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Foundry Daily News

11. May 2007

'Mining goliath' creation concerns regulators

Speculation about a mega merger between the world's two biggest miners is refusing to go away this lunchtime.

The share market has been abuzz with rumours that BHP Billiton is about to mount a $128 billion offer for it's rival Rio Tinto.

The deal has the potential to create a $300 billion company, which would control around 30 per cent of the global mining sector.

The merger talk is persisting despite Rio Tinto's denial late yesterday that in was in any talks with BHP Billiton, and this morning Rio's shares have fallen as a result.

Nevertheless concerns are being expressed that the creation of a global mining goliath would alarm competition regulators in Australia and around the world.

More from our Business Editor Peter Ryan.

PETER RYAN: Yesterday at the height of talk that BHP Billiton was about to swallow it up, Rio Tinto's shares surges 11 per cent, and almost became Australia's first $100 stock in four decades.

But just after the close of trade, Rio denied any discussions with BHP had taken place and that saw Rio's shares dip three per cent this morning as profit takers took their cue.

But that hasn't stopped the excitement or the gossip as speculators continue to ponder the sheer power and dominance of what would be a global mining goliath.

CARLO CAIANI: They'd be humongous from here to Timbuktu, I mean the synergies are very good, you merge the two together you'd have the largest iron ore producer by a long shot, you'd have the largest copper, nickel, thermal coal, coking coal – I mean it would be a humongous, mega, mega company.

Mining analyst Carlo Caiani says both Rio Tinto and BHP Billiton are regarded as under-valued and obvious targets for predators. But he believes a correction to commodity prices sooner or later could see any suitor paying too much.

CARLO CAIANI: We would have to say that we do believe that the commodities will eventually start going down, quite steeply when it starts to happen. This might be end of '07 or '08, as soon as supply comes on. And so therefore you really wonder if these deals are going to come off.

PETER RYAN: Carlo Caiani has also been doing a reality check on the feasibility of a company that would dominate the global mining scene. He says the enormity of a merged Rio and BHP Billiton would alarm competition regulators around the world, starting with the Australian Competition and Consumer Commission.

CARLO CAIANI: Like any other issue on mergers and acquisitions, the ACCC would have to look at the strength of monopoly or perceived monopoly power for a variety of consumers and customers both in Australia and overseas.

So if the two merged you'd have the largest player with huge market share, so you'd have to really question whether the various complexities involved in ACCC and other anti-trust rulings around the world, whether that would shemozzle and make life too difficult for such a deal to take affect.

PETER RYAN: Despite the competition issues, mining analysts believe the rumours have a whiff of substance.

TIM GERRARD: Where there's smoke there's fire. This share price performance has been quite incredible and probably quite good reasons why it's happening.

PETER RYAN: But Tim Gerrard of Austock doesn't believe BHP Billiton is preparing an aggressive raid on Rio.

TIM GERRARD: I think what's happening is that both BHP and Rio will be dusting off their own plans about what it might look like if they merge as equals. So that's quite different than BHP making them aggressively.

PETER RYAN: Mining watchers also say a private equity tilt at wither Rio Tinto or BHP cannot be ruled out, and that with so much cash looking for a home some of the big buy out firms around the world would have had the miners on their target lists for months.

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