Filed
by:
BHP Billiton Plc
and
BHP
Billiton Limited
Pursuant
to Rule 425 under the Securities Act of 1933
Subject
Company: Rio Tinto Plc
Commission
File No.: 001-10533
and
Rio
Tinto
Limited
Commission
File No.: 000-20122
The
following is a transcript of a presentation by Marius Kloppers, Chief
Executive
Officer, BHP Billiton on December 12, 2007 and made available on
www.bhpbilliton.com on December 13, 2007.
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BHP
Billiton
Analyst
Briefing: A Matter of Value
12
December 2007
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DISCLAIMER
The
directors of BHP Billiton accept responsibility for the information contained
in
this document. Having taken all reasonable care to ensure that such is
the case,
the information contained in this document is, to the best of the knowledge
and
belief of the directors of BHP Billiton, in accordance with the facts and
contains no omission likely to affect its import.
In
connection with BHP Billiton’s proposed combination with Rio Tinto by way of the
proposed Schemes of Arrangement (the "Schemes"), the new BHP Billiton shares
to
be issued to Rio Tinto shareholders under the terms of the Schemes have
not
been, and will not be, registered under the US Securities Act of 1933,
as
amended, or under the securities laws of any state, district or other
jurisdiction of the United States, and no regulatory clearances in respect
of
the new BHP Billiton shares have been, or (possibly with certain
limited exceptions) will be, applied for in any jurisdiction of the United
States. It is expected that the new BHP Billiton shares will be
issued in reliance upon the exemption from the registration requirements
of the
US Securities Act provided by Section 3(a)(10) thereof.
In
the
event that the proposed Schemes do not qualify (or BHP Billiton otherwise
elects
pursuant to its right to proceed with the transaction in a manner that
does not
qualify) for an exemption from the registration requirements of the US
Securities Act, BHP Billiton would expect to register the offer and sale
of the
securities it would issue to Rio Tinto US shareholders and Rio Tinto ADS
holders
by filing with the US Securities and Exchange Commission (the “SEC”) a
registration statement (the “Registration Statement”), which would contain a
prospectus (“Prospectus”), as well as other relevant materials. No
such materials have yet been filed. This communication is not a
substitute for any Registration Statement or Prospectus that BHP Billiton
may
file with the SEC.
U.S.
INVESTORS AND U.S. HOLDERS OF RIO TINTO SECURITIES AND ALL HOLDERS OF RIO
TINTO
ADSs ARE STRONGLY URGED TO READ THE REGISTRATION STATEMENT AND PROSPECTUS
AND
ANY OTHER DOCUMENTS MADE AVAILABLE TO THEM AND/OR FILED WITH THE SEC REGARDING
THE POTENTIAL TRANSACTION, AS WELL AS ANY AMENDMENTS AND SUPPLEMENTS TO
THOSE
DOCUMENTS, IF AND WHEN THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN
IMPORTANT
INFORMATION.
If
and
when filed, investors and security holders will be able to obtain a free
copy of
the Registration Statement, the Prospectus as well as other relevant documents
filed with the SEC at the SEC's website (http://www.sec.gov), once such
documents are filed with the SEC. Copies of such documents may also
be obtained from BHP Billiton without charge, once they are filed with
the
SEC.
Transcript
begins
Slide
1
Good
morning, ladies and gentleman. Thank you for joining us at what is
quite short notice and at a busy time of the year. It is now exactly
a month since BHP Billiton advised the market, on 12 November, of the terms
of
the approach that we made to Rio Tinto on 1 November as well as the strategic
rationale behind that approach.
Feedback
has confirmed a clear understanding of the industrial logic behind the
proposed
combination. Also, based on our observation of the combined value of
Rio Tinto and BHP Billiton, relative to market movement, the market recognises
the tens of billions of dollars of value to be unlocked as part of the
combination. The market also anticipates the transaction will
occur.
On
26
November, Rio Tinto made a presentation explaining its rejection of our
proposal. In seeking to persuade the market that Rio Tinto was
undervalued, that presentation highlighted the value of Rio Tinto and its
growth
prospects. Our analysis of that presentation concluded that it was
largely additional detail on matters that we were already aware of, and
the
material presented did not change our prior views on Rio Tinto.
Shareholders
recognise that the all-share proposal requires an assessment of relative
value. A number of shareholders have requested a more detailed
picture of the relative value that BHP Billiton will contribute to the
proposed
combination.
It
is a
matter of value. It is about value that we want to talk
today.
Slide
2
Slide
3
I
refer
you to the disclaimers in pages two and three of this presentation, and
urge you
to read them carefully as it is important information to be
considered.
Slide
4
We
have
all heard the message that it is ‘all about value.’ We are in
complete agreement. It is about value, but it is also about the
facts. In that context, the first matter that I want to discuss today
is the value of BHP Billiton compared to Rio Tinto. We will look at
the complete facts and not simply the facts that suit a particular
argument. The facts will tell us that BHP Billiton is clearly the
superior performing company in this potential combination.
I
also
intend to cover prospective value creation and the future. I will
draw out a few examples of the superb assets that we have in our portfolio
in
order to illustrate why we believe the future for BHP Billiton will be
even
better than the past. As we have said all along, we believe that Rio
Tinto is a good company. It is just that we believe that BHP Billiton
is the better company in this combination.
I
would particularly like to emphasize that, given the share for
share nature of our proposal, there are two things to consider:
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The
relative contribution of each party to this
transaction.
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The
value that is there to be unlocked by the combination
and the additional value that would be lost to shareholders if
a
transaction did not take place.
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Slide
5
Slide
6
Let
us
now examine the facts. In June 2001, at about the time when the BHP
Billiton DLC was created, the market capitalisations of these two companies
were
very similar. From then, BHP Billiton’s market capitalisation has
grown at a compound annual growth rate of 37%, versus 29% for Rio Tinto,
year on
year. That is a massive outperformance. In absolute value
dollar terms, the difference in value between the two companies had grown
from
just $7 billion at the time of our DLC formation to more than
$100 billion just prior to our proposal.
The
performance of BHP Billiton has definitively been in a different
league. Or – if I can take a little licence – played on a different
set of ballparks. The question is why.
