BHP-Rio must sell Coega project

Johannesburg - South Africa's Competition Commission has recommended that the Competition Tribunal approve BHP Billiton's $70bn takeover bid for rival Rio Tinto, provided that it sells Rio Tinto's Coega aluminium smelter project within 12 months of a merger.

The Competition Tribunal is South Africa's final decision-maker on competition issues.

European Union regulators are reported by Bloomberg to have told BHP Billiton that its proposed offer may breach competition laws.

Bloomberg cited two unnamed sources as saying the EU regulators will issue a statement of objection to the hostile bid, which will create a merged company with a large share of the global iron ore market with price implications for that commodity.

BHP Billiton made an initial three-for-one share offer for Rio Tinto in November 2007, subsequently sweetening the offer to 3.4 shares per Rio share. Rio has rejected the offer.

BHP Billiton has for years been the dominant aluminium producer in South Africa with its two smelters in Richards Bay. It has used that position to its advantage, the commission said in its finding on the merger.

"BHP Billiton has adopted a pricing regime that has reduced the benefits to these downstream firms. This pricing regime has however been recently discarded, as a response to the prospect of a new entry in Coega," it said.

Near-monopoly

Rio Tinto acquired the Coega project when it took over Alcan, which had studied setting up a smelter at South Africa's new large industrial development zone.

However, a severe electricity shortage in the country which shut mines for a week in January and the fact that there will not be a great deal of excess power available much before 2013, when expansion programmes kick in, caused Rio to cool its heels on the aluminium smelter project.

"In its investigation, the commission established that the Rio Tinto smelter would have brought about competition to BHP Billiton in South Africa, which has enjoyed a near-monopoly for many years," the commission said.

While there is an overlap in a wide range of minerals, the commission said the BHP Billiton takeover of Rio Tinto would eliminate that competition in the primary aluminium market to the detriment of downstream users that beneficiate the metal.

"The commission has recommended to the Competition Tribunal that the merger be approved subject to BHP Billiton divesting of the entire interest to be acquired by it from Rio Tinto relating to the Coega Aluminium Smelter Project within 12 months of the implementation of the proposed merger," the commission said.

"This includes agreements made between Rio Tinto and Eskom and the South African Government relating to the supply of electricity and other elements necessary for the development of the Coega Aluminium Smelter Project."

Australia's competition authorities have cleared the bid and the US Justice Department said it would not oppose it.

- Miningmx.com

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