Editorial: BHP Billiton Dodges A US$42B Bullet

The week ended Nov. 29, the 48th trading week of 2008, was characterized by a couple of things that didn’t happen.

• BHP Billiton threw in the towel on its year-long hostile bid to acquire base metals giant Rio Tinto. The world’s biggest miner is probably quietly grateful that European red tape slowed its takeover attempt long enough for the enormity of the commodities crash to become apparent even to its board.

The value of the all-share deal peaked at just under US$200 billion in May, but stood at around US$66 billion by the time the offer lapsed in the last week of November. The market reaction to the deal’s scuppering spoke volumes: BHP Billiton’s shares surged 19% while Rio Tinto’s tumbled 37%.

Some of the other numbers being thrown around are huge, too: BHP Billiton says it will take a US$450-million charge related to bid expenses, while Rio Tinto is estimated to have spent US$179 million fending off its unwanted suitor.

While the value of any mining company’s assets will ebb and flow with commodity prices, its debt load tends to have a nasty immobility during commodity downturns. And so it has been with Rio Tinto’s ginormous net debt of about US$42 billion, almost all of which was taken on to carry out its US$38-billion cash acquisition of Canadian aluminum major Alcan in October 2007.

With aluminum prices having pulled back substantially since then, Rio Tinto is now rumoured to be considering writing down its Alcan assets by at least US$6 billion. (Canadians may be sell-outs, but at least we know enough to sell out at the top.)

Officially at least, Rio Tinto isn’t panicking about its debt burden and is betting on a quick recovery in Chinese industrial consumption. But look also for the major to be pushed into substantial asset sales in the new year (anyone out there looking to buy an Arctic diamond mine?) as well as a boost in Chinalco’s ownership stake in the company towards the currently allowed maximum of 14.99%.

In February, Chinalco, which is majority controlled by the Chinese government, teamed with Alcoa to spend US$14 billion for a 9% stake in Rio Tinto, which was the largest-ever overseas purchase by a Chinese company. The pair paid US$117.97 per share, with Alcoa contributing only US$1.2 billion.

BHP Billiton’s sudden move away from Rio Tinto echoes the decision by Vale half a year ago to call off its equally super-sized acquisition of Xstrata. And it’s all part of a larger trend: Thompson Reuters reports that withdrawn mergers and acquisitions (not including offers that were bettered by a competitor) totalled US$322 billion so far in the fourth quarter, almost matching the US$362- billion worth of deals completed so far this quarter.

• Months of weakness in the uranium sector and broader problems in the global economy prompted partners Areva, Denison Mines and OURD to put their Midwest uranium joint venture in Saskatchewan on hold. Another factor was the swelling in the project’s anticipated capital cost by 50% to around $650 million. The partners will keep tinkering with ways to improve the project, though, and have budgeted $12.4 million for Midwest next year.

Denison is also suspending operations at its Tony M uranium mine in Ticaboo, Utah, until uranium markets improve.

• One exploration highlight was Canplats Resources’ tallying of its first independent resource estimate for the Represa zone at its wholly owned Camino Rojo project in Mexico’s Zacatecas state. Canplats has now outlined 4 million oz. gold in the measured, indicated and inferred categories, plus another 60.7 million oz. silver. Canplats says the numbers demonstrate the size and strength of the Represa mineral system, which is open in all directions.

• While we can’t predict what will have happened by the time this newspaper reaches you, we should at least note for our foreign readers that on Nov. 30, the stage had been set for Canada’s Conservative minority government to be toppled by two left-leaning opposition parties propped up by a Quebec separatist party. For miners active in Canada, the ascension of this new government would translate into a weaker Canadian dollar, a depressed stock market, higher business taxes and possibly an introduction of carbon taxes.

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