Slide
7
We
believe that the growth and market value for a resources company is determined
by a very simple formula: own a portfolio of tier one assets; large, low
cost
and expandable. Those are themes that you will hear over and over
again as we talk today.
We
demonstrate a superior record in growing production from those assets,
importantly, by investment throughout the cycle. A combination of the
tier one assets and the growth drives the EPS and dividends, and therefore
the
real shareholder returns. To deliver these returns into the future we
must continue to replace the resources used by new large-scale high-margin
resources to ensure that the future outlook remains just as
exciting.
We
will
show you how the application of these principles – ownership of tier one
resources, growth, and the replacement of resources – has led to the
outperformance that you have seen.
The
facts
are:
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We
have grown production more.
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We
have a better growth profile.
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Slide
8
These
two
companies were the same size in 2001. BHP Billiton’s stated strategy
has remained unchanged since the time of our DLC creation. It was to
invest in growth
throughout
the cycle: growth in volume and growth in value. Since 2001, we have
completed 38 projects for an investment of
$11.2 billion. On the basis of the projects completed, BHP
Billiton has spent more than double what Rio Tinto has spent on organic
growth. I would like you to start cementing that ratio of 2:1; more
than double.
This
investment profile is a fact. It tells us that BHP Billiton picked
the China growth early, and responded to it more aggressively to meet the
challenges with a consistent strategy.
Slide
9
Building
the capability to grow organically is not done overnight. We have,
over the last six years, consistently emphasised the unchanged strategy
to
invest throughout the cycle. Investment in production means building
new mines and expanding existing ones. Here, we have done more than
twice as much as Rio Tinto.
The
projects shown on this slide are the large ones and the ones where we are
the
operator. This shows how well we have done in executing these
projects. We conventionally put out P50 estimates for timing
schedules. That is shown in the two bars on the scales, on the
slide. We see that, as we measure our projects, our teams have done
very well indeed.
Of
course, there is always the example that proves that you can do
better. In our case, it was the Ravensthorpe project that we
commenced just as the general squeeze and inflation in Western Australia
took
hold. Incidentally, Rio Tinto had exactly the same experience at its
Argyle operation in the same environment. However, Ravensthorpe was
well ahead of its peer project, Goro, in New Caledonia, in terms of budget,
and
more than a year in advance of that project, in terms of timing.
The
key
facts are that we have invested in projects consistent with our strategy,
and we
have delivered what we have promised. That is the basis of our
outperformance.
Slide
10
The
combination of aggressive investment in new projects and our track record
in
development means that our production growth has been outstanding. We
have used the same metrics here that we have used in the past: converting
all of
the production to copper-equivalent units. On the left hand side of
the slide we can see the performance of both companies, excluding all the
assets
we have sold. We can see that BHP Billiton has grown its production
at a compound annual growth rate of 8% per year, versus Rio Tinto’s
4%. This is again, a ratio of 2:1.
If
we
include the operations that we have sold or ceased, we have grown the company
by
5% per year; Rio Tinto has grown by 2% per year. That is a factor of
2.5.
The
contrast is stark. BHP Billiton’s performance is clearly superior in
production terms.
What
matters to our shareholders is financial performance. How is this
superiority in production and operational performance translated into financial
performance?
Slide 11
Both
companies have benefited from a very good pricing environment for its
products. However, the combination of growing production and rigorous
cost control has helped BHP Billiton deliver superior earnings per share
growth
since 2001. On an “apples for apples” basis, using a June 30 year
end, BHP Billiton has delivered a 50% compound annual growth rate in earnings
per share while Rio Tinto has delivered only 37%. That is a massive
outperformance for BHP Billiton.
Slide
12
We
have
also delivered materially superior dividend per share growth. BHP
Billiton has had compound annual growth rate in ordinary dividends of
29%. Rio Tinto’s was 11%.
BHP
Billiton has also returned over $11 billion in capital, compared to just
over $6 billion that Rio Tinto has returned.
Slide
13
Given
BHP
Billiton’s superior performance, it comes as no surprise to shareholders that
they have enjoyed a greater return: 433% versus 276% total return since
June
2001. I am not sure about “under-promise and over-deliver”, but it is
clear who has delivered more. The fact of BHP Billiton’s track
record, over a long period of time, in delivering superior returns for
shareholders has been real and material.
Slide
14
Slide
15
We
often
comment on our unchanged, long-standing strategy. Our strategy has
been to own upstream, long-life, low-cost, expandable, export-oriented
assets
diversified by commodity, geography and market. As we have
demonstrated, our strategy is to continue to invest in those assets throughout
the cycle in order to grow output and value. This strategy is what
has enabled us to grow at more than twice the speed of Rio Tinto.
The
recurring themes are about simplicity and scale. They do not come as
accidents; they come as a result of a deep and diligent execution of the
same
strategy. Scale gives us the ability to deploy new capital towards
known assets, known operating environments, and known ore
bodies. This strategy reduces risk and increases speed. It
also gives us a more manageable business. BHP Billiton is a simpler,
more upstream, yet much larger and more valuable company than Rio
Tinto. There is no better illustration of the higher complexity,
smaller scale, less resource-focused and intrinsically lower margin business
that Rio Tinto is than by looking at personnel numbers.
BHP
Billiton has less than 40% of Rio Tinto’s workforce, despite being almost twice
as valuable before our proposal. That will continue to be the case,
even after the disposal of the downstream assets that Rio Tinto is
considering.
Earlier
this year I illustrated BHP Billiton’s pipeline of future growth
options. I noted specifically at the time that most of these growth
options are oriented towards quicker, lower risk expansions of known
assets. Does that sound similar? It is the same strategy:
scale and simplicity. BHP Billiton has an extraordinary array of
future growth options.
In
aggregate, we illustrated $70 billion of future projects and options in our
pipeline. I would like to focus on the elements of scale and
simplicity that drive value as we look at a few examples of how a deep
implementation of an unchanged strategy gives us the superior performing
set of
assets and the superior set of growth options.
Slide
16
The
specific assets I will cover today will be:
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The
Pilbara iron ore business; a superb
business.
