Rio-BHP Billiton iron ore merger urged

RIO Tinto has been urged to merge its huge Pilbara iron ore operations with rival and former suitor BHP Billiton, and hand over management to help reduce high debt levels. In a report bound to anger Rio executives, analysts at Goldman Sachs JBWere, one of BHP's advisers on the Rio bid, called on the miner to form a 50-50 joint venture with BHP, which walked away from a $135 billion takeover offer last month. Rio's main publicly stated objection to BHP's failed bid was that it was an attempt to gain cheap access to Rio's iron ore ports, which were relatively easy to expand. The bid was killed last month by the global financial crisis, which made Rio's high debt levels -- and European Union demands for coking coal and iron ore asset sales -- unattractive. "The BHP/Rio deal highlighted the strategic benefit of combining the iron ore assets in the Pilbara," Goldman analyst Neil Goodwill said in a report. "We believe that Rio should look to capture these benefits and we think that a combined BHP/Rio iron ore group would add significant value to both companies." Before its takeover bid failed, BHP said that iron ore was the only commodity the merged entity would produce more of than what the miners would produce on their own. Mr Goodwill said it would be essential to BHP that it operate any joint venture. He said that Rio could ease its debt burden by extracting cash from BHP. Neither BHP nor Rio would comment on the report. There has been much speculation about how Rio will pay down some of its $US38.9 billion debt following big falls in Rio's share price. Last week, Rio said it would cut 14,000 jobs, reduce next year's capital expenditure by $US5 billion and try to sell significant assets. Rio would not comment on the prospect of BHP running its all-important iron ore mines but Rio chief executive Tom Albanese has been reported in the British press as saying he was disappointed with BHP's management of the Escondida copper mine in Chile. Goldman Sachs, which is free to publish stock recommendations now the bid is dead, put a buy rating on BHP and a hold on Rio. Source: The Australian