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Rio Tinto, BHP Billiton to Establish Iron Ore Joint Venture

06/09/2009 - Rio Tinto and BHP Billiton sign a non-binding agreement to establish a 50:50 production joint venture that would combine both companies' Western Australian iron ore assets and liabilities into a single operating unit.

Rio Tinto and BHP Billiton have agreed to establish a 50:50 production joint venture that would combine both companies' Western Australian iron ore assets and liabilities.
 
The joint venture is to operate as a cost centre, delivering iron ore, in equal volumes, to ships designated by BHP Billiton and Rio Tinto to sell independently through their own marketing groups. BHP Billiton will pay Rio Tinto US$5.8 billion for equity type interests at financial close to take its interest in the joint venture from 45% to 50%.
 
The companies said they expect the joint venture to unlock significant value from their overlapping resources, estimating the net present value of those synergies to be in excess of US$10 billion (on a 100% basis). The companies said the synergies would result from combining adjacent mines into single operations, which would result in shorter rail hauls and more efficient allocations of port capacity. They said the joint venture would also provide blending opportunities that would help to maximize both product recovery and operating efficiencies, and would also allow the development of consolidated, larger and more capital-efficient expansion projects. They also noted that the joint venture would allow them to combine management, procurement and general overhead activities into a single entity.
 
Technology and research and development activity will also be shared. The agreement excludes HIsmelt, any secondary processing facilities, and operations and future business development outside Western Australia.
 
The joint venture’s senior management is to be determined jointly with broadly equal participation from Rio Tinto and BHP Billiton. Sam Walsh, currently Rio Tinto Chief Executive Iron Ore will serve as the initial Chairman of the nonexecutive owners' council, and BHP Billiton Iron Ore President, Ian Ashby will be the initial CEO of the production joint venture. Future CEOs are to be appointed by mutual consent.
 
"The synergies in this combination are so substantial that both companies have been investigating ways to combine these operations for more than a decade,” said BHP Billiton CEO Marius Kloppers. “I am delighted that we have found a solution that works for both companies. This joint venture brings together world-class iron ore resources, infrastructure and people, unlocks large synergies and is an outstanding outcome for all stakeholders."
 
Tom Albanese, Chief Executive of Rio Tinto, added, "We have long recognized the natural fit of our two iron ore businesses and the industrial logic for bringing them together in order to unlock substantial synergies. We are very pleased that we have been able to realize this vision which offers value to both companies."
 
Pre-conditions for formation of the joint venture include receipt of regulatory and relevant governmental clearances and approval from the shareholders of both Rio Tinto and BHP Billiton.
 
Rio Tinto and BHP Billiton have also agreed to certain exclusivity and other provisions that commit both parties to negotiate binding agreements governing the formation of the joint venture, including a mutual break fee of US$275.5 million payable in the event that either party does not fulfill certain commitments. The break fee would also be payable in the event that either party announces that it does not intend to proceed with the transaction; fails to recommend the transaction to its shareholders or take the steps necessary to obtain the approval of its shareholders; or breaches the agreed exclusivity provisions.
 
Formation of the joint venture is expected to be completed around mid-2010.
 
Goldman Sachs and Gresham Partners acted as financial advisers to BHP Billiton on this transaction. Morgan Stanley acted as financial adviser to Rio Tinto on this transaction.