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Olympic
Dam, one of the greatest ore-bodies on
earth.
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The
Nickel business, which is relatively new and one which we are
delighted
with. I will show one or two examples
there.
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Petroleum,
a business where we have a track record of outstanding investment
decisions and exploration success which has delivered BHP Billiton’s
shareholders something quite special. 50% growth over the next
four years in a business that had 64% margins last
year.
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Rio
Tinto
has substantially no operating presence in two of these businesses: Nickel
and
Petroleum. This again illustrates the superior spread and
diversification of our portfolio.
Slide
17
The
first
example is that of the Pilbara iron ore business. This is a tier one
asset by anyone’s definition. I want to continue to focus on the
scale and simplicity as drivers of value as we examine this asset. A
quick summary:
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Resource
and mineralisation that supports operations for more than 50
years.
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Importantly,
we have a high level of equity ownership in the underlying
businesses.
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Large,
high quality ore bodies, clustered around key infrastructure,
which
supports our concept of mega mining
hubs.
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Low
Free on Board (FOB) cost position; close to the Asian growth
markets.
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Great
track record of project execution and
growth.
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First
class infrastructure which is simple to match those high-grade
large ore
bodies, both in rail and harbour.
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I
would
like to stress that this business is not about needing another
business. This business obviously is part of the
proposal. There are obvious synergies here. However, it is
not about one business needing the other. This is about considering
how we would get more if we put the two businesses together.
Slide
18
Rio
Tinto
has made much of its strong mineralisation in the Pilbara. The
reality is that there is little difference between the two companies, based
on
tonnes of mineralisation to be mined potentially in the future. Of
course, the way that Rio Tinto presented the results counts all of the
joint
venture tonnage, ignoring ownership. We prefer, conventionally, to
count only the things we own.
Slide
19
If
we
take account of the fact that we have large ownership in the underlying
assets,
with most of them at 85% or 100%, the picture becomes a little bit
different.
We
believe that, if anything, BHP Billiton’s owned mineralisation position in the
Pilbara is superior to Rio Tinto’s.
Slide
20
The
map
on the slide shows BHP Billiton’s reserves and resources. The
question was rightly asked of Tom [Albanese] at his presentation: “why does Rio
Tinto have twice the tenement area”? I can answer that question by
taking some licence with a well-known line from one of my favourite engineers:
‘Because (sometimes) less is more.’
This
is
because it is not the land area that counts; it is the mineralisation contained
in the land. BHP Billiton owns greater percentages of fewer tenements
with more mineralisation, clustered more closely around its
infrastructure. It is about scale and simplicity. The
clustering strategy facilitates a strategy with less infrastructure, and
fewer
larger integrated mining hubs. This strategy is entirely consistent
with our stated strategy of scale, allowing for a more agile, simple, and
more
manageable organisation.
Slide
21
If
we add
our mineralisation assets, the story is only enhanced. Our assets are
clustered around our infrastructure. Of course, the BHP Billiton iron
ore portfolio was not put together in bits and pieces from various
transactions. The Rio Tinto mineralisation is generally more spread
out with smaller ore bodies and mineralisation.
I
will
turn now to the logic of our proposal to Rio Tinto. The combination
of BHP Billiton and Rio Tinto in the Pilbara will create something quite
special: more tons, faster; cost and capital expenditure
saved. Together, on a sensible basis, there is huge value to be
unlocked. However, neither party needs the other.
Slide
22
Does
BHP
Billiton need Rio Tinto because of port
constraints? No. Our plans for Port Hedland are well
publicised and well advanced. Inner Harbour is adding another
90-100 million tonnes of capacity to over 200 million tonnes per
annum. The Outer Harbour development is adding 100-150 million
tonnes, with the potential for 400 million tonnes of total
capacity. The combined Port Hedland capacity could be well in excess
of 700 million per annum. It is about scale and
simplicity.
Our
plans
to double-track our railway line are well advanced, with the first project
expenditure due in the next six months. It is perfectly consistent
with our strategy of fewer larger assets.
Slide
23
I
thought
it also appropriate to return to Rio Tinto’s portrayal of BHP Billiton’s growth
in production. We have already stated that, across the portfolio, we
have grown at twice the speed of Rio Tinto. However, if I recall what
was said about the iron ore business it was as follows: ‘Rio Tinto has grown its
Pilbara business by 15% year on year, which is two and a half times the
growth
rate of BHP Billiton in the Pilbara.’
Rio
Tinto
chose the period just prior to the acquisition of North to support the
statement
and also presented the statistics on a 100% basis, rather than an equity
basis.
The
true
picture is somewhat different if we look at the long-term growth trend
on an
equity basis. The compound annual growth rate for both companies in the
Pilbara
has been largely similar and will be largely the same in future.
On
the
basis of these facts, it is difficult for anyone to conclude that
“2.5 times the growth rate of BHP Billiton in the Pilbara” is
fair.
Slide
24
Time
constraints prevent me today from going into, for example, our world class
portfolio of assets in Latin America. Instead, I will focus on one
asset: Olympic Dam in Australia. First, however, I would like to
reiterate our sincere regret at the fatality that we had at this operation
overnight, in the course of maintenance activities. Our hearts really
go out to all of those people affected by this incident. As you know,
safety is absolutely the most important thing to us. It is with
regret that I talk about that.
Olympic
Dam could well turn out to be the world’s greatest ore body, if it is not so
already. We are stopping drilling, with the resource still open, but
on the basis of the drilling work that we have done so far, it is the
fourth-largest copper deposit in the world, the largest uranium deposit
in the
world – and simply without peer in the uranium world – and the fifth-largest
gold deposit.
BHP
Billiton owns 100% of this operation. What is really special about
the Olympic Dam is that it is an operating mine. It is not a far-off
uncertain Greenfield site. The location is about as stable and
geopolitically secure as one could imagine.
Slide
25
If
we
plot the contained mineralisation and grade of Olympic Dam relative to
the very
early stage prospects presented by Rio Tinto, and consider the fact that
we own
100% of this asset, the true and rather special character becomes
apparent. It is significantly higher grade and with higher
mineralisation. However, this is not only a copper mine.
