WA election puts Rio takeover in doubt
February 2, 2010
Dear Mayne Reporters,
we've just had an extraordinary weekend in Australian politics with a new government set to take power in the booming mining region of Western Australia - a move that could scupper BHP-Billiton's $200 billion empire-building takeover bid for Rio Tinto.
Labor's Alan Carpenter looks finished, so WA Liberal leader Colin Barnett is highly likely to be the next West Australian premier. However, market watchers should sit up and take notice because he is against the BHP-Billiton bid if you can believe this interview he gave to The Australian's Jennifer Hewett during the election campaign. The key quotes from the story were as follows:
"It is not healthy."
"The state government couldn't stop them merging at a corporate level,'' Mr Barnett said. "But certainly the state government could have a big role in saying what happens in terms of their physical operations – not to frustrate, but as a player at the table.''
The Opposition leader said that there would be a clear cost to the state if more than half its mining and petroleum industry ended up in the hands of one company.
"If they want to do that (merge), then other things would come into play,'' he said.
"For example, why would they continue to receive a concessional royalty rate? It would be time to get rid of that. The current rates fall well below the normal rates for mining royalties. It would be one of the issues we would have to discuss.''
State finances under pressure, mining royalty rates to rise
Australian states deliver most of the services but don't have many revenue sources, which explains why we are the world's biggest gamblers courtesy of state-issued gaming licences and also have every state and territory hurtling deeper into debt during the middle of an enormous mining boom.
And now that former NSW Treasurer Michael Costa came clean on Friday about the parlous financial position of state governments, the hunt for new revenue will be on in earnest.
Resource nationalism is on the rise globally and we recently saw the Queensland government jack up coal royalties from 7% to 10% for all revenues generated above $100 a tonne. Check out this list of major foreign-owned Australian resource projects as it includes details on the various state royalty arrangements, showing that Queensland charges more than most.
Compare that new 10% Queensland coal royalty with Western Australia which only only levies a flat 3.75% royalty on iron-ore "fines", although it rises to 7.5% for premium quality "lump" production. Colin Barnett is clearly signalling that he'll increase the royalty rate which would potentially cost a combined BHP and Rio Tinto billions of dollars when you consider that together they are slated to exceed 350 million tonnes of iron-ore production in the Pilbara next year.
Do the numbers assuming an average contract price of $US145 a tonne for 2008-09 and the mind boggles because 350 million tonnes at the price is worth $A60 billion. If new WA premier Colin Barnett decides there will be a "merger royalty premium", each 1 percentage point increase would strip $600 million of revenue from the combined business.
If he copies the Queensland model and slaps a 10% royalty on all sales above $US100 a tonne, this would cost the two companies more than $2 billion. If the royalty rates will be higher because of the merger, then it won't make sense to do the merger. Simple as that!
How the National Party negotiation will hurt the big miners
The National Party have emerged as the kingmakers in WA politics and they have a non-negotiable position to direct an additional $700 million a year in mining revenues into regional areas, as this story in today's special edition of WA Business News explains.
Nationals leader Brendan Grylls is waiting for an offer from the Liberal and Labor parties to see which side he will support to form a government from this hung parliament. Clearly, Colin Barnett will have to abandon his earlier opposition to this plan, but he'll need to raise a pile of new revenue to avoid a huge blowout in WA's public debt, which is already under pressure with a record $7.4 billion borrowing program for 2008-09.
Check out pages 9 and 10 of budget paper number three produced by the WA Treasury and you'll see that net debt is forecast to hit a record $12 billion by 2012, after the extraordinary $27 billion 4-year infrastructure spending binge is completed.
The same link shows that mining revenue is forecast to hit $3.42 billion in 2008-09, but it will need to rise substantially to stop further increases in state debt and to accommodate National Party demands for more government spending in regional areas. The penalty on WA's GST distributions from the Commonwealth due to the resources boom is another factor to consider.
The National Party, with its roots in agrarian socialism, is about to unleash some potentially severe resource nationalism on Melbourne-based BHP-Billiton and London-based Rio Tinto, regardless of whether the merger proceeds.
Regional communities have voted in large numbers for the National Party message that more revenue should stay in those communities, rather than head off to Perth and to the largely foreign shareholders in the companies which operate the mines.
