The document provides an overview of the mining industry and two major companies within it, Rio Tinto and BHP Billiton. It discusses the volatile nature of the mining industry and declining iron ore prices. It then provides background on each company's operations, strategic drivers, history and recent financial performance. Recommendations include increasing automation, pursuing select acquisitions, diversifying commodities, and lower costs through reducing fixed and variable expenses and selling non-core assets. A merger between Rio Tinto and BHP Billiton is deemed unlikely due to antitrust concerns.

1. Mine Wars
BHP Billiton and Rio Tinto
Yevgen Avramych, Tyler Beauchea, Jimmy Briceno,
Rundell Cabio, Ingrid Catlin, Danielle Chirico

2. Agenda
• Industry Overview
• Background: Rio Tinto
• Background: BHP Billiton
• Future Predictions
• Financial Analysis
• Recommendations
• Implementation
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3. Spring 2016 Global Management Strategy 3
Industry Overview

4. Industry Overview
• The Mining Industry is volatile
– Fluctuations in world iron ore prices
– High supply
– Stagnating demand
• Why has demand stagnated?
– Iron and steel production has slowed
– Heavily reliant on GDP in developing countries, especially China.
– Industrial production of OECD countries
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5. Industry Overview | Market
• Very global industry
• Largest exporters are Australia and Brazil
• Largest Importers are China and Japan.
• Three large players: Vale (Brazil), Rio Tinto (UK) and BHP
(Australia) account for ⅓ of revenue.
– But, market concentration is low overall.
• Barriers to entry are high
– High capital costs
– Fierce competition
• Heavily regulated

6. Industry Overview | SDG’s
• UN Sustainable Development Goals are adopted by 193
member states.
• Mining sector is poised well to support these goals
– 60-90% of all FDI in low and middle income countries is in this sector
– Historically this industry created many problems, and governments may
hold mining companies to higher standards.

7. Industry Overview | Future
• Revenues are expected to decline or stagnate
– Iron ore prices declined nearly 43% in 2015, and may only rise about 3%
annually over next five years
– Rising costs due to increases in wage labor
– Demand will likely increase, but slowly
• M&A activity likely to increase

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Rio Tinto

9. Rio Tinto
Company Background
• Company was founded in 1873 by a group of investors
• Achieved inorganic grwoth via M&A activity
• 55,000 employees in 40 countries
Operations:
Rio Tinto has four operating units:
• Aluminum
• Copper and Coal
• Diamond and Minerals
• Iron Ore
Supporting Functions:
• Technology and Innovation
• Exploration
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10. Rio Tinto
Strategic Drivers
• World class portion
• Growth:
• Operating and commercial excellence
• Balance sheet strength
• Capital Allocation Discipline
• Free Cash Flow generation
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BHP Billiton

12. BHP Billiton
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• Formed in 2001
• 80K employees and contractors in 16 countries
• Donates 1% of pre-tax profit for CSR
• Corporate strategy based on diversification
• Four “pillars” of business:
– Coal
– Iron Ore
– Petroleum
– Copper

13. History of BHP
• Broken Hill Proprietary Company Ltd. founded in 1885
• Original specialties:
– zinc
– silver
– lead
• Brought in experts from United States as managers
• Entered iron ore market in early 1900s using land the
company already owned
• Growth in 20th century helped by entry into steel (1910s)
and petroleum (1960s) markets.
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14. History of Billiton
• Founded 1860
• English/Dutch company with focus on mining interests in
Dutch East Indies
• Acquired by Royal/Dutch Shell Company in 1970
– Expansion outside Australia as a result
• Sold to Gencor in 1994
– Expansion into South Africa, South America and Canada
• Divested in 1997 and became London-based independent
company
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15. BHP and Billiton Merger
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• Merger occurred in 2001
• Now second largest mining/metals organization
• Result of competition with arch-rival Rio Tinto
• New market cap of USD $28B
• BHP CEO becomes CEO
• Billiton CEO becomes Deputy CEO

16. Rio Tinto Acquisition Attempt
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17. BHP Billiton Today
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Predictions

19. Future Predictions
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• Declining iron ore prices
• Increased labor costs
• M&A Activity
• Vertical Integration
• Scrutiny from environmentalists
• Focus on Corporate Social Responsibility

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Financial Analysis

21. Financial Analysis
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BHP Rio Tinto
Total Revenue $44.6 billion $34.8 billion
Revenue from Iron Ore $14.8 billion $15.3 billion
Market Cap $84.35 billion $60.27 billion
Enterprise Multiple 8.16x 7.1x
Current Ratio 1.58x 1.53x
Operating Profit Margin 11.68% 12%
Return on Equity Ratio -7.77% -3.48%
Return on Assets Ratio 1.96% 2.62%
Debt to Equity Ratio 59% 62%
Information sourced from Investopedia, Yahoo Finance and Rio/BHP 2015 financial statements

