No pipeline envy at BHP

Marius Kloppers was quite restrained at BHP Billiton's annual meeting, choosing not to attack Rio Tinto's bullish and aggressive presentation to investors earlier this week. He nevertheless made his point.

His Rio Tinto counterpart, Tom Albanese, had essentially argued that Rio had a bigger and more attractive pipeline of projects than BHP to make the case that BHP's merger overtures grossly undervalued his company. He spoke of ‘'conceptual pathways'' and ‘'optionality'' to highlight Rio's longterm growth prospects.

Kloppers, without referring directly to Rio, talked about his own growth pipeline and the base from which it will build. Under his predecessor, Chip Goodyear, commodity volumes had grown 55 per cent in six years, with 33 new organic projects completed at a cost of about $US23 billion plus the WMC acquisition. BHP expected a further 9 per cent growth in volumes this financial year.

In BHP's pipeline, he said, there are another 33 projects, with an estimated cost of about $US21 billion. Of them, 19 projects, costing about $US14.3 billion, were already approved and being developed. There were another 14 projects, representing another $US6.6 billion of investment, in their final stage of evaluation.

Then there were the ‘'future options,'' or what Rio might describe as conceptual pathways or optionality. Kloppers says those could represent more than $US50 billion of further investment.

In other words, if Rio wants to debate size and optionality, BHP has a pipeline and options totalling more than $US70 billion with which to end the debate. While that's a fairly crude argument – quality matters as much as quantum – it does tend to put some of the differences between BHP and Rio into perspective. Both have growth options and massive upside whether they merge or not.

As Kloppers said, the bottom line is simple. The two companies are worth more together than apart and (in a direct reference to Albanese's argument that BHP needs Rio more than Rio needs BHP) it isn't a question of who needs whom most but rather about creating extra value for both sets of shareholders.

Arguing that Rio shareholders should get a bigger share of the synergies because more of those synergies flow from their asset base is disingenuous. As someone else put it, a locked door is no good without a key – it is irrelevant who contributes to the synergies if those synergies can't be accessed without a merger.

Rio's investor briefings have yet to have the desired effects. Essentially, since the briefing the Rio and BHP share have been trading in line with each other – the briefing failed to re-set the relativities. That may change, as Albanese starts an investor roadshow designed to reinforce the message with institutional shareholders.

He may be able to make the case that Rio would deserve more than 41 per cent of a merged BHP/Rio. Trying to argue that Rio's pipeline and ‘'conceptual pathway'' is bigger and longer than BHP's, however, is not going to get him there.