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Rio Tinto and BHP Billiton today signed a non-binding agreement to establish a production joint venture covering the entirety of both companies' Western Australian iron ore assets. The joint venture will encompass all current and future Western Australian iron ore assets and liabilities and will be owned 50:50 by BHP Billiton and Rio Tinto.

The joint venture is expected to unlock significant value from the companies' overlapping, world-class resources. Both companies believe the net present value of these unique production and development synergies will be in excess of US$10 billion (100 per cent basis). These substantial synergies are anticipated to come from:

  • Combining adjacent mines into single operations;
  • Reducing costs through shorter rail hauls and more efficient allocations of port capacity;
  • Blending opportunities which will maximise product recovery and provide further operating efficiencies;
  • Optimising future growth opportunities through the development of consolidated, larger and more capital efficient expansion projects; and
  • Combining the management, procurement and general overhead activities into a single entity.

The joint venture will operate as a cost centre and deliver iron ore, in equal volumes, to ships designated by BHP Billiton and Rio Tinto to sell independently through their own marketing groups. In order to equalise the contribution value of the two companies, 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 per cent to 50 per cent.

Senior management of the entity will be determined jointly on the basis of the 'best person for the job' with broadly equal participation from Rio Tinto and BHP Billiton. The initial Chairman of the nonexecutive owners' council will be Sam Walsh, currently Rio Tinto Chief Executive Iron Ore, and the initial CEO of the production joint venture will be BHP Billiton Iron Ore President, Ian Ashby. Future CEOs will be appointed by mutual consent.

Commenting on the joint venture, Rio Tinto Chairman Jan du Plessis said, "The joint venture will establish an unrivalled iron ore business with world class assets and infrastructure. We believe it represents great value for shareholders and will create a business combination able to serve growing international markets with unparalleled efficiency."

BHP Billiton Chairman, Don Argus, said, "I am delighted that we are able to announce a transaction that can deliver significant real and quantifiable synergies to our shareholders. The combination of these two asset portfolios will unlock the scale benefits inherent in this world class resource basin."

BHP Billiton CEO Marius Kloppers said, "The synergies in this combination are so substantial that both companies have been investigating ways to combine these operations for more than a decade. 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, said, "We have long recognised 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 realise this vision which offers value to both companies."

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.

Rio Tinto and BHP Billiton will now move to signing definitive and binding transaction documentation as soon as practicable based on the agreed principles set out in the attached agreement that has been signed today. 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. The core principles are set out in the attached non binding heads of agreement, certain provisions of which have been redacted for reasons of commercial sensitivity.

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 fulfil certain commitments to complete those documents. The break fee would also be payable in the event that either party:

a) announces that it does not intend to proceed with the transaction; or
b) fails to recommend the transaction to its shareholders or take the steps necessary to obtain the approval of its shareholders; or
c) breaches the agreed exclusivity provisions.

The attached agreement will terminate if binding agreements are not executed within six months of the date of this announcement or the conditions precedent are not satisfied by 31 December 2010. 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.

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