bhp eyes market for bargain buys

http://business.theage.com.au/business/bhp-eyes-market-for-bargain-buys-20090527-bno7.html

BHP eyes market for bargain buys
Barry FitzGerald
May 28, 2009

BHP BILLITON chief executive Marius Kloppers has followed the lead of his chairman, Don Argus, in warning that the global economic recovery will be slow and protracted.

But he has also raised the prospect that BHP will use its financial muscle to pursue merger and acquisition opportunities created by others' distress, in addition to continuing to invest through the cycle in "organic" growth opportunities.

"Investment in organic growth and M&A activity are not mutually exclusive - in fact, both can benefit our shareholders and our communities," Mr Kloppers told the Minerals Week conference in Canberra yesterday.

His comments drew wry smiles from Rio Tinto operatives in the audience as speculation continues that BHP could be planning to break open Rio's $US19.5 billion ($A24.8 billion) recapitalisation deal with China's state-owned Chinalco.

BHP cannot mount a renewed takeover bid for Rio until November after pulling the plug on its hostile 3.4-for-1 scrip offer last year. But it could return with an offer if invited to do so by Rio.

But the more likely scenario - and one that Rio's biggest local shareholders believe BHP is working on with fervour - is a pitch by BHP for specific assets included in the Chinalco deal or a proposed iron ore joint venture in the Pilbara, the latter having to secure anti-trust clearance.

Unlike its competitors, BHP is essentially debt free and, as Mr Kloppers put it, can "take advantage of any opportunities the current market provides".

The potential for BHP to move on OZ Minerals once it is reduced to just the Prominent Hill copper/gold mine has also been floated in the market.

Mr Kloppers had nothing to say on Rio's iron ore price settlement with the Japanese steel industry, announced on Tuesday.

The 33 per cent price reduction for the main "fines" product will cost Rio, BHP and Fortescue Metals more than $US10 billion in lower revenue in 2009-10, assuming it becomes the new benchmark.

But there was debate among analysts on whether the settlement would become the global benchmark given that the Chinese steel industry - the world's biggest - has made it clear it wants price cuts of 40-45 per cent.

Analysts at Macquarie said BHP might well use the Rio settlement as a starting point for another push towards quarterly pricing of iron ore as distinct from the annual contract price-setting mechanism.

"We'd hardly be surprised to see further evolution of the pricing framework for iron ore," Macquarie said.

Citi analysts said the Rio settlement would become the benchmark. It said that while the Chinese would be unhappy with the settlement, they would end up agreeing to it.

The reporter owns BHP shares.