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Recommendations

23. Recommendations (some perspective)
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Copper Prices

24. Recommendations (some perspective)
Iron Ore Prices

25. Recommendations (some perspective)
Aluminum Prices

26. Recommendations
Automation (Mine of the Future concept)
• Operation Center, big data collection/analysis
• Autonomous haulage systems in mine operations
• Autonomous drilling/excavating systems
• AutoHaul concept
First Mover advantage - Rio Tinto
• Komatsu vs Caterpillar
Pilbara results
• $200M maintenance cost savings, $24.40 → $16.20 iron ore
production cost savings.

27. Recommendations
Acquisitions
• Easily integratable companies (ex. Atlas iron for BHP)
• Smaller players in areas already dominated by BHP and
Rio Tinto primarily in Australia
– Grange Resources - $54 B/E
– BC Iron - $51 B/E
– Mount Gibson - $44B/E
– Arrium - $43 B/E
Rio Tinto and BHP have a $29 B/E point on iron ore for
comparison purposes.

28. Recommendations
Diversifying options
• Quantum Minerals Ltd. (an option for both BHP and RIO)
– Small copper producer with growing production
capacity
– Diversifying option in terms of geography (Finalnd and
Central African operation in addition to Australia)
– New copper mines are not viable so long as prices
remain below $6000/ton

29. Glencore’s woes are opportunities for Rio Tinto and BHP
• Early in 2015 Glencore floated the idea of merging with Rio Tinto due
to the compatibility of many large operations.
• Glencore chose to not hedge its oil exposure in 2015 and cut metals
production in an attempt to raise prices which resulted in the fact that
the company can hardly finance its debt today.
• In order to alleviate its debt burden Glencore is looking to sell off
roughly $10Billion worth of assets.
• Rio Tinto could take advantage of a weaker counterpart and collect
some of Glencore’s valuable mines/operation at a cheap price.
– Copper Mines in Australia, Chile and possibly Zambia.
Recommendations

30. Recommendations
The Aluminum Business
• BHP is spinning off most of its aluminum assets vs Rio
Tinto which is investing more in aluminum.
• Rational
– BHP does not see Aluminum as a good margin business (sale of South
32 mine) as it tries to focus its efforts on Iron ore, Copper, Potash, and
Coal/Oil production.
– Rio Tinto sees Aluminum as one of its core businesses in the future
(acquisition of Alcan) because aluminum is a “developed economy” metal
with increasing applications in the auto industry.
• Alcan Purchase and fallout
– $32 Billion debt burden for Rio Tinto, Aluminum prices collapse in 2007-
2008, Rio Tinto scrambles to control costs.
– Lessons learned: Timing is everything, don’t get into large bidding wars.

31. Recommendations

32. Recommendations
Divestitures differentiate Rio Tinto and BHP in recent years.
• BHP has been selling off assets to lower costs and refocus
itself on its core businesses.
• Rio Tinto has been selling assets primarily to control the
fallout from the Alcan purchase.
• BHP maintains a leading position over Rio Tinto in this
respect.

33. Recommendations
A Rio Tinto and BHP Merger
• Would produce by far the largest mining company in the world with a
real ability to influence prices.
• A strong response to Vale (3rd largest producer) and it’s S11D project
which is supposed to become fully operational by 2018 adding huge
production capacity for the brazilian mining company.
• The longer commodity prices stay low the idea of a merger becomes
more intriguing.
• Verdict: highly unlikely given the antitrust fallout which will likely occur.

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Implementation

35. Implementation
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Lower Cost
Reduce Fixed Cost
a. Automation
b. Negotiate employee reduction
i. Outsource non critical job functions
ii. Hire skilled temporary workers
c. Reduce production levels on high cost sites
d. Move non critical softwares to stable open source
versions.

36. Implementation
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Lower Cost
Reduce Variable Cost
i. Implement a lean production process
ii. Identify and remove non value added processes
iii. Control process variability
iv. Improve logistics by:
1. Controlling supplies
2. Improving asset utilization
3. Implementing JIT (Just in Time) service

37. Implementation
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Increase Cash
1. Sell non-performing assets, sites, and businesses
2. Re-negotiate debt payment structure
3. Reduce costs

38. Implementation
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Acquisitions and Partnership
1.Limited acquisitions
a. Acquire businesses/mining sites, within a target
country. Partner with a local company if necessary.
b. Acquire control of businesses that can provide cost
savings to your core business. Ex. Port Businesses
2.Critical partnerships
a. Review existing contracts and negotiate an extension
b. Look for new partnership with your product users, ex
Steel companies

39. Thank you!
Questions?