By James Regan

SYDNEY (Reuters) – Rio Tinto Ltd/Plc’s (RIO.AX) rejection of a $140 billion all-share offer from BHP Billiton Ltd/Plc (BHP.AX) is likely to trigger rival bids from resource companies awash with cash from record commodity and stock prices.

A marriage of BHP (BLT.L) and Rio (RIO.L) would create the world’s biggest mining force, capable of controlling the global flow of fleet loads of iron ore, copper, coal and other commodities for industrial use.

Analysts said BHP Billiton’s approach may be just the first shot in a battle that could draw in other parties and push up the bidding for Rio above $170 billion.

A host of interested parties, from Chinese oil companies to Siberian nickel miners, have the potential to launch rival offers after massive stock market floats have brought companies excess funds, supplying the capital needed to finance a bid.

“If you put together a consortium of Chinese, they could be out there, as well as the Russians, given there’s a lot of oil money being generated,” said Shaw Stockbroking analyst John Colnan.

Global mining leader BHP said on Thursday it had approached third-ranked Rio with a 3-for-1 share offer, but Rio was quick to rebuff the offer as too low.

The BHP offer was initially pitched at a 14.4 percent premium. Rio shares gained nearly 16 percent to A$130.90 in Australian trade, while BHP fell 1.8 percent, putting Rio about 3 percent above the indicative offer price.

Rio would not say whether it had received other approaches, although analysts said the company’s broad range of operations and healthy profit outlook made it an attractive target.

The Rio board was open to other offers and a higher BHP bid, said a source familiar with the deal, who asked not to be named.

Only hours earlier, Rio had mopped up the last of the shares in Canadian aluminum maker Alcan, which it acquired for $38.1 billion after trumping an offer by Alcoa Inc. (AA.N).

Credit ratings agency Moody’s said it may put BHP’s rating under review for a possible downgrade if a formal offer is made for Rio, reflecting uncertainties about integration risk, regulatory restrictions and financial policies.

The global mining boom means both companies are generating piles of cash, with BHP Billiton expected to post 2007/08 net profit of $15.7 billion, while Rio is expected to post profit of about $7.6 billion.

At current prices, Rio trades at a forward earnings multiple of 17.6 times, and BHP at about 14.3 times.

REGULATORY CONCERNS

BHP has not said how it would address potential anti-trust issues, particularly in iron ore where the two companies command 30-35 percent of the seaborne market, say analysts. BHP and Rio mine a combined 277 million tonnes a year and are expanding rapidly. Only Brazil’s CVRD (VALE5.SA) mines more.

However, Rio’s acquisition of Australian and Canadian iron ore miner North in 2000 raised few alarms with regulators.

Given neither BHP nor Rio sells much into the highly regulated U.S. and European markets, Tim Barker of BT Financial Group said he doesn’t see any anti-trust issues.

“The scarcity and the difficulty of bringing on new projects, sourcing people, makes these sorts of consolidations attractive,” said Denis Donohue, senior portfolio manager of Suncorp Metway Investment Management, which owns shares in BHP and Rio Tinto.

Rio’s rich iron ore, coal and copper mines, as well as its ranking as the world’s top aluminum maker, would offer diversification from oil for China’s PetroChina (601857.SS), which has a market value exceeding that of Exxon Mobil Corp (XOM.N) and Royal Dutch Shell Plc (RDSa.L) combined.

“One possibility would be Chinese sovereign funds taking a blocking stake in Rio Tinto,” said FW Holst analyst Rob Craigie.

In Russia, the world’s biggest nickel miner Norilsk Nickel (GMKN.MM) has said it will look overseas for more assets after completing the largest foreign acquisition by a Russian company.

Norilsk already explores with Rio Tinto in the Russian Far East and with BHP in northwest Russia and western Siberia.

BHP, which merged with Billiton in 2001, almost went bankrupt in the late 1990s after a disastrous foray into copper mining in the United States, which raised the company’s penchant for spreading its commodity base far and wide.

Rio is also a combination of a merger, in 1997.

British-based Rio Tinto Co was formed in 1873 to mine ancient copper workings at Rio Tinto near Huelva in Spain. In Australia, Consolidated Zinc was incorporated in 1905 to treat zinc bearing mine waste from the outback.

