Australia | Nov 24 2006
By Rudi Filapek-Vandyck
As predictable as can be: Phelps Dodge and Freeport McMoRan announce the intention to tie-up and within the next few days news wires and websites are speculating whether BHP Billiton (BHP) and/or Rio Tinto (RIO) may possibly intervene with a higher bid.
Well, investors better not get too excited about it, believes Merrill Lynch resources analyst Vicky Binns. BHP management, for instance, has consistently stated it has a single priority for high growth, low cost quality assets, reminds Binns. She acknowledges Freeport’s Grasberg Mine in Indonesia could be considered as fitting the label “world class asset” but this overlooks the fact that Freeport’s plan is to go fully underground by 2015 – this will send the costs at the mine through the roof.
What about Rio? The company currently owns 40% of the production above the metal strip at Grasberg so would this make it a logical fit? Binns recalls Rio Tinto management has in the past openly discussed the benefits of having a US company, with US government backing, as the operator of Grasberg. (Everyone can draw his own conclusions from this, but I am certain what Vicky Binns is thinking.)
Binns does not see much incentive for both companies to start a takeover battle to acquire more copper assets. Primo because both have already done their homework in the past and can now rely on a solid organic growth outlook for the metal. Segundo, copper prices are likely to trend towards a lower price level from here onwards, and this means whoever buys anything today is likely to come to the conclusion he’s paid too much in twelve months from now.
Vicky Binns also believes lower copper prices in the months ahead have the potential to drag the whole resources sector lower. On a twelve month basis, however, she’s still rating both BHP as RIO a Buy.