Slide
26
I
demonstrated earlier that Olympic Dam is simply in a different league when
compared to other uranium resources.
The
map
on this slide shows nuclear reactors in four different stages of
development. The black dots show 439 currently operating
reactors, based mainly in Europe, the eastern seaboard of the United States
and
parts of Asia. The 33 blue dots show reactors under
construction. These are mainly in Asia, especially China, India,
Japan and South Korea. The 94 green dots show reactors with a
reasonable level of commitment: budget or advanced plans. They are
very heavily concentrated in East Asia, especially China, Japan and South
Korea. Finally, there are another 222 planned reactors as nations
seek to respond to the greenhouse challenges and energy needs.
This
slide highlights the global significance of Olympic Dam. It is
perfectly positioned, together with our other energy products in our portfolio,
to meet the world’s growing energy needs. It is against this backdrop
that we are examining very material staged expansion of our operations,
facilitated by the outlook for growth in uranium demand.
Slide
27
I
will
now highlight how valuable this resource is by looking at its development
potential. This is new information. We have not detailed
this development sequence previously.
Phase
one
will see us construct a massive open pit operation while expanding the
smelter
and building more concentrating capacity to produce 350,000 tonnes of
copper, 9,000 tonnes of uranium, and 400,000 ounces of gold per
annum.
Phases
two and three will see us continue to enlarge the scalable, open-cut mine
and
match it to more concentrating capacity; selling the additional copper
concentrate produced. The combination of these stages will take us to
730,000 tonnes of copper, 19,000 tonnes of uranium, and
800,000 ounces of gold per annum.
There
is
no reason to believe that this resource base will not support additional
expansions beyond that.
To
emphasise: the development sequence outlined here for Olympic Dam alone
is
larger than Rio Tinto’s combined ownership in all of the Greenfield copper
projects that they showed you two weeks ago. It is about scale and
simplicity. Additionally, we want to also emphasise that this is an
expansion of an existing operating asset.
As
I
noted at the start of this presentation, we have a compulsion towards simplicity
and scale. We own few large, expandable, valuable assets with decades
or even generations of life. There is no better example than Olympic
Dam.
Slide
28
We
turn
now to the ranking of our Nickel business and another unique
differentiator. We are a leading producer: number three in the world
after Norilsk and Vale. We have very substantial future growth
plans. We are obviously very pleased that we were able to add the
Nickel West assets through acquisition, and we are building the Ravensthorpe
project which is ramping up well.
Today
I
will talk about Cerro Matoso (CMSA).
Slide
29
CMSA
is
our 99.8%-owned nickel operation in Colombia. It is one of the
world’s premier low-cost nickel assets that also has very exciting growth
prospects. I will now highlight some growth options that we have not
detailed before.
Our
aim
is initially to double the existing asset by installing a third and fourth
rotary kiln electric arc furnace combination. This is proven low-risk
technology and, apart from the normal upgrades, identical to lines one
and two
that we operate today.
Like
most
of the rest of our expansion options, it is a low-risk expansion of an
existing
asset in operation for decades.
In
addition, we are hoping to go beyond the doubling of nickel output by maturing
and implementing our leading heap leach technology to further augment the
doubling in smelting capacity. These projects will make Cerro Matoso
an extraordinary nickel operation in the global context by any
measure. Simplicity, scale and expandability are once again
manifest.
Slide
30
Finally,
I would like to talk about our Petroleum business. I will also give
you new and additional information about this unique
differentiator. In an era where most petroleum companies are
struggling to maintain production, we are adding 11% compound annual growth
rate
per annum in volume until 2010. That is an uplift of nearly 50% of a
business that had 64% margins last year.
This
growth is of high-margin production in some of the best fiscal regimes
in the
world. It is underpinned by projects already starting up or well into
development.
I
will
comment on a few of those:
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Our
50%-owned Stybarrow project started on 7 November and is now
at
80,000 barrels a day on peak
days.
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Our
44%-owned Atlantis operation is ramping up, with 200,000 barrels per
day and 180 million MMcf is expected in the next six
months.
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Zamzama
and Genghis Khan are also ramping
up.
|
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These
projects will be followed by Neptune, in the first quarter of
2008; Train
5 North West Shelf in late 2008; Shenzi in 2009; and Pyrenees
in
2010.
|
We
will
see double-digit volume growth of high-margin barrels through 2010.
Slide
31
Looking
forward, our longer-term growth prospects are based on our continued exploration
effort and success. Our petroleum business has a strong history of
successful discovery and development. We have had multiple finds in
the deep water Gulf of Mexico in the last five years; in Trinidad with
Angostura; and in WA with Stybarrow, Pyrenees and Macedon. In the
last six months, we have discovered the 3 Tcf Thebe gas field in WA, and a
major extension of Mad Dog, a 1,000 ft oil column on the west side of that
field.
Our
development pipeline post 2010 has an extensive project slate from already
discovered resources. These include the LNG projects in WA, all of
which are material future prospects. We are also adding new resources
and pursuing new resources in the Gulf of Mexico, Malaysia, Colombia, South
Africa and the Falkland Islands.
Slide
32
I
trust
that these examples have helped to remind you of what a truly great portfolio
of
assets we have, and the prospects that BHP Billiton has to underwrite its
future
delivery of total shareholder return. To recap:
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Pilbara
iron ore is at least the equal of everyone else, if not the
leader.
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Olympic
Dam is unrivalled and, in our view, the most valuable brownfield
development on the globe.
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The
Nickel business with strong growth prospects and an especially
exciting at
Cerro Matoso.
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The
Petroleum business with a strong history of successful discovery
and
development. Unlike most companies in this sector, we have a
rapidly increasing production profile over the next years from
projects
currently in development.
|
These
four businesses are where we are concentrating 70% of our development pipeline
capital expenditure during the next years. These businesses had, on
average, a more than 50% EBITDA margin during 2007. This can be
contrasted with Rio Tinto. They are focusing their capital
expenditure with 70% in aluminium and industrial minerals. These are
business that, in 2007, had margins in the 30% range.