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‘Gold prices will gain further momentum’

Investing in gold mining companies as against buying gold bullion gives the investor an opportunity to benefit from the growth potential of equities as well as the strong fundamentals of gold. There is a multiplier effect on the profitability of gold mining companies with rise in gold prices.

Aarati Krishnan

Of all the gold-related mutual fund products flagged off recently, DSP Merrill Lynch’s World Gold Fund has had the most promising debut, having notched up a 27 per cent return since its launch in August. The fund is also different from the other Gold ETFs, in that it does not invest in physical gold but takes exposures to gold mining companies worldwide. Rising consumption demand for gold, renewed interest from central banks and the possibility of a weaker dollar suggest that gold prices will gain momentum over the next 3-5 years, says Mr S. Naganath, President and Chief Investment Officer of DSP Merrill Lynch Fund Managers, in an interview to Business Line.

Excerpts from the interview:

With international gold prices close to a three-decade high, is this really the right time to buy gold?

From the perspective of fundamentals, gold has shown strong signals to support its recent price rise. With a steady fall in production and a corresponding increase in demand, the demand-supply gap is widening. There has been dual demand in the recent past with central banks steadily increasing their exposure to gold as a hedge against the weakening dollar and strong consumption demand for gold jewellery and ornaments being generated from the Middle-Eastern countries, India and China.

Historic price trends show that the last bull-run for gold was between December 1969 and 1981. One can divide this cycle into three phases, where Stage 1 (1969-1972) saw gold prices move up gradually as the US dollar weakened. In Stage 2 (1972-1978), the price gained momentum as global investment demand witnessed a rise. In Stage 3(1978–1981) as a result of speculative trading, gold shot up quite rapidly.

We are now witnessing the second phase in this cycle for gold. Increased demand from central banks, as well as consumer demand for jewellery indicates that we are currently in Stage 2. Taking these indicators into account, we believe that although there may be some short-term volatility, gold prices will continue to gain momentum over the medium to long term.

What is your outlook on gold prices over the next 3-5 years? On what do you base this?

Gold prices have witnessed a sharp uptrend recently, gaining nearly 10 per cent over a 3-month period. Reports published by gold analysts suggest that in the next 3 to five years, supply-and-demand dynamics will undergo substantial change, caused by a decline in supply and increased demand from India, China and the investment community. This, we feel, would result in gold prices continuing to rise.

The recent upsurge in gold prices appears to be backed by a flight to safety on the weakening of the US dollar. Economists over the past two years have often been wrong on their predictions of a sharp depreciation in the US dollar. Is the recent weakening, in your view, the beginning of a trend reversal, where the dollar will really begin a secular decline?

The fallouts of sub-prime lending have begun surfacing in different segments of the US economy. According to a report from a leading financial institution, the construction sector has lost 36,000 jobs in the past two months. Such reports raise doubts about forecasts for slow but steady economic growth in the US. Analysts fear the housing slump would lead to a full-blown recession in 2008 and result in a negative impact on the dollar.

One of the key arguments for investing in gold is pegged to rising jewellery demand. Yet jewellery demand, especially in regions such as India, is quite price-sensitive. Will higher prices reduce demand and what will this mean for the demand-supply equation?

Although there should be one-to-one correlation between jewellery demand and price of gold, in India jewellery is bought not only for adornment and investment, but also for other sentimental and traditional reasons — be it marriage or other family functions; there are even auspicious days when buying gold and/or gold jewellery is considered to bring good luck. In our opinion, the increase in gold prices may somewhat impact buying behaviour, but social traditions will continue to generate demand, even at higher price levels. According to a recent report from World Gold Council, India has witnessed a vibrant demand for gold this year and jewellery accounts for 70 per cent of this demand. Manufacturing and designing significantly add to the price of jewellery, making jewellery less price-sensitive to the actual movement of gold bullion.

Earlier, India was the primary contributor to consumption demand for gold but the wealth effect witnessed in other regions such as West Asia (higher oil prices bringing in more petro-dollars) and China (fastest growing economy) is also driving demand for gold.

Selling by central banks has been one of the key fundamental dampeners on gold prices in recent years. Do you see signs of a shifting central bank stance on gold as a reserve asset?

Central banks are the largest holders of gold reserves worldwide. Emerging markets have international reserves of approximately $2.7 trillion.