When you combine this element with Barnett's own opposition to the BHP-Billiton bid for Rio, it is increasingly unlikely that the bid will succeed and more likely that a big royalty tax slug is coming anyway. It will just be bigger again if BHP takes over Rio Tinto.
Campaigning to have Rio Tinto HQ moved to Perth
I'm been campaigning hard against both Rio Tinto over the past year. There was this video promising a Rio Tinto board tilt that didn't eventuate but strongly made the point that it should be based in Australia and have more than 3 out of 15 Australians on the board. It is just crazy that Rio has a majority of its assets in Australia but is headquartered in London and is now only 15% Australian-owned.
Rio Tinto's Australian AGM in Brisbane last April also generated plenty of heat around this issue of the company treating Australia with disdain. Check out this package of highlights. Since then, the board has added another London-based director called Jan du Plessis, who is the chaiman of British America Tobacco. These Rio toffs haven't got a clue. Don't they realise that Australia runs the world's most punitive regulatory regime against big tobacco. Regional voters in WA who backed the the National Party plan will have very little sympathy for a snooty London-based multi-national with a board populated by Lords, Knights and now Big Tobacco.
There was also this emotive appearance on Today Tonight's WA edition criticising the influx of Chinese Government investment in Australian mining projects. It's hard to know what is worse, Rio Tinto behaving like snobby imperialists or the Chinese communists buying up its shares.
Where the BHP-Billiton board tilt fits in
Whilst Rio Tinto should move its domicile Down Under, right now there has been some very topical developments on the other side of the equation with BHP-Billiton.
Despite being a strong critic of Rio, I also think BHP's proposed takeover is ridiculous at a number of levels, as was explained in this recent Mayne Report video. There was also this discussion with presenter Helen Dalley on Sky Business Channel's Business View program.
To ratchet up the pressure, last month I nominated for the BHP-Billiton board at the forthcoming AGMs in London and Melbourne and requested the following platform be distributed to shareholders in the notice of meeting:
Mr Mayne believes BHP-Billiton is embarking on an ill-considered empire-building frolic with this putative Rio Tinto takeover. He is standing for election to give shareholders a vehicle through which to register their opposition to this proposal. Mr Mayne contends the Rio Tinto merger could be highly dilutive for BHP-Billiton shareholders, similar to what happened with BHP's 2001 merger with Billiton. In that case, 42% of BHP was exchanged for Billiton's assets which have proved to be patently inferior to the booming coal, iron-ore and petroleum operations held by BHP at the time. He also feels the exhaustive and complex Rio Tinto takeover process is an unnecessary distraction for management which should be focusing on capitalising on this once-in-a-generation resources boom.
Mr Mayne also believes it is time for BHP-Billiton chairman Don Argus to retire, rather than attempt one of the world's biggest takeovers to finish off his career. Mr Argus has been a director of BHP since 1996 and chairman since 1999. He is a 70 years old. Time's up! Please vote for Mr Mayne to send the board a strong protest message on the Rio Tinto takeover strategy and the need for generational change at the top.
BHP-Billiton company secretary Jane McAloon wrote back last week confirming that the nomination had been successful, but said the company "will contact you in due course regarding the wording of your CV and platform in the notice of meeting". Hmmm, let's hope they're not planning any censorship.
The overall message to anyone playing the market at the moment is that I reckon Rio Tinto shares will soon be back below $100. The elements lining up against BHP's bid are getting stronger by the day, with the position of Colin Barnett now a major factor. And BHP's own shareholders have a vehicle through my board nomination to send the directors a message that they don't want to see this excessive 35% premium offered.
The Sunday Times of London interviewed Don Argus in January this year and Rio shareholders should look back on the story before trading begins tomorrow, as it began like this:
Don Argus...has written to Rio Tinto chairman Paul Skinner, asking him to talk to BHP Billiton about its takeover plan, and pointing out that Rio's shares would slide if the deal were scrapped.
“That's what the market should be asking Rio's board,” said Argus. “What happens to your share price if we walk away?”
Colin Barnett is now in a position that he could force BHP-Billiton to walk away. With the commodities bubble bursting, the Rio Tinto share price could be about to come under substantial pressure.
And here's two final predictions: BHP won't get Rio and Don Argus won't be BHP's chairman in 12 months time.