The
longstanding strategy on our part, deeply implemented, and the focus on
upstream
tier one assets of scale and expandability makes the BHP Billiton portfolio
the
superior one.
Slide
33
Slide
34
Any
argument that Rio Tinto is undervalued relative to BHP Billiton simply
cannot be
countenanced. From very similar market capitalisations in 2001, BHP
Billiton has outperformed Rio Tinto by more than $100 billion.
On
every
measure shown, BHP Billiton has outperformed Rio Tinto.
BHP
Billiton’s future growth prospects are not only substantial, high quality and
large scale, but it is also focused on the higher margin businesses, and
focused
towards fast, brownfield lower risk expansions in known
geographies.
BHP
Billiton’s asset portfolio is truly world class and its investment proposition
is without peer. We believe that Rio Tinto’s shares were fairly
valued relative to BHP Billiton at the date of the approach.
Slide
35
Why
then
combine these two companies?
I
will
now remind you of the upside that the combination would create. We
have already shown that BHP Billiton has delivered more product more quickly
than Rio Tinto. The proposed
combination would further facilitate our ability to deliver more product
more
quickly. It would be faster and at lower cost. At the same
time, it would remove duplication.
This
combination could create synergies which rise to $3.7 billion per
year. These synergies are unique to this combination; they are not
owned by anyone; they come into existence only when we put these two portfolios
together. They require a transaction in order to be
released.
We
do not
need Rio Tinto, as the project portfolio and our baseline strategy that
I have
articulated clearly illustrates. However, these synergies are there
to be captured for the benefit of both sets of shareholders. Rio
Tinto’s updated set of Alcan synergies, revised after the two teams worked
together for only a few months, show how realistic our synergy estimates
are.
We
would
also create a minerals industry super major, a unique portfolio of tier
one
assets, and the definitive growth portfolio which we could high grade as
we go
forward. In addition, we will realise further benefits from corporate
renewal. A combined entity would be a core holding, regardless of
sector. Its strong cash generation would enable it to continue to
return capital to shareholders, with $30 billion immediately, and with the
continuation and maintenance of BHP Billiton’s progressive dividend
policy.
Slide
36
There
is
no better way to conclude this presentation than with the market’s view of both
companies during 2007. With the exception of the weeks in May, when
there was some speculation that we were going to make an offer for Rio
Tinto,
the downward trend in the contribution – which we have plotted on the slide as a
share-exchange ratio – is clear. This trend was only reinforced after
the Alcan transaction, which the market generally viewed as
expensive. Since the Alcan transaction, we can see that the share
exchange ratio stabilised for months at 2.4.
In
an
all-share proposal, it is the relative value that is important. When
we approached Rio Tinto on 1 November 2007, had the companies merged on
a
nil-premium basis, Rio Tinto shareholders would have earned 36% of the
combined
company, and the share-exchange ratio would have been 2.4. Under our
proposal, Rio Tinto shareholders would be offered, for each Rio Tinto share,
three BHP Billiton shares, arguably the superior currency, given our track
record of outperformance.
This
means that the Rio Tinto shareholders would earn 41% of the combined company,
up
from the 36% at the 2.4 nil-premium exchange ratio that existed prior to
our
approach. The premium over the month prior, implied by our offer, is
a substantial 28%. Importantly, no shareholder is being asked to
exit. We are asking them to share in what we believe is the
substantial value creation which will ensue after this combination.
Also,
our
proposal, structured as script, means that eligible shareholders will get
100%
CGT rollover relief.
Slide
37
This
is
clearly and simply a compelling proposal. We have consistently tried
to discuss this matter with Rio Tinto. Rio Tinto has refused
discussion in this matter and has informed
us that it has approached the UK Takeover Panel, seeking a ‘put up or shut
up’. Whether the notice will be issued by the Panel is another
question. We will, of course, be discussing this with the
Panel.
We
do not
believe that it is in the interests of either set of shareholders, and
particularly for the Rio Tinto shareholders, to cut short the debate regarding
this potential combination in favour of independence. We remain open
to engagement with Rio Tinto, shareholders, and obviously the board and
management.
Slide
38
I
will
now summarise where all of this brings us and why we have a compelling
proposal. We have a great company with excellent performance and
prospects. Our shares have delivered outstanding performance for our
shareholders. It is those shares that we are proposing to offer as
currency to the Rio Tinto shareholders. As an all-share proposal, we
are offering to share the upside in BHP Billiton and in the synergies that
we
create. These synergies add material value. They cannot be
replicated without the transaction.
Our
proposal includes a significant premium. Based on the post-Alcan
exchange ratio, it is a material uplift in favour of Rio Tinto
shareholders. This premium, through the all-share offer, translates
to an ongoing greater share of the combined entity for the Rio Tinto
shareholders. Our proposed $30 billion buyback and confirmation
of our progressive dividend is further tangible evidence of the proposed
benefits for shareholders, and of our confidence in the future of the combined
company.
Our
proposal is directed towards wealth creation for all shareholders. It
is compelling, but, as much as we believe in this combination, it must
create
value and uplift for both sets of shareholders. Thank you very
much. We will now take questions.
I
have
members of my management team here to support me today: Alberto Calderon,
Karen
Wood, and Alex Vanselow.
Questions
Question
I
have
two questions. I think you have been a very successful company over
the years, but I disagree slightly with why you have been
successful. I would say that there are three reasons as to why you
have been successful. Firstly, clearly your high exposure to spot
prices. Secondly and thirdly, and more importantly, because you are
driven by opportunistic deals and, at the same time, you are very much
a company
which is able to deliver on the operational side.
When
I
look at your proposition for Rio Tinto, and the four examples you have
given us,
the main ones come out of WMC. I am therefore asking myself: why
should Rio Tinto shareholders become the next WMC for you? Why won’t
you admit to the fact that there is an important iron ore uplift in terms
of
pricing going forward? An important part of that value has not been
shown, let alone the synergy effects which you talk about.
The
second question is with regards to Olympic Dam. You have highlighted
the significant reserves you have there. Is there an issue, from the
European standpoint, that they will look at this deal and worry about putting
the two companies together because they are somewhat driven by the French
angle? Is it possible that they will not allow it on the basis of
that?
