There has been little said about BHP Billiton Ltd.’s (BHP) attempted takeover of Rio Tinto PLC (RTP) in recent months, but the proposal is far from dead.  In fact, rumors that BHP may increase its bid have brought about even more speculation that China’s largest steelmakers will further enter the fray.

Rio Tinto Group, the world’s third-largest mining company, rose in London trading yesterday (Tuesday) on speculation BHP Billiton Ltd. will increase its $179 billion hostile bid for the company.

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"The rumor doing the rounds is that BHP will increase its bid to 3.8 shares for each Rio share," Manoj Ladwa, a derivatives broker at TradIndex in London, told Bloomberg News.

Rio Chief Executive Officer Tom Albanese rejected BHP’s initial $127 billion offer saying it "significantly undervalued Rio Tinto and its prospects." Albanese also said the bid, which offered three shares of BHP for every one share of Rio, was not just out of the ballpark, but "several ballparks away" from being an accurate appraisal. A second offer of 3.4 BHP shares per share of Rio Tinto was also rejected.

BHP has refused to comment on the rumors, but it’s not too great a stretch to imagine another bid might be on its way. That’s because the one thing the world’s second and third largest mining companies can agree on is that Asian markets should be paying more for their iron ore.

Both Rio and rival BHP Billiton are believed to be pushing for an 85% increase in 2008-2009 benchmark iron ore prices, despite the 65% to 71% rise agreed to by Brazilian mining rival Vale (RIO).  

The two Aussie juggernauts believe their proximity to Asian markets gives them greater leverage to charge higher prices.

"Rio Tinto will continue to negotiate to obtain a freight premium, to reflect its proximity to Asia and its major customers," Sam Walsh, Rio’s chief executive of iron ore projects said in February.

Freight accounts for 30% of the landed cost of Australian iron ore in China, but close to 50% of Brazilin iron ore. China, the world’s largest steel producer and consumer, imported 383 million metric tons of iron ore in 2007, up 56.8 million tons, or 17.4%, from the previous year, the China Iron and Steel Association reported.

China’s Chess Game

China is perhaps most affected by the increase in iron ore prices. The country produces about a third of the world’s steel and the vast majority of that output is being used to build the foundation of what will one day become the world’s premier economic power. A boom in commodities prices that has caused the spot price of iron ore to triple in the past five years threatens to derail the country’s fast track development.

However, the only thing that scares Beijing more than soaring ore prices is the prospect that BHP and Rio will team up to ensure that high metal prices are supported well into the future, and perhaps through the duration of China’s economic and industrial expansion.

So far, Xiao Yaqing, chief executive of Aluminum Corp. of China (ACH), otherwise known as Chalco, has given the strongest indication that the state-backed Chinese company is uneasy about the prospect of BHP and Rio forming an ironclad alliance.

"A firm that owns too many resources is not good for the world," he said in an interview with Hong Kong’s South China Morning Post. "People do not want to see a company dominate the market in any industry."

Earlier this year, Chalco and Alcoa Inc. (AA), the U.S. aluminum company, bought a 9% stake in Rio Tinto Group for $14 billion. The move turned the duo into Rio’s single largest shareholder, ensuring BHP would have to obtain a 50.1% stake in the company to complete its takeover.

Last month, Sinosteel Corp., China’s second-largest iron ore trader, won over Midwest Corp. by raising its takeover bid to $1.3 billion. Sinosteel has also acquired a 2.4% stake in Murchison Metals Ltd., a rival iron ore producer to Midwest.

Few believe that Chinese companies will stop there, however. The Australian newspaper reported Monday that China’s three largest steel firms – Sinosteel, Chinalco and Baosteel Group Corp.- were looking at a 16% stake in Fortescue Metals Group Ltd., that Harbinger Capital Partners is considering selling. Fortescue is Australia’s third largest iron ore producer behind BHP and Rio Tinto.

"Harbinger chief executive Philip Falcone has been regularly contacted by many Chinese and European companies, particularly in recent weeks," the paper said. "But because of federal Government concerns about the level of foreign investment, any sale to the Chinese will probably be for only about half of the Harbinger stake."

Even Marius Kloppers, chief executive of embattled BHP Billiton, thinks a stake in his company will soon fall into Chinese hands.

"Various parts of China that have got surplus funds, capital to deploy, are deploying that across a wide range of things in the world," he said at an investor briefing. "I have no doubt that one day we will see them show up on our register."

News and Related Story Links:

• Bloomberg:
  Rio Tinto Rises on Speculation BHP to Sweeten Offer

• Money Morning:
  Rio Tinto: New BHP Offer Neglects its "Underlying Value"

• Money Morning:
  Rio Tinto Wants More For Its Iron Ore

• The Australian:
  Iron prices still red-hot, says Rio Tinto’s Tom Albanese

• Money Morning:
  Chinalco, Alcoa Stun BHP With Surprise Counterpunch, Grabbing a 12% Stake in Takeover Target Rio Tinto

• Sydney Morning Herald:
  Chinese whispers of discontent over Rio bid

• The Australian:
  Chinese circling Fortescue Metals

India’s benchmark stock index yesterday eclipsed the 19,000 level, the first time that’s happened, The Associated Press reported.

The Bombay Stock Exchange’s 30-share Sensex peaked at 19,059, a 639.6 point gain and a new all-time high.  The Sensex has soared by 1,000 points in just five trading sessions, similar to the leap it made last month when the index roared from 16,000 to 17,000.

On the National Stock Exchange, the 50-company Standard & Poor’s Nifty index jumped 242 points, or 4.5%. Foreign institutional investors have fueled India’s market surge with cash inflows totaling $16.5 billion to date, nearly double the amount invested in all of last year. Foreign investment in October alone has roared past the $4 billion mark.

