A Mining Merger Involving China?

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In addition to possessing all the action of one of this wacky football season's gridiron clashes, BHP Billiton's (NYSE: BHP) few-week-old effort to acquire mining rival Rio Tinto (NYSE: RTP) exemplifies just how much our world has changed. Indeed, not only are the two companies jousting with each other, but there have been rumors that Chinese interests could possibly become involved in the tussle.

In mid-November, Melbourne-based BHP launched a long-rumored bid for its London-based rival, Rio Tinto, worth about $150 billion at the time. The prospective acquirer currently sports a market cap of more than $200 billion, versus Rio Tinto's value close to $140 billion. Currently, BHP, Rio Tinto, and Companhia Vale do Rio Doce (NYSE: RIO) are involved in more than three-fourths of the iron ore market. Combining two of the companies may significantly affect the market.

That notion doesn't sit well with China, whose voracious iron and steel industry constitutes a huge iron ore customer for both companies. The Chinese remain concerned that a combination could create a de facto ore duopoly, and rumors have surfaced that Chinese steelmakers and the government's new investment fund will offer $200 billion themselves to acquire Rio Tinto. However, the Chinese parties have denied these reports.

If Rio Tinto CEO Tom Albanese has his way (at least as it relates to the current proffered price for his company), the Chinese may not have much to worry about. On Monday in London, he acknowledged a certain logic to the combination but said that BHP needs Rio Tinto more than the other way around. He also noted, "We can deliver to shareholders a stronger economic equation without BHP."

Still, Rio Tinto clearly understands the notion of a bidding war, having trumped aluminum producer Alcoa (NYSE: AA) not long ago in acquiring Canada's Alcan. That acquisition was part of a spate of takeover activity in the metals and mining sector this year, including copper producer Freeport McMoRan's (NYSE: FCX) purchase of Phelps Dodge, a rival about twice Freeport's size.

For my money, I'd wager that the BHP-Rio Tinto deal will get done, but at a higher price than is currently on the table. More rumors about potential acquirers will only paint Rio Tinto as an even more attractive prize. In any event, I'd suggest that my Foolish friends keep this sector clearly in their sights. It's been a thrill a minute thus far this year and doesn't appear likely to change.

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