BHP gloomy on short term, defends Rio decision

Business Materials 27 November 2008 06:31 (UTC +04:00)

Global miner BHP Billiton painted a gloomy near-term outlook for metals demand on Thursday as it defended its decision to drop a $66 billion bid for rival Rio Tinto, Reuters reported.

BHP, facing its shareholders for the first time since walking away from the Rio bid on Tuesday, told its Australian annual meeting that uncertainty in commodities markets would continue in the short term and it was ready to close loss-making operations.

"There is no doubt that these are very challenging times, uncertainty in the shorter-term outlook remains and we do not expect to be immune from the changes in the world economy," Chief Executive Marius Kloppers told shareholders in Melbourne.

"If we look at Chinese steel production, the subject of much public discussion recently, we see a decrease of 17 percent year-on-year and this will eventually flow through to all of us in the industry," Kloppers said, referring to 2007 versus 2008.

BHP and its former bid target, Rio Tinto, are the third and second largest producers respectively of iron ore, which is required in steel-making.

The scrapping of the proposed hostile takeover was warmly welcomed by steelmakers in Asia and Europe, who had feared the creation of a global giant that would hold the upper hand in annual price negotiations.

BHP said it retained a strong balance sheet, despite the market slump, and remained ready to pursue other acquisitions, especially firms weakened by the financial crisis.

"Our longstanding focus on strong balance-sheet capability and financial stability stand us in good stead in the current volatile environment ... in being able to take advantage of opportunities that may arise as others falter," Kloppers said.

Mining analysts expect BHP to target rivals worth more than $1 billion and with assets still operating in the black.

"BHP's not going to get out of bed for just anybody," said James Wilson of DJ Carmichael & Co. "They'll only look at the big elephants."

Kloppers highlighted not only the heavy recent falls in metal prices, including copper, nickel and aluminum, in explaining the company's decision, but also the excessive financial risk of taking on Rio Tinto's $39 billion in net debt.

He said an acquisition would have left the combined group with gearing ratio of close to 48 percent.

"Your board believes that a heavily geared position, and reduced capacity to deal with that debt, creates unacceptable financial risks for BHP Billiton shareholders," Kloppers said.

BHP shares was up more than 5 percent to 28.70 at 1:25 a.m. GMT (8:25 p.m. EST), outpacing gains in the wider market .