Big Deals: BHPB and Rio Tinto

BHP Billiton is a great company, and yes, I am consulting to one of their plants at the moment.

Despite their size, they are able to run over 100 businesses in 25 countries (be they mines, smelters, refineries or new projects).

And they run them well. Check out their latest production report, and note how often you see words like “record levels of production”. (Kwinana Nickel Refinery, where we’ve spent the last 7 months, gets a “performed at near record levels”.

Rio Tinto also has a large and diverse set of assets, and is also known as a very good operator, with a similar culture to BHP Billiton.

Meanwhile BHP Billiton has a successful track record of adding significant new businesses to their own, such as the WMC purchase which added Western Australia’s Nickel, Olympic Dam’s Uranium and other properties. These plants now form a solid part of BHP Billiton, and are producing well.

That said, it is going to be harder to swallow Rio Tinto than WMC. Rio has about 50-80 operations (it’s hard to define what an ‘operation’ is for either company) to BHP Billiton’s 100, but the nature of the industry makes it easier.

Essentially each (well most) operation is an independent business, with a very clear mandate to find, mine, smelt or refine a basic commodity. Sales and marketing is simple when you produce commodities, as you can sell directly to the market at daily (say LME quoted) rates, or lock in lonfer term contracts based on LME prices. Indeed BHP Billiton seperates their sales and marketing functions from operations. So an operation just needs to focus on efficiently producing whatever they produce.

The operatons, in both businesses, are glommed into product groups, auch as “Aluminium” or “Stainless Steel Materials”. These sometimes have sub-groups reporting to them, as, for example, Nickel West reports through to Stainless Steel Materials at BHP Billiton. Rio has a handful of groups, with more structure underneath, it seems, while BHP Billiton has more “CSG’s” (Customer Service Groups) at the top level.

Combining Rio and BHPB’s assets will be simply a matter of taking the Rio assets and placing them into the appropriate BHP Billiton CSG’s. They’d need to add on  one or two new CSG’s to cope with Rio products such as such as salt, borates and talc, but that is easy enough.

At the asset level there would be little change in personnel, but above the assets you’d expect to see a bit of movement as senior people jostle for fewer positions.

There’ll also be excellent opportunities for synergies, as the firms often mine in a similar geographical area, and would be able to combine transport and the like. Those synergies can be captured on the ground by the plants working together, although one can imagine several dictates coming in from on high.

Overall the greatest thing about this combination is that it does not add complexity, just scale. The assets can still be run independantly, the average size of a business unit will not change, and the senior corprate structure can be manipulated to ensure that the number of assets looked after by any one group is not too large.

Both company’s share prices are largely a reflection of underlying commodity prices, and the effect of a movement in those prices is probably greater than the impact of the merger. However I’d be looking for some sort of stuctured investment going short on a basket of other companies in similar commodities (or the commodities themselves) and long on Rio/BHPB. That’s once the merger happens.

Will it happen? Who knows, but the numbers and synergies stack up and BHP Billiton boss Marius Kloppers seems like a very determined and patient man.

Two great companies combining – a good thing.

Published by Lance Wiggs

@lancewiggs

2 replies on “Big Deals: BHPB and Rio Tinto”

  1. The possibility is fast a reality – the 12%, or $7.1bn, of Rio UK that was purchased just now by Alcoa and Chinalco does throw a spanner in the works. That equates to about 9% of the dual listed company.

    The fundamentals to me are, though, that Rio and BHPB make a good fit, and that they can extract more synergies from each other than outsiders can. One future could by a BHPB/Tinto combination that incorporates a cornerstone stake by Chinese money keen on locking in supply.

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