Rio Tinto-BHP Iron-Ore JV Is Losing Luster

MELBOURNE—A planned iron-ore joint venture with rival BHP Billiton Ltd. is looking less attractive for Rio Tinto Ltd. as iron-ore prices rise, with some within the miner hoping competition regulators will scuttle the deal, Australian mining-industry participants said Wednesday.

Rio Tinto remains publicly committed to a deal that the two miners say will deliver $10 billion in synergies. One mining executive said Rio Tinto Chief Executive Tom Albanese couldn't afford to admit another misstep. His tenure has featured the top-of the cycle purchase of Alcan, the rejection of BHP's takeover bid and a failed attempt at an unpopular $19.5 billion bailout by Aluminum Corp. of China.

But mining-industry participants say some within Rio have deep doubts about the joint venture, which was unveiled in June last year, and wouldn't be concerned if competition regulators blocked it.

With spot iron-ore prices more than double last year's benchmark, analysts say an equalization payment of $5.8 billion that BHP Billiton would make to Rio Tinto as part of the deal in recognition of Rio's larger West Australian iron-ore business is now looking cheap.

"There are noises coming from within the company, and there is a view in the market, that they should re-examine it," said one analyst.

With many major investment houses advising on the deal, analysts are loath to be quoted, but most agree the improvement in the iron-ore pricing environment makes the deal look favorable for BHP and that some inside Rio are having second thoughts.

"There is a belief within Rio Tinto that they have the best iron-ore operations in the world and that the deal that was done does not reflect the quality of the assets nor the resource base, and I would have to agree with that," another analyst said.

One mining-industry participant said the deal was struck when Rio Tinto was still grappling with the $38.7 billion of debt it incurred in the takeover of Alcan, but the company had now righted itself thanks to the recovery in prices, asset sales and its $15.2 billion rights issue. "It is a vastly different landscape."

A Rio Tinto spokesman said the company remained "very committed" to the joint venture, which was a "win-win" for both miners.

BHP Billiton declined to comment on the impact iron-ore prices may be having on the attractiveness of the equalization payment, though it pointed to the original announcement of the deal, which mentions some flexibility to adjust the size of the payment based on cash flows between July 1, 2009, and the closure of the deal. Just how much flexibility is unclear.

Few expect Rio to have the stomach to walk away from the deal after the tumult of the past 18 months, and given the $275.5 million break fee it would incur as it is divesting assets to pay down debt.

The biggest barrier to the deal is approval by the European Union's executive arm, the European Commission, which is being lobbied hard by steelmakers worried about higher prices.

"Rio will not be disappointed if the European authorities don't allow the deal to proceed," a third analyst said. The European Commission hasn't said when it is likely to hand down its findings, while the Australian regulator is due to rule by April 18 and is widely expected to pass the deal, as it had earlier approved a proposed full BHP bid for Rio.

As well as regulatory approval, the deal is conditional on shareholder approval by holders of Rio's London-listed stock, which isn't seen as a given.

"Non-Australian shareholders in Rio Tinto will definitely be looking at this on a standalone basis and wondering if it is good for them," one analyst said.