Marius
Kloppers
I
will
try to answer the two parts of the two questions. Firstly, obviously
the only asset we spoke about today from WMC was in fact Olympic
Dam. Cerro Matoso is an old Shell asset. The iron ore
business obviously has a longstanding BHP Billiton history. The
Petroleum business has been grown organically by the BHP Billiton
team.
With
regards to the iron ore business, we have not taken price in any of our
calculations of synergy here. Our business is not one of pricing
power; our business is one of large-scale, low-cost, favoured ore bodies
that
sit at the bottom of the cost curve and expand to grow their
value. The nature of the proposition in the iron ore business, and
the value that is to be had, is in delivering more tonnes more quickly,
and to
do that in a more capital-effective way.
In
terms
of the uranium and the effects of the transaction by combining the two
uranium
portfolios, we have obviously taken a huge amount of anti-trust
advice. We have done our homework here, and while we remain to have
all of those discussions with the various regulators around the world,
we do not
believe that there is any remedy that is required nor is there anything
that we
can envisage that will impact the basic value proposition of putting these
two
companies together.
Alberto
Calderon
Just
further on your WMC question. That was a different
time. Just to remind you, it was a cash acquisition and this is all
scrip, so we are basically inviting the Rio Tinto shareholders to share
in the
up-side, so a totally different transaction.
Question
But
the
principle is the same in so far as you benefit from your commercial insight,
from your opportunistic approach, from the value that has been left on
the table
by WMC and, some would say, previous deals as well.
Marius
Kloppers
Well,
I
am clearly flattered that you think, in addition to our demonstrated operating
acumen and so on, that we’ve been so successful in other
regards! However, I do think that the point that Alberto makes is
very important here. We are asking every shareholder to remain in
this company. We are asking one set of shareholders to accept a
premium for the privilege of unlocking the synergies.
Question
You’ve
shared with us some new numbers on the growth projects that you have out
there. That is the potential volume outputs only. Could
you give us some clues in terms of the expected capex and the timings of,
for
instance, when Olympic Dam might come on. There’s rumours of $20
billion, post-2015. But this is a staged
ramp-up. Similarly, on Port Hedland, the deep port expansion, the
timing and potential capex on that? Just a ball-park
figure. And also, Cerro Matoso the timing and capex.
Marius
Kloppers
We
haven’t given any additional guidance on capex today. Obviously, we
had quite a large amount of detail from the recent analyst’s visit to the iron
ore assets that detailed the ramp-up schedule there. I believe the
number that we put out was 300 million tonnes by 2015. Likewise,
we’ve not finalised any capex figures for Olympic Dam and Cerro
Matoso. But I want to emphasise one or two things.
While
in
all of these assets, no doubt, all of these things will be more expensive
to
build than they were a couple of years ago, the question you’ve got to ask
yourself is, ‘Which ones are likely to be the cheapest? The ones
where they are expansions of known high-grade assets, in known environments
with
lots of synergies available, because you operate already or new things
in new
places with no infrastructure?’ That is the salient point of the
scale and simplicity message that I want to get today. I think that
pertains to all of the expansions that I’ve shown today.
Question
Can
you
just – the first few slides that you’ve presented. You talked about
total capex on completed projects of $11.2 billion, versus Rio, $4.9
billion. Does that include WMC or does that exclude WMC?
Marius
Kloppers
It
excludes the WMC acquisition.
Question
Thank
you, and then just two other questions.
Marius
Kloppers
It
excludes acquisitions. This is only organic growth, because the point
that we want to bring very strongly is about the capability to organically
grow
the business.
Question
Can
you
give us an idea of how much capex you spent on your petroleum business
since
2001?
Marius
Kloppers
I
don’t
have an exact figure here, but on average, I think we spent about a third
of our
capex in the petroleum business.
Question
Thank
you. Finally, just a technical question about the whole
deal. A lot of analysis has been done into the concentration of iron
ore that arises from the combination. It’s starting to get split into
the three different types of iron ore – the broad generalisation of lump, fines
and pellets. On that basis, it looks like you have over 50% of the
lump iron ore globally. Do you see that as being tested by any of the
anti-trust authorities around the world?
Marius
Kloppers
We
see
ourselves as having, you know, a protracted and fruitful set of discussions
with
a number of authorities around the world. We have done a huge amount
of work, and we don’t believe that any remedy is required and we do not believe
that any of the intrinsic value propositions that we are making here, by
combination of synergies and so on, will be impacted by regulatory
matters.
Question
My
question is about the sequence of events from here. Obviously, Rio
Tinto have requested the ‘put up or shut up’ thing, and you know that the
Takeover Panel have a decision to make on that. But if they continue
to refuse talking to you on the three to one basis, what is the next step
for
BHP Billiton?
Marius
Kloppers
Well,
we
want to make absolutely sure that people are reminded of what the relative
contribution is of our company. With those facts out in the open, we
have a basis to continue discussions. We’ll take as much time is
necessary to do so. But we have not yet contemplated any additional
actions in the light of the ‘put up or shut up’. Whether they
eventuate or don’t eventuate. The only proposal that we can discuss
today is the one that’s on the table. We will continue to seek
engagement and we will evaluate our course of actions and any actions,
if any,
post that.
Question
Just
referring to your slide, number 36, which shows the relative share exchange
rate
between the two companies. Indeed, it was 2.4 before the
announcement, then you offered 3. Since the announcement, the ratio
has been, pretty much, on average, 3.4 and indeed, subsequent to Rio’s
presentation it hasn’t changed. So, 3.4 would seem the kind of ratio
that the market was looking for. How did that factor into your
thinking about where to go from here?
Marius
Kloppers
We
are
obviously delighted that the market is so enthusiastic about this
conversation. I think that the second thing that I’d like to
emphasise though, is that there seems to be only one proposition on the
table
here, which is the one that extracts the synergies, creates the value and
so
on. It is, at the end of the day, making sure that both sets of
shareholders get value out of this, not one set of shareholders.
We
are
supremely value-focussed, very disciplined, and we will certainly stick
to that
as we contemplate what we will do in the future.
