ASX spikes as Rio and BHP unite in Pilbara

Rio and BHP announced a joint-venture of all their Pilbara iron ore assets just hours after news that Rio's US$20bn talks with Chinalco had collapsed.

The $10bn deal was a bombshell for the iron ore market and follows BHP Billiton's abandoned effort to acquire all of Rio Tinto last year in a three-for-one share purchase which would have cost US$66bn at the time it was cancelled.

Rio Tinto said today that the joint venture would cover all of the two mining giants' Pilbara iron ore assets, which are to be owned in a 50:50 arrangement.

But the deal has given the Australian Securities Exchange a kick-start, with BHP Billiton shares leaping 9% to $38.40 in trading this morning.

Rio Tinto shares were up 10% to $75.30 after being in a trading halt.

The mining giant said it would hold a rights issue for Australian and London shareholders.

It will offer 21 shares for every 40 shares held at a price of $28.29.

Fortescue saw its shares soar by 14% to $3.21, bordering on its highest level since the bottom dropped out of the bulk market late last year.

Under the terms of the agreement, both groups will share infrastructure but market their iron ore independently.

BHP Billiton will pay Rio US$5.8bn for equity-type interests to take its share of the combined assets from 45% to 50%.

Rio Tinto iron ore chief executive Sam Walsh will be the initial chairman and BHP's Ian Ashby will be chief executive of the new alliance.

Other senior managers would be appointed on a "best person for the job" basis, Rio said.

BHP chairman Don Argus said he was "delighted" to announce the transaction which would unlock significant value in both companies.

Rio Tinto chief Tom Albanese said the two mining giants had long recognised the value in combining their assets and was pleased to have now realised the vision.

The two parties have set a mutual break fee of US$275.5m if either party does not meet its commitments.

The groups want to complete the deal by mid-2010.

Last night Rio Tinto issued a short statement recognising press speculation that its $20bn alliance with Chinalco had broken down.

The two parties had been in talks about Chinalco investing more than US$12bn into Rio's aluminium, copper and iron ore mining operations.

Chinalco was to take US$7.2bn of convertible bonds in Rio, effectively an 18% stake.

Rio Tinto shares were placed in a trading halt on the Australian Securities Exchange this morning ahead of the announcement.

Rio Tinto has been left in a difficult financial position after the US$38bn takeover of Alcan just before the mining bubble burst and prices dropped.

The breakdown of talks will see the Federal Government avoid having to make a decision on whether or not to block the proposed deal on the grounds of national interest.

Rio confirmed it would pay a US$195m fee to Chinalco for ending the talks.

The Rio Tinto-BHP deal will now be subjected to intense scrutiny from competition authorities.