That's all for now.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.
we've just had an extraordinary weekend in Australian politics with a new government set to take power in the booming mining region of Western Australia - a move that could scupper BHP-Billiton's $200 billion empire-building takeover bid for Rio Tinto.
Labor's Alan Carpenter looks finished, so WA Liberal leader Colin Barnett is highly likely to be the next West Australian premier. However, market watchers should sit up and take notice because he is against the BHP-Billiton bid if you can believe this interview he gave to The Australian's Jennifer Hewett during the election campaign. The key quotes from the story were as follows:
"It is not healthy."
"The state government couldn't stop them merging at a corporate level,'' Mr Barnett said. "But certainly the state government could have a big role in saying what happens in terms of their physical operations – not to frustrate, but as a player at the table.''
The Opposition leader said that there would be a clear cost to the state if more than half its mining and petroleum industry ended up in the hands of one company.
"If they want to do that (merge), then other things would come into play,'' he said.
"For example, why would they continue to receive a concessional royalty rate? It would be time to get rid of that. The current rates fall well below the normal rates for mining royalties. It would be one of the issues we would have to discuss.''
State finances under pressure, mining royalty rates to rise
Australian states deliver most of the services but don't have many revenue sources, which explains why we are the world's biggest gamblers courtesy of state-issued gaming licences and also have every state and territory hurtling deeper into debt during the middle of an enormous mining boom.
And now that former NSW Treasurer Michael Costa came clean on Friday about the parlous financial position of state governments, the hunt for new revenue will be on in earnest.
Resource nationalism is on the rise globally and we recently saw the Queensland government jack up coal royalties from 7% to 10% for all revenues generated above $100 a tonne. Check out this list of major foreign-owned Australian resource projects as it includes details on the various state royalty arrangements, showing that Queensland charges more than most.
Compare that new 10% Queensland coal royalty with Western Australia which only only levies a flat 3.75% royalty on iron-ore "fines", although it rises to 7.5% for premium quality "lump" production. Colin Barnett is clearly signalling that he'll increase the royalty rate which would potentially cost a combined BHP and Rio Tinto billions of dollars when you consider that together they are slated to exceed 350 million tonnes of iron-ore production in the Pilbara next year.
Do the numbers assuming an average contract price of $US145 a tonne for 2008-09 and the mind boggles because 350 million tonnes at the price is worth $A60 billion. If new WA premier Colin Barnett decides there will be a "merger royalty premium", each 1 percentage point increase would strip $600 million of revenue from the combined business.
If he copies the Queensland model and slaps a 10% royalty on all sales above $US100 a tonne, this would cost the two companies more than $2 billion. If the royalty rates will be higher because of the merger, then it won't make sense to do the merger. Simple as that!
How the National Party negotiation will hurt the big miners
The National Party have emerged as the kingmakers in WA politics and they have a non-negotiable position to direct an additional $700 million a year in mining revenues into regional areas, as this story in today's special edition of WA Business News explains.
Nationals leader Brendan Grylls is waiting for an offer from the Liberal and Labor parties to see which side he will support to form a government from this hung parliament. Clearly, Colin Barnett will have to abandon his earlier opposition to this plan, but he'll need to raise a pile of new revenue to avoid a huge blowout in WA's public debt, which is already under pressure with a record $7.4 billion borrowing program for 2008-09.
Check out pages 9 and 10 of budget paper number three produced by the WA Treasury and you'll see that net debt is forecast to hit a record $12 billion by 2012, after the extraordinary $27 billion 4-year infrastructure spending binge is completed.
The same link shows that mining revenue is forecast to hit $3.42 billion in 2008-09, but it will need to rise substantially to stop further increases in state debt and to accommodate National Party demands for more government spending in regional areas. The penalty on WA's GST distributions from the Commonwealth due to the resources boom is another factor to consider.
The National Party, with its roots in agrarian socialism, is about to unleash some potentially severe resource nationalism on Melbourne-based BHP-Billiton and London-based Rio Tinto, regardless of whether the merger proceeds.
Regional communities have voted in large numbers for the National Party message that more revenue should stay in those communities, rather than head off to Perth and to the largely foreign shareholders in the companies which operate the mines.
When you combine this element with Barnett's own opposition to the BHP-Billiton bid for Rio, it is increasingly unlikely that the bid will succeed and more likely that a big royalty tax slug is coming anyway. It will just be bigger again if BHP takes over Rio Tinto.