Question
But
you
talk about the market view and the market’s view is obviously that the correct
ratio is 3.4:1.
Marius
Kloppers
No,
I
don’t think that is the case. The market’s view is that there is
value in the combination of these two companies. The share prices
show some anticipation which might or might not eventuate. It is
based on something which might or might not occur. The salient thing
here is, let the market value the synergies - having increased the combined
value of these two companies, tells us the synergies that we think are
real,
deliverable and the market anticipates that they will be delivered.
I
want to
stress that those synergies must be shared between – and the value must be
shared – between the two sets of shareholders. I can’t contemplate
going to my existing shareholders and telling them that they get nothing
in
addition, and it is on that basis that we will evaluate our actions going
forward.
Question
I
missed
the earlier part of your presentation, you may have already answered this,
have
there been any actual physical discussions between the BHP and the Rio
board,
behind closed doors?
Marius
Kloppers
We
have
not been able, on this proposal, to engage with the Rio Tinto board, outside
of
the written material that we have given to them. No discussion has
taken place, obviously the companies have at various points in the past,
and
discussed various matters.
Question
You
made
the observation that the Rio share price, that the market might have viewed
the
Alcan acquisition as expensive. Is that a viewpoint that BHP
shares? If so why did you not move then to potentially stop the
transaction?
Marius
Kloppers
I
think
the market is in our view well informed about these companies; they are
normally
covered by multiple analysts and in multiple jurisdictions. The
shares are very liquid and traded on a number of exchanges. In
reality the Alcan assets have been re-priced into the Rio Tinto share
price. It is on that basis that we are making our
proposal. What the actual amount paid was for the assets, because
that is in the past it is not relevant. What is relevant is what the
combined portfolio of Rio Tinto was valued at before our proposal, which
includes the Alcan portfolio.
Question
Just
to
follow up, do you have any comment on your view of aluminium versus, if
we are
talking about relativities between the two companies, your view on aluminium
versus petroleum or nickel where BHP are obviously bigger?
Marius
Kloppers
I
find it
difficult to be objective here because I spent much of the early part of
my
career in aluminium. There is no doubt that Alcan was the definitive
portfolio in the aluminium sector. However, aluminium is
intrinsically higher capital, more processing intensive and less resource
focused than the other businesses. That is the reason why I think
Alcan’s margins last year were less than half of our petroleum, and also at a
much slower growth rate. The aluminium business is less resource-like
in its nature, it is more capital and processing intensive. While the
Alcan assets are clearly the definitive set of assets in the aluminium
sector,
to date the aluminium industry as a whole has just not shown the potential
to
translate price to profit that our other businesses have.
Question
You
have
mentioned that you are offering a significant premium to Rio Tinto
shareholders. Given that you have also suggested that the growth is
within BHP Billiton, rather than Rio Tinto, why should your shareholders
accept
a smaller proportion of the business combination than is their due?
Marius
Kloppers
We
believe that the net value of the two businesses together will be greater
than
the sum of the parts. I think that that is what we have seen in the
share price movement as we tabled our transaction. It is very
important that any proposal that we make, such as the one that is on the
table,
is value accreted to our shareholders. We believe that the
proposition we have put on the table will be value accretive to our
shareholders, given the value unlock, the ability rationalise, and the
ability
to grow these companies, but we are disciplined.
Question
It
is my
understanding that China will have anti-trust legislation in place by 1
August
‘08. If there is going to be a transaction here, are you pre-empting
that legislation, and therefore having
discussions with the Chinese authorities, along with any other anti-trust
committees?
Marius
Kloppers
There
really is no one to talk to there at the moment because there is no legislation
in place. We clearly did not time this transaction for that
purpose. I should point out that in general how anti-trust
legislation works is that it does not prohibit a combination, but it could
prohibit the sale of products into the region covered by the anti-trust
legislation.
Question
A
lot of
the argument you have presented is based on the argument of superior growth
in
the market of this company. The out performance of BHP Billiton
against Rio is timed almost precisely with the beginnings of the better
EBIT
growth. Margins in some of those businesses, comparing directly, were
much lower in BHP than they were in Rio, and the Pilbara is an example
of
that. About the time of the DLC some 15% points lower
margin.
I
can
think of many assets in the old Broken Hill Propriety Ltd company that
were
seriously under-managed. My point is that when you have got lower
margins and rising commodity prices, you are better leveraged to that situation
and your earnings will naturally grow more quickly. I am just
wondering to what extent you are simply pointing to ‘catch up’ as better
management of the assets than Rio Tinto, whereas in fact the better management
is BHP Billiton compared to the old BHP Ltd company.
Marius
Kloppers
Perhaps
one comment and then I am going to ask Alex to help me out here. We
do think that the catalytic effect that we had with the DLC creation and
the
steel spin out made a change in our company. In the same way we
believe that this combination will reinvigorate, reenergise and allow us
to put
two teams together to better effect. There are no doubts about
that. Alex you have got to help me, I recall that the margins have
been very similar over the last couple of years, albeit ours a bit
better.
Alex
Vanselow
They
have, I think one of the points that you have to take into consideration
is back
to the Jackson Pollock chart that we presented at the last years
results. Commodities will be commodities and then you see the
fluctuations of the markets. The range of diversity and the scale of
diversity in the BHP Billiton portfolio is definitely much greater than
in Rio
Tinto, and that provided the better effect in terms of the combined margin
going
forward. That again has not just happened, it is there, it has been
worked at to be that way.
If
you
look, one of the key components of that work is the divestment process
we have
in place. If you look at the volume of divestments, and elimination
of the lower margin businesses that we have over the last six years, in
excess
of $6 billion. That has also helped to create that
effect.
Marius
Kloppers
I
do
think in the early years there was probably some leverage effect, the last
couple of years I think our margin growth has, I think, been superior to
Rio
Tinto’s, but not a material effect. The material effect here is
really that we have grown our business more quickly because we have invested
more money. For emphasis, we do believe that there is a cathartic
value in putting two companies together, reenergising, refocusing the
organisation and so on. We think that that will be the case when we
put these two companies together as well.
