UBS: BHP-Rio Tinto Merger 'Not Impossible, Nor Illogical'

Includes: BHP, RIO
by: FP Trading Desk

Rumors of a tie-up between Rio Tinto (RTP) and BHP Billiton (NYSE:BHP) provided a boost for shares of both companies on Wednesday, and while a deal doesn’t look likely at this stage, a combination of the mining giants deserves a look.

While anti-trust issues could force ‘BHP Tinto’ to divest some of its combined assets (iron ore is cited as the most obvious example), their potential combined share of several markets and the pricing power this could bring is likely garnering the attention of rivals and customers alike.

A BHP-Rio Tinto combination would give it 41% of the global seaborne iron ore market, surpassing Brazil’s CVRD (NYSE:RIO) at 38%, UBS analyst Paul Galloway said in a note to clients.

His calculations also suggest Cameco Corp.’s (NYSE:CCJ) 13% share of the uranium market would also be surpassed by 5.4% from BHP and 9% from Rio.

‘BHP Tinto’ could also take the lead away from Aluminum Corp of China Ltd. (Chalco) (NYSE:ACH) in the alumina market.

Mr. Galloway calls a future merger “not impossible, nor illogical” given the overlapping asset bases of the Anglo-Australian giants and US$2-billion in potential cost savings.

He added that the catalyst for a possible merger could be underperformance for BHP and Rio’s share prices, which have recently seen somewhat of a correction. However, both stocks fell more than 3% in London on Thursday.

He also noted that both BHP and Rio have been buying back their own shares.