantage and shouldn't be afraid of paying a premium for Rio, given the significant benefits that will flow to the merged entity from such a merger. As the author states, BHP overpaid for Billiton in 2001, but without overpaying back then, it would never have become the biggest mining company in the world and would likely have been gobbled up by someone bigger.

However, this article disputes that BHP needs to hurry up or even increase its bid. In fact there is no point hurrying up anyway as BHP needs regulatory clearance for its bid to go through and this will not happen until much later this year. The fundamentals underlying each company (Rio with its better iron ore and BHP with its coal) are starting to shift in favour of BHP anyway. Also not increasing the offer and contradicting the rumors may lead to Rio's price deflating and the advantage going further towards BHP.

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