Question
Can
I
just ask one follow question on that basis? To what extent do you
think there is risk that if you turn yourself into a super major, that
you put
yourself out of reach of other corporate activity? With that comes an
element of complacency, I think back again to BHP Ltd, which used to brand
itself as ‘the big Australian’ and was hopelessly under-managed.
Marius
Kloppers
I
hope
that we have conveyed a sense to you that this is not about
size. What it is about is a focus on a consistent strategy, simple,
large scale expansion and so on. Alex, I do not know if you want to
run through everything that we have sold? You should take it as read
that we would want to have that same focus on the assets of scale and try
and
run the simplest asset portfolio that we can. A very large part of my
message here today was about what our ongoing business will look
like. That message is: we want to be simple, we want to be ever
larger assets – fewer of them if we can so they are easier to
manage. Alex, perhaps just run through everything we have sold in
order to implement that strategy over the last six years.
Alex
Vanselow
I
do not
think we will have the time to go through every single one but I think
what you
have seen is the continuous period, since really the merger with Billiton,
which
brought those skills into the combined entity, to be operating at a level
of a
portfolio manager. We continuously review business performance and
business potential to understand what is the best way of divesting and
execute
that divestment. We have done spin offs, we have done individual
asset sales, we have sold to joint ventures. It is a continuous
process in this organisation. As we speak, we are continuously
looking at our portfolio.
What
the
combined group would mean is that we will have to look at it from a much
broader
perspective in terms of understanding how we can create this tier-one combined
entity but in a manageable sense, so things do not get too far out of reach
for
us.
Marius
Kloppers
Marcus
Randolph is not here today and I want to state this anecdotally, because
I
cannot verify it, but Marcus always states that BHP was a $10 billion company
with a 100,000 workforce before the merger. Today we are $200 billion
plus company with 40,000 people. It is that focus on simplicity and
scale that is a key feature of our strategy. That focus on the
upstream part of that value chain.
Question
I
understand you are in the process of raising a $70 billion debt facility, I
was wondering if you could comment on how that is progressing.
Alex
Vanselow
We
have
been in contact with a group of banks; it is quite advanced what we are
looking
at is having a facility that will allow us flexibility on the buy back
at the
end of the combination, but also be there on standby for the roll-over
of the of
the Alcan acquisition facility. If you put those two numbers together
you come to that; it might not be exactly that but we are looking with
that
intent and we are quite advanced in that.
Marius
Kloppers
The
way
that we have articulated that is, I look at that as what is the target
leverage
of the company? What we said is that we would like to be a Single A,
I do not want to restate the matrix here but that you can add the debt
that is
on the balance sheet of the two companies at the moment, add the
$30 billion buy-back and you get an approximate sense of what we want to
target the combined company’s gearing at.
Question
What
macro environment have you factored in and how are they included in the
outlook
for commodities? How would a much weaker scenario affect your
shareholder value creation estimate?
Marius
Kloppers
Internally
the team have called this a deal for all seasons, our base case outlook
is for
strong medium- and long-term demand of our products, but I do not think
that
this is the driver. The nature of this proposal is a relative one, it
is a scrip for scrip exchange, so therefore we are less sensitive for that
reason on exactly what eventuates. But our base case outlook is for
strong, long-term demand of our products based on the industrialisation
that we
have in North and South Asia, in particular.
Alberto
Calderon
Although
our base case, as Marius said, is stronger for longer, an all scrip deal
implies
we are really not taking a view on the future and we have internally stress
tested this on a P10, P50, P90, and actually it works probably even better
on a
downside because on a relative terms basis this unlocking of value is even
greater.
Marius
Kloppers
The
underlying value is a bigger percentage in the downside scenario than it
is in
an upside scenario.
Question
You
have
been to see your clients, can you summaries what the main push-backs might
be,
from the discussions you have had. Also to confirm whether you have a
materially different view to Rio Tinto on how iron ore should be
priced.
Marius
Kloppers
Two
things, I think, when people do not know they make up the facts. The
material portion of our talks and education of customers has been just
reflecting on the fact that we have grown our business twice as fast as
Rio
Tinto. It is not something I think the market reflects on everyday:
when the customers see two providers they do not really look at their growth
rates, what we have said is we have grown quicker, we have invested
more. If you put these two companies together we will grow even more
quickly. Then you will have more product, if you will have more
product in the market then ultimately that will lead to a lower pricing
environment for you as well. That is what we have spoken to our customers
about
and I think that especially those customers that are short-product, do
not have
contracts and so on, understand this proposition very, very well
indeed.
In
terms
of pricing of product, I do not need to talk about iron ore in
specificity. I can talk about what our approach is towards product
pricing in general because like our strategy, it has been unchanged in
the last
six or seven years. What we like is not to take price risk for the
company but to accept market prices, have the portfolio diversify the cash
flows, that is that Jackson Pollock diagram Alex spoke about, and we have
diligently across a number of products worked towards better price discovery
of
our products. We hope that in due course there is a better price
discovery mechanism for iron ore so that we can just accept that price
that is
discovered, produce more volume from low cost assets and get on with
life. That would be our approach across all of our products, we have
worked very hard for more transparent prices in manganese, energy, coal,
diamonds. Clearly, all of the base metals products. We
would like the same in iron ore because we believe that that delivers the
best
outcome if we just get good price discovery mechanisms.
Question
Are
we
going to get any indication of the capital costs, particularly in the iron
ore
business and at Olympic Dam over the course of this process so we can get
a more
accurate judgment going forward?
Marius
Kloppers
We
are
unable to give you a more accurate guidance on that because we have not
completed feasibility. The way that our expansions work is that in
the proof of concept and pre-feasibility we seek out the most economic
path for
expansion. In feasibility, we do all of the engineering and the
detailed capital estimates. We do not have more detailed capital
estimates for you today. What I would point out again though is where
are they? They are operating assets, they have synergies, the
infrastructure is in place, on balance we believe that in these times
of
relative capital costs, doing things where you have synergies which are
the
brown-field nature, therefore intrinsically cheaper is always a better
option
but I cannot give you more guidance.
I
will
close on that note. Thank you for attending at short
notice. I appreciate all the input that you have given.