In the last 15 months, China and India have seen an approximate increase in international reserves of $500 billion and $80 billion respectively. Continued dollar depreciation makes gold an attractive investment alternative for central banks.

An analysis of 10-year gold price trends suggests that while gold does deliver outsized returns during times of crisis, it has not delivered much for buy-and-hold investors over a 10-year period, with annualised returns of about 9 per cent. Thus, do you advocate gold or gold stocks as an investment for long-term investors?

We agree with you that gold bullion in its physical form has not delivered smart returns and that is why we recommend investing in gold mining companies through a mutual fund.

We have highlighted the benefits of investing in gold mining companies vis-À-vis gold bullion or ETFs earlier. While bullion has delivered a 147 per cent return (absolute) in rupee terms over 10 years, the Merrill Lynch World Gold Fund has delivered 615 per cent over the same period! The outperformance has also been sustained for 5-, 3- and one-year periods.

Investors now have different routes to invest in gold- ETFs, physical gold in coin/bar form as well as funds such as yours. What advantage does DSPML World Gold Fund carry over alternative investment routes?

Let me answer this by asking a question. If you had a positive outlook on any commodity… say, copper, are you better off buying a tonne of copper or investing in shares of a copper mining company? An investor can expect better returns by buying shares of a good copper mining company as the profits of the company will tend to increase much more than the increase in the price of copper.

If costs are contained and increase to a lesser extent than the sale price of the end product, profits expand, driving share prices of such companies. Of course, the converse can happen if commodity prices decline.

Investing in shares of gold mining companies as against buying gold bullion/ETFs gives the investor an opportunity to benefit from the growth potential of equities and also the strong fundamentals of gold. Gold mining companies can grow organically or through the M&A route, while gold bullion/ETFs cannot. There is a multiplier effect on the profitability of gold mining companies with rise in gold prices, due to operating leverage.

KELLY KEARSLEY; The News Tribune
Published: October 7th, 2007 01:00 AM

World market raises value of copper, aluminum, more

Joseph Simon & Sons’ 12-acre yard on the Tacoma Tideflats is filled with mountains of what some may call junk.

There are bales of crushed aluminum cans and cardboard boxes loaded with used bullet casings. There are mounds of wheels and extension cords, boxes of old faucets, stacks of aluminum siding.

But in the booming scrap metal business, even the smallest bit of metal – from aluminum shavings to copper sprinkles – has value.

Global demand for metal has kept the prices of scrap aluminum, copper, nickel, steel and other metals increasing for the past five years.

The recycling of discarded metal items is now a $65 billion industry with players including billion-dollar corporations down to one-man, junk-peddling operations. Exports of scrap metal total billions of dollars each year, providing the raw materials that fuel manufacturing in foreign countries.

“It’s no longer the ‘junk’ business,” said Marc Simon, Joseph Simon & Sons senior account manager.

A GLOBAL BUSINESS

Joseph Simon started his scrap metal recycling company in the 1920s, near where the Tacoma Dome bus station is now. He had one truck, and most of the people he bought and sold metal from were in the Puget Sound area.

“He never knew about China or international markets,” said Phil Simon, Joseph’s son and the company’s president. “He would have thought we were out of our minds.”

Things have changed.

International sales are a large part of the scrap metal industry. Joseph Simon & Sons has been exporting for decades, and overseas sales account for 90 percent of the company’s estimated $200 million revenue. Schnizter Steel and Calbag Metals, two other large scrap recyclers, also export metal out of Tacoma.

On a recent afternoon, Simon & Sons workers loaded a shipping container full of electrical cords. The product was headed overseas, likely to China, where manufacturers will strip the plastic casings and reuse the copper inside.

Marc Simon gets to work at 5:30 a.m. to check prices on the world markets and see if the company received offers overnight. His father and his uncle arrive shortly after, so they can make calls to customers in places such as China, India and Japan.

The United States exported $15.7 billion worth of scrap metal last year. Washington state accounted for more than $200 million, according to the state Community, Trade and Economic Development Department.

The country’s export of scrap metal has surged in recent years, right along with metal prices, said John Mothersole, a nonferrous metals analyst with Global Insight, an economic forecasting firm.

