Renewed talk of BHP bid for rival

THE drums are beating about a renewed BHP Billiton bid for Rio Tinto, as anger smoulders over Rio's deal with Chinalco. And BHP has added fuel to the fire with comments that it is "well-placed" to make acquisitions during the commodities downturn, despite reporting output declines in most of its key sectors yesterday. In its production report for the March quarter, BHP reaffirmed it was on the lookout for potential acquisitions, after it raised the possibility at its half-year results in February. BHP said yesterday: "With our low financial and operational leverage and a strong balance sheet, we are in a unique position to continue to invest in future growth and deliver long-term value to our shareholders. "We are also well-placed to take advantage of opportunities in the market, but with our usual disciplined approach." The comments came as Citigroup released a report, boldly titled "BHP Billiton & Rio Tinto: Consolidation Time", canvassing the pros and cons of a tie-up between the rivals. "Will BHP Billiton relaunch a bid for Rio Tinto? This is probably the question we are most asked by investors and one that has to be considered from a number of angles," Citigroup said. "BHP has clearly indicated that it wants to own Rio; the question is how to play the very high stakes game from here." Citigroup noted that under the Chinalco deal the Rio board could not solicit competing proposals but "they are required to consider a superior offer if one is made". "Additionally, the break fee of $US195 million ($A278 million) is largely immaterial in a deal this size." The Citigroup report also commented on the possibility of BHP acquiring oil producer Woodside, OZ Minerals' Prominent Hill copper-gold mine in South Australia and Canadian potash producers Potash Corp and Mosaic. BHP dropped its $US66 billion hostile bid for Rio last November, ending a bitter year-long campaign to gain control of its rival. Rio then secured an unpopular $US19.5 billion financial lifeline with the Chinese government-owned Chinalco, ahead of the first repayments on its $US38.7 billion of debt built up from the acquisition of Canadian aluminium producer Alcan in 2007. Elsewhere in its production report yesterday BHP revealed that buyers of its Pilbara iron ore had asked to defer long-term sales contracts, forcing it to sell at lower rates on the spot market. Spot market rates for iron ore are around 35 per cent lower than the 2008-09 contract prices settled last year. The world's three big iron ore producers - BHP, Rio and Brazil's Vale - remain locked in talks with Chinese steel giant Baosteel over the terms of this year's contracts. In a bleak assessment of the commodities outlook, BHP warned that market conditions remained "uncertain" for the medium term. "Consistent with the way we have managed our business to date, all our operations remain under review," BHP said. "We will continue to take appropriate actions in any business that is cash negative and set to remain so, or where there is lack of demand." Since commodity prices plunged from record highs last July, BHP has scaled back output at its Samancor manganese operations in Australia and South Africa, its Samarco iron ore pellet joint venture with Vale in Brazil, and its metallurgical coal operations. It joins major rivals such as Rio, which is in the throes of a savage program to slash this year's spending from $US9 billion to $US4 billion through mine closures, production cutbacks and the axing of 14,000 jobs from its global workforce. BHP said it had restarted Samarco during the last quarter. Elsewhere, BHP forecast a hefty 30 per cent drop in annual production at the world's largest copper mine, Escondida in Chile. A BHP-Rio joint venture, Escondida is one of the assets in which Chinalco stands to gain a stake. Copper, aluminium, iron ore, petroleum, lead, zinc, silver, manganese and coal production were lower in the March quarter compared with the December quarter. Uranium and diamond output rose. BHP shares were 7 lower at $31.49 yesterday and Rio rose 72 to $55.25.