Rio May Bid for WMC to Boost Output, Analysts Say

Simon Casey and Tan Hwee Ann Bloomberg/London/Sydney

Rio Tinto Group, the world's third-largest mining company, may bid for WMC Resources Ltd. to boost copper and uranium output, challenging BHP Billiton's A$9.2 billion (US$7.3 billion) offer, said analysts such as Gavin Wendt.

WMC accepted BHP's offer of A$7.85 a share on March 8, fending off a hostile approach by Zug, Switzerland-based Xstrata Plc. Melbourne-based WMC's shares rose to A$8.02 in Sydney on Thursday, indicating investors anticipate a higher bid.

BHP wants WMC's Olympic Dam project in South Australia, site of the world's biggest uranium deposit and fourth-largest copper and gold deposit. Buying WMC would help London-based Rio Tinto keep up with BHP's growth, Merrill Lynch & Co. said March 8.

"Rio is already a major player in uranium and copper and it would strengthen their position in both these commodities significantly if they got hold of WMC," said Wendt, an analyst at Intersuisse Ltd. in Sydney.

Shares of WMC rose 3 cents, or 0.4 percent, to A$8.02 on the Australian Stock Exchange. Rio Tinto's stock fell 9 cents, or 0.2 percent, to A$47.30 and BHP's fell 0.4 percent to A$19.14.

The WMC purchase will be the mining industry's biggest since the March 2001 merger that formed BHP Billiton, the world's largest mining company. Producers of copper, nickel and other metals are expanding mines and seeking new reserves as China's surging demand drives prices to multiyear highs. Copper, used in electrical wiring, traded March 8 at a record in London.

Rio Tinto's shares barely budged in 2004, lagging behind BHP, whose stock jumped 26 percent. BHP has approved $5.5 billion on new projects, while Rio's board has sanctioned as much as $3 billion of spending.

"Rio's growth profile and project pipeline is inferior to BHP's," Vicky Binns, an analyst in Sydney at Merrill Lynch said in the report. "We believe that Rio Tinto management will be doing a lot of pencil sharpening right now."

Lisa Cullimore, a spokeswoman for Rio Tinto in London, declined to comment. Natasha Hill, a spokeswoman for London-based Anglo American Plc, the world's second-largest mining company, didn't immediately return a voicemail seeking comment on whether it would be interested in a bid.

Rio Tinto shares closed up 0.8 percent in London on Wednesday. They have climbed 20 percent this year, valuing the company at 29 billion pounds ($56 billion). BHP, also dual-listed in Sydney and London, has a combined market value of 47 billion pounds.

"If BHP Billiton does get WMC, that would put them in a league almost untouchable," said Alfred Wong, who helps manage $12 billion at UOB Asset Management in Singapore and owns shares in BHP, Rio and WMC. "On the strategy aspect, Rio would be hard pressed to do something."

A successful acquisition of WMC would increase BHP's market value to almost $100 billion, making it twice as big as Rio Tinto, said Glyn Lawcock, an analyst at UBS AG, in a March 8 report.

Xstrata, the world's biggest exporter of coal burned in power plants, said March 8 it won't raise its bid of A$7 a share. Shares of WMC, the world's fifth-largest nickel producer, have climbed 56 percent since Oct. 28, when WMC rejected Xstrata's initial bid.

Rio Tinto might consider a bid that includes stock because WMC's Australian investors, as many as half, would avoid a 15 percent tax on capital gains from BHP's cash offer, said Pieter Bruinstroop, who helps oversee $2.3 billion at APS Asset Management Ltd. in Singapore, including BHP and WMC shares.

"I really don't think it comes into their thinking on whether they're bigger or smaller than BHP," he said. "I don't think Rio Tinto views any assets as a must-have. It all comes down to their valuation."

Grant Samuel & Associates Pty, a corporate advisory group hired by WMC, valued the company at A$7.17-to-A$8.24 a share, before a 20 cents dividend payout that WMC plans.

Rio Tinto has "been very focused on divesting assets when it thinks prices are high and acquiring when it is low," Neil Boyd- Clark, who helps manages $580 million at ABN Amro Asset Management Australia Ltd. said in a March 8 interview. "It may be hard for Rio Tinto to come into the fray over and above BHP, as they have sold their non-core assets over the last few months on the view that they've got good prices on them."

Adding WMC would give Rio Tinto a virtual monopoly over Australia's uranium production. The company's Energy Resources of Australia unit, acquired in 2000, is the world's third-largest uranium producer and supplies 8 percent of global demand from the Ranger mine in Northern Territory.

"There shouldn't be a domestic competition issue over Rio becoming a dominant uranium producer because Australia doesn't use uranium," said Mark Pervan, an analyst at Daiwa Securities in Melbourne. "But it could be a question for the European Union regulatory authorities to look more closely at."

Rio Tinto's copper production fell 13 percent last year to 753,000 metric tons, or 4.8 percent of the world total, after fatal landslides disrupted output at Indonesia's Grasberg mine.

The company owns 40 percent of a venture with New Orleans- based Freeport-McMoRan Copper & Gold Inc. that runs part of Grasberg, the world's largest gold mine and second-biggest copper mine. Rio Tinto also holds 30 percent of Chile's Escondida copper mine, the biggest.

"I would be very surprised" by a Rio Tinto bid, said Graham French, who helps manage $120 billion at M&G Investment in London, including 2.5 percent of Rio Tinto's shares listed in London and 1.6 percent of Australian shares. "I think it's a killer blow by BHP."