The price of scrap metal is derived from the price of the base metals, such as copper and aluminum, which have been on an upward run since about 2003.

Most of the demand is coming from China.

“It reflects the strength of investment spending there, particularly in basic infrastructure: the metals used to build the ports and roads needed to put out the goods we then buy,” Mothersole said.

According to figures from the Institute of Scrap Recycling Industries, the price of copper averaged about 81 cents per pound in 2003, compared to $3.45 per pound last month. Aluminum was at 65 cents per pound in 2003, and now the price is closer to $1.13 per pound. Iron and steel were selling at $120.56 per gross ton then, compared to $256.50 per ton last month. The consistently strong market is a new frontier for those in the scrap industry, whose veterans are used to volatile cycles with fast rises in prices and corresponding steep drops.

ABOVE GROUND MINING

Large scrap metal recyclers get their material from a few places: smaller recyclers, industrial manufacturers and junk peddlers.

In one section of the Joseph Simon & Sons facility, there are dryer-sized boxes of curlicue aluminium scrap – leftovers from a local aerospace contractor. Large chunks of titanium molds – also remnants of an aerospace manufacturer – sit on a pallet in another part of the yard.

And there are sources like Bobby White.

The Lakewood man calls himself a traditional recycler. He’s been visiting Joseph Simon & Sons almost daily since 1968. He mines the world of used metal goods, picking up junk from people’s homes and the occasional thrift store and selling them to the scrap yards.

On a recent, misty Tuesday afternoon, White and his partner unloaded their wares from his truck: old lamp parts, metal tables, crutches, even a toy-sized, metal shopping cart.

“I just pick up stuff for free if people want to get rid of it,” White said. “I do aluminum, copper – everything but refrigerators.”

White said the past few years have been good for business.

The high prices have paid off for legitimate junk peddlers but have contributed to an increase in copper and metal theft. In the South Sound, thieves have stolen wiring from local parks, sports fields and construction sites, and even pilfered a copper gong from a Federal Way yoga studio. The rash of crime led 20 states, including Washington, to pass laws this year aimed at cracking down on shady scrap-metal sales, according to stateline.org.

Bona fide recyclers are doing their part, the Simons said. The Tacoma company checks the IDs of people who sell them metal and sends checks to people who earn more than $30 from their scrap. Tacoma scrap recyclers have said they won’t take items that seem suspicious or stolen.

Buying and selling scrap metal is as fast-paced as trading shares on the stock market.

Inside the Simon & Sons office, computer monitors at staff desks track changing metal prices on the London Metal Exchange and COMEX.

Outside, whirring conveyor belts move and cut wire into bits. Welders dismantle large chunks of metal machinery. Forklifts haul bales of metal roofing and bricks of crushed aluminum cans.

Peddlers such as White bring in small truckloads of goods, while semis line up to pick up outgoing containers.

The company moves 36,000 tons of nonferrous scrap metal, including aluminum and copper, each year and about 48,000 tons of scrap steel and iron. In addition, Simon & Sons also brokers 30,000 tons of metal material annually, buying and selling the goods but never bringing them to Tacoma.

A NEW WORLD, A SOLID FUTURE

The metals market is now at a turning point, and the dramatic growth in prices is likely to slow, said analyst Mothersole.

Usually a collapse in demand puts an end to price runs, he said. This time that doesn’t seem to be the case.

Instead, he’s forecasting more of a price correction in some metals, including copper, and slower growth – but growth nonetheless – overall.

Even if some prices dip, he noted, the increases of the past couple years have created a higher plateau for the market.

In Tacoma, scrap recyclers say the overseas sales have stabilized their industry.

The companies have their eyes on emerging markets – and their finger on the pulse of the world’s economy.

In one conversation, the Simon brothers talked of growing demand in Vietnam and Malaysia, their Indian customer that imports metals from Tacoma for castings only to send them to Seattle to be distributed, and the Iranian president’s speech at Columbia University.

For now, Phil Simon has his eye on the weakening dollar, something that bodes well for his industry, as overseas customers can pay more for scrap metal, but not so much for Americans, who rely heavily on imported goods.

“The outlook for scrap is very good,” he said. “The long-term is good because we are in a global economy and people can afford to buy scrap.”

http://www.thenewstribune.com/business/story/173275.html

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