EVERYTHING to do with mining is impressively vast. It is an industry that makes huge holes in the ground and relies on trucks with tyres the size of houses. In recent years, thanks to China’s rapid industrialisation and its voracious appetite for metals, mining companies have also produced mammoth profits, boasted gigantic valuations and undergone a series of outsized mergers and acquisitions.
BHP Billiton, an Anglo-Australian company that is the world’s largest mining firm, is trying to do the biggest deal yet. On February 5th, just before a deadline imposed by British regulators, it increased its offer for Rio Tinto, the industry’s number three. Having offered three of its shares for each of Rio’s last November, BHP raised its offer this week to 3.4 shares, valuing its rival at $147 billion. Rio quickly rejected the revised offer. This is not the only big deal in the offing: Vale, a Brazilian firm and the industry’s number four, has offered to pay $90 billion for Xstrata, ranked sixth.
The two main motivations behind such deals are scale and diversification. Bigger companies benefit from economies of scale: BHP reckons that buying Rio Tinto and merging the two firms’ operations, in particular those at Pilbara, an immense iron-ore deposit in Australia, could result in annual savings of $3.7 billion within seven years. The combined firm would also be strong in aluminium, uranium and coking coal.
See also the Wall Street Journal article: BHP Billiton: We Are Not the World