BHP Timing Right for Rio Ore Venture, Perennial Says (Update1)

July 23 (Bloomberg) -- BHP Billiton Ltd., the world’s biggest mining company, got the timing right in forming a $100 billion iron ore venture with Rio Tinto Group as demand from China soars, according to Perennial Investment Partners Ltd. “It will allow some of the execution of the efficiencies of the joint venture to happen more quickly,” said Ken West, who helps manage the equivalent of $1.9 billion at Perennial in Melbourne, including BHP and Rio shares. “I have got BHP and Rio coming back on this growth path a bit, volume wise.” Imports of ore into China, the biggest buyer, rose 29 percent in the first half, fueled by a rebound in the economy that’s driving demand from steelmakers. BHP reported fourth- quarter iron ore output slid 10 percent because of disruptions caused by accidents and $4.8 billion of expansion works in Western Australia’s Pilbara region, where Rio also mines. “For China and other developing Asian countries to meet the aspirations of their people, raise the standard of living for the middle class, the level of construction that must occur remains phenomenal,” said Grant Craighead, managing director of Stock Resource, a Sydney-based mining and energy research group, with ‘hold’ recommendations on BHP and Rio. The formation of the joint venture may help reduce BHP’s safety issues, he said. BHP rose 0.5 percent to A$37.10 at the 4:10 p.m. Sydney close today on the Australian stock exchange. It has gained 22 percent this year. London-based Rio rose 3 percent. Venture Savings BHP agreed to pay Rio $5.8 billion to create the 50-50 venture, the two companies said June 5 after Rio earlier abandoned a proposed $19.5 billion investment with Aluminum Corp. of China. The two companies may save more than $10 billion by combining their iron-ore assets in the Pilbara region, they said. “BHP is well behind Rio in terms of its capacity in iron ore,” said Perennial’s West. “I suppose it feels it has more room to grow and that is reflected in these expansion programs.” Full-year iron ore output was 114.4 million tons, up 2 percent on last year, BHP said yesterday in a statement. Output would be “a few million tons” below its 130 million tons target because of accidents, iron unit head Ian Ashby said in May. BHP had received 70 safety-related notices in the past two years, Western Australia’s state government said in April. Rio is forecasting output of 200 million tons this calendar year. “BHP has tended to utilize contract workers to a significant degree as opposed to Rio Tinto being owner-operator focused,” Stock Resource’s Craighead said. “The new joint venture is going to move towards the Rio Tinto model of owner- operator, which does seem to have the superior safety record.” Rapid Expansion Global demand for commodities remained modest and iron ore production will continue to be affected by the expansion work in Australia, BHP said. China, the biggest importer of metals, has “essentially” completed building inventories, BHP said. The fifth stage of BHP Rapid Growth Project expansion at the Pilbara iron ore operations in Western Australia will add 50 million tons of capacity, and production will start in the second half of 2011, the company said yesterday. BHP is the world’s third-biggest iron ore exporter, Rio Tinto is the second-largest and Brazil’s Vale SA is the biggest. The venture will boost BHP’s earnings before interest and tax by about $1 billion in the “formative years,” Macquarie Group Ltd. analysts led by Brendan Harris said today in a report. Ore production was 27.05 million metric tons in the three months ended June 30, compared with 29.92 million tons a year earlier, BHP said yesterday in the statement. Ore output at Rio rose 8 percent in the same period. Ore Demand China’s economy, the third-largest in the world, grew 7.9 percent in the second quarter from a year earlier fueled by a 4 trillion yuan ($586 billion) government spending program. Global iron ore demand should have a strong recovery in 2010 as idle steel capacity restarts in response to stronger demand, Barclays Capital said this week. China, the world’s largest steel producing nation, should curtail “reckless investments” in the industry by withholding project approvals, Zhu Hongren, spokesman for the Ministry of Industry & Information Technology, said yesterday at a conference in Beijing. “The industry must produce according to market needs, and avoid adding to the excess capacity,” Zhu said. BHP sold 68 percent of its iron ore at the benchmark price during the 12 months to June 30, the company said. Rio said last week that it had sold 50 percent of its ore on the spot market in the first six months of 2009.