Campaigning to have Rio Tinto HQ moved to Perth
I'm been campaigning hard against both Rio Tinto over the past year. There was this video promising a Rio Tinto board tilt that didn't eventuate but strongly made the point that it should be based in Australia and have more than 3 out of 15 Australians on the board. It is just crazy that Rio has a majority of its assets in Australia but is headquartered in London and is now only 15% Australian-owned.
Rio Tinto's Australian AGM in Brisbane last April also generated plenty of heat around this issue of the company treating Australia with disdain. Check out this package of highlights. Since then, the board has added another London-based director called Jan du Plessis, who is the chaiman of British America Tobacco. These Rio toffs haven't got a clue. Don't they realise that Australia runs the world's most punitive regulatory regime against big tobacco. Regional voters in WA who backed the the National Party plan will have very little sympathy for a snooty London-based multi-national with a board populated by Lords, Knights and now Big Tobacco.
There was also this emotive appearance on Today Tonight's WA edition criticising the influx of Chinese Government investment in Australian mining projects. It's hard to know what is worse, Rio Tinto behaving like snobby imperialists or the Chinese communists buying up its shares.
Where the BHP-Billiton board tilt fits in
Whilst Rio Tinto should move its domicile Down Under, right now there has been some very topical developments on the other side of the equation with BHP-Billiton.
Despite being a strong critic of Rio, I also think BHP's proposed takeover is ridiculous at a number of levels, as was explained in this recent Mayne Report video. There was also this discussion with presenter Helen Dalley on Sky Business Channel's Business View program.
To ratchet up the pressure, last month I nominated for the BHP-Billiton board at the forthcoming AGMs in London and Melbourne and requested the following platform be distributed to shareholders in the notice of meeting:
Mr Mayne believes BHP-Billiton is embarking on an ill-considered empire-building frolic with this putative Rio Tinto takeover. He is standing for election to give shareholders a vehicle through which to register their opposition to this proposal. Mr Mayne contends the Rio Tinto merger could be highly dilutive for BHP-Billiton shareholders, similar to what happened with BHP's 2001 merger with Billiton. In that case, 42% of BHP was exchanged for Billiton's assets which have proved to be patently inferior to the booming coal, iron-ore and petroleum operations held by BHP at the time. He also feels the exhaustive and complex Rio Tinto takeover process is an unnecessary distraction for management which should be focusing on capitalising on this once-in-a-generation resources boom.
Mr Mayne also believes it is time for BHP-Billiton chairman Don Argus to retire, rather than attempt one of the world's biggest takeovers to finish off his career. Mr Argus has been a director of BHP since 1996 and chairman since 1999. He is a 70 years old. Time's up! Please vote for Mr Mayne to send the board a strong protest message on the Rio Tinto takeover strategy and the need for generational change at the top.
BHP-Billiton company secretary Jane McAloon wrote back last week confirming that the nomination had been successful, but said the company "will contact you in due course regarding the wording of your CV and platform in the notice of meeting". Hmmm, let's hope they're not planning any censorship.
The overall message to anyone playing the market at the moment is that I reckon Rio Tinto shares will soon be back below $100. The elements lining up against BHP's bid are getting stronger by the day, with the position of Colin Barnett now a major factor. And BHP's own shareholders have a vehicle through my board nomination to send the directors a message that they don't want to see this excessive 35% premium offered.
The Sunday Times of London interviewed Don Argus in January this year and Rio shareholders should look back on the story before trading begins tomorrow, as it began like this:
Don Argus...has written to Rio Tinto chairman Paul Skinner, asking him to talk to BHP Billiton about its takeover plan, and pointing out that Rio's shares would slide if the deal were scrapped.
“That's what the market should be asking Rio's board,” said Argus. “What happens to your share price if we walk away?”
Colin Barnett is now in a position that he could force BHP-Billiton to walk away. With the commodities bubble bursting, the Rio Tinto share price could be about to come under substantial pressure.
And here's two final predictions: BHP won't get Rio and Don Argus won't be BHP's chairman in 12 months time.
That's all for now.
Do ya best, Stephen Mayne
* The Mayne Report is a multi-media governance website published by Stephen Mayne with occasional email editions. To unsubscribe from the emails click here.