BHP/Rio merger would create $300 billion mining group: analyst

The possible merger of BHP Billiton and Rio Tinto would create a $300-billion "mega-mining company" in which energy assets could be demerged in order to concentrate on core mining activities such as steel raw materials, a Prudential Equities analyst said Tuesday in a conference call to investors.

"BHP could sell their oil and gas assets, which we think are worth $40 billion-plus... and use that to pay most of the costs of buying Rio Tinto," John Tumazos, senior metals and mining analyst, said during the call. This would result in "a market cap that could rival that of Exxon, Mobil, GE, Citigroup, or other very large caps in the liquidity market," he said, adding that Rio Tinto's share price currently can be assumed to incorporate a takeover premium.

"Streamlining might save a billion dollars," Tumazos said of possible synergies that could be realized by the combined companies.

He did not cite specific examples of synergies in steel raw materials but noted that the two companies were similar to one another and have iron ore and coal properties in Australia that essentially adjoin one another.

Steel-related companies today were trading at 11 to 14 times earnings, Tumazos said, at a time when world steel output is up 10% in the first four months of the year, despite market softness in the US.