Indian indexes got a boost from blue chip stocks such as Tata Steel, a subsidiary of the larger Tata Sons, and Reliance Energy Ltd. Tata Steel was up 7.5% at Monday’s close, but Reliance was the day’s big winner soaring 12.9%. 

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Reliance Industries is the largest petrochemical company in India’s private sector. The stock’s dramatic surge came one day after it had announced it would be breaking $28 billion out of its war chest to press forward with foreign acquisitions.  According to the Financial Times, Reliance Chairman Mukesh Ambani detailed the plans at the company’s annual meeting.

A renewed focus on foreign acquisitions and open-mindedness towards partnerships "will give Reliance the ability to pursue both organic and inorganic growth opportunities of significant scale and size," Ambani said.

It is not yet known specifically what types of acquisitions Reliance will target, but many analysts expect the company to make a strong move into Western markets. Reliance is already building what will be the world’s largest refinery complex in the Indian city of Jamnagar.  And, according to Ambani, the company will be investing $4 billion in oil and gas exploration "in the coming years." 

Mukesh Ambani is on his way to becoming the richest man in India, as he possesses a 47% stake in Reliance, estimated to be worth $50 billion.

News and Related Story Links:

• The [Indian] Financial Express:
  2007 FII inflows hit $16 billion.

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Murchison Metals, a company heavily backed by Japan-based Mitsubishi, has launched a hostile takeover of Midwest Corp., a company backed by Sinosteel, a state owned Chinese entity. The maneuver underscores a long-standing rivalry between the two nations, one that sees the two Far East juggernauts squaring off in a bid for a big slice of Australia’s vast cache of natural resources.

At the heart of this particular conflict are operations at Weld Ridge and Jack Hills in Western Australia. Right now, the companies have neighboring operations at both locations. Murchison has said that jointly developing the two areas would "unlock cost and revenue synergies," that could total 40 million to 50 million tons a year.

With iron ore prices projected to rise as much as 20% to 30% in 2008 – the sixth-straight year of increases – there’s an added incentive to get the deal done. Both Japan and China have been searching out alternative sources of the ore.

The deal is also important because $2.71 billion (A$3 billion) worth of infrastructure work is at stake. That would include a 186-mile (300km) rail link, and a port located north of the city of Perth.

But there’s a problem: The two companies can’t agree on how to best exploit the region’s resources.

By accomplishing this takeover, Murchison would eliminate its only competition.

Murchison’s hostile bid could be worth as much as $889.45 million (A$986 million) to Midwest. The bid has two options. The base offer is one Murchison share for every 1.16 Midwest shares. This deal values the company at $830.24 million, (A$919.8 million) or $4.04 (A$4.48) per Midwest share.

The second option includes a higher offer, which values the stock at $4.24 (A$4.70). But to qualify, Midwest must avoid any material tax liability from the sale of its 50% stake in the Weld Range and Koolanooka projects to Sinosteel. At the Australian equivalent of $4.24 a share (A$4.70 a share), Murchison is offering a 200% premium to the price at which Midwest executed a rights issue in May.

Murchison has made its all-paper offer unconditional, which means it does not need to secure the majority of its rival’s shares.

The preliminary signs are positive. Shares of Midwest jumped nearly 30% Wednesday, when Murchison first launched its takeover bid. The Age, an Australian news source, quoted Murchison Chairman Paul Kopejtka as saying the British Virgin Islands-incorporated Amardale Offshore, which has a 15.2% stake in Midwest, had already given the deal its blessing. Also, in a surprise move, Murchison announced its own – previously undisclosed – 2.7% stake in Midwest.

Some analysts believe that Yilgarn, another China-backed consortium that’s backing Midwest, may try to block the deal by making a rival offer. One analyst told the Wall Street Journal that "if these two merged, then there would be no vehicle via which Yilgarn could have a role in the infrastructure. Yilgarn would have an interest, if they wanted to stay in the game, of blocking the merger."

However, comments made by the company would seem to indicate otherwise.

"Yilgarn’s exclusive agreements with Midwest Corporation hold us in good stead for a positive outcome with respect to merger or acquisition discussions between miners in the Mid-West," a company spokesperson told The Australian newspaper. "This may finally lead to the combining of forces for the region that Yilgarn has been advocating for the past two years."

If the bid succeeds, Murchison will be Australia’s second-largest independent iron miner after Fortescue. Kopejtka, the Murchison chairman, sees this as one of the many compelling reasons for the two companies to join forces. And the market seemed to agree, as it sent Midwest’s share price to record highs on Wednesday. The two companies have gone back and forth on the issue of infrastructure for months now. At this point, the quickest and most efficient way to effect progress would be for the companies to strike some sort of alliance, rather than pursuing competing – and mutually exclusive – agendas.

Unfortunately, many analysts see this as yet another instance of Japanese and Chinese interests colliding. In one sense, that’s true. But those analysts also note that this particular takeover doesn’t look like a cutthroat move by Murchison to eliminate a competitor. Instead, it looks more like a final course of action dictated by business, and not political, mandates – by a company that’s determined to free up the ironclad profits of Australia’s promising western provinces.

News and Related Story Links:

• AFX:
  Australia’s emerging iron ore producers key challenge — getting ore to market.

• The Age:
  Iron ore miners fight for port.

• The Age:
  Midwest shares soar on Murchison bid.

• Money Morning Investment Research:
  Goldman Sachs Finding Resistance to Deals in China.

• Money Morning Investment Research:
  U.S. Global Investors to Focus on Global Infrastructure Investment Opportunities.