Kloppers regards record results as road to Rio

BHP Billiton delivered a record set of annual results for the seventh year in a row as it benefits from high prices for its main products such as iron ore, coal, copper and oil. In doing so, Marius Kloppers, the youthful South African-born chief executive of the world’s largest mining company, has turned up the pressure on Rio Tinto, his rival and acquisition target, to report similarly strong growth when it announces half-year results next week. BHP was accused by analysts at MF Global, in a note to clients on Monday, of “trying to have its cake and eat it” over its view of the global commodities market. They point to the fact that Mr Kloppers is using a possible short-term slowdown in the commodities boom and soaring costs to push the strategic logic of the deal at the same time as highlighting the long-term strength of the mining sector by lifting BHP’s dividend sharply. BHP expects “short-term global economic growth to slow as developed economies experience further weakening” and warns that “higher inflation will also have a likely negative impact on emerging market economies”. However, Mr Kloppers says Chinese demand for raw materials remains strong. “There is so much construction to go on in China ... there’s going to be very ‘longtime’ demand here. We just hiked our dividend by 52 per cent. We don’t do that unless we have confidence in our outlook.” A comparatively weak set of results at Rio would bolster Mr Kloppers’ argument that his proposed takeover, valued at about $127bn (£68bn), makes “more sense than ever” as rising costs such as labour and fuel puts pressure on industry profit margins. However, many analysts expect Rio to deliver similarly robust figures, which could bolster its defence and force BHP to increase its offer. Charles Cooper, a mining analyst at Evolution Securities, believes BHP may need to offer four of its own shares for every Rio share, instead of the 3.4-for-one offer on the table, or “put in a substantial cash component”. While most industry watchers believe a tie-up still makes sense, price and regulatory approval remain the biggest hurdles. Earlier this month, Australia’s competition regulator delayed its ruling on the proposed takeover, saying it needed more information from BHP. The US has already given preliminary approval, but European regulators are not expected to give their view before November. At issue is whether the combined company would control too much of the world’s iron ore, a main ingredient in the making of steel. BHP may have to offer remedies such as the sale of iron ore mines to ensure the European Commission approves the deal. Michael Rawlinson, an analyst at Liberum Capital, says BHP could offer to sell lower-margin iron ore mines in Canada and Brazil that supply the European market, perhaps to a steelmaker such as ArcelorMittal. Mr Kloppers, for his part, says it is too early to say whether BHP will pursue some kind of asset sale to win approval from competition authorities. “Our basic view would be there is no economic harm because we are going to produce more volume and we don’t control prices,” he says. “I am confident that this deal is do-able in all of its dimension from shareholders to antitrust,” he adds. He also plays down the threat of a rival bid from Aluminum Corp of China, or Chinalco, which teamed up with Alcoa earlier in the year to snap up a 9 per cent stake in Rio. “You would have to compensate shareholders for synergies they aren’t going to get and you would presumably have to pay more. So you are talking about raising the bid to $200bn in cash. That is a reasonably big hurdle,” he says. ---Financial Times