Shares digital

With less than a fortnight to go before BHP Billiton (BLT) has to make a formal offer for Rio Tinto (RIO), analysts are speculating what might happen if the takeover fails and global economic conditions worsen. Investment bank ABN Amro last week increased its share price target for Rio Tinto by 10% to £50 on upgraded selling prices for iron ore and coal, the miner’s bulk materials. Subsequent industry talk that BHP may not improve its £65 billion all-share proposal has depressed Rio’s stock price.

On Monday, Rio had fallen 10% to £42.28, depressed by a severe drop in the FTSE 100 index and lack of action by BHP. Media reports suggested the predator would not wait until the February 6 deadline to table a bid.

Rio’s share price could collapse if BHP fails to move. Better-than-expected iron ore price agreements for 2008 could be one of the few catalysts to keep the shares afloat. ABN Amro believes iron ore prices will increase by 35% but could surprise with 50% gains.

BHP’s shares are relatively cheap even if commodity markets weaken, said investment bank Lehman Brothers. It believes the earnings of Anglo American (AAL) and Xstrata (XTA), of the UK-listed majors, would be most at risk in such a negative climate. ‘On the other hand, if commodity markets are much stronger than expected,’ added Lehman, ‘we estimate Anglo American, Xstrata and Lonmin (LMI) would have the most potential upside to earnings.’

Stockbroker Killik & Co has initiated ‘sell’ recommendations on BHP and Rio. ‘As a diversified miner with high exposure to base metals, BHP is geared into a downturn in global economic growth. BHP’s scale precludes it from being a beneficiary of the consolidation trends within the global mining industry,’ said Graham Neale, a partner at Killik. Commenting on Rio, he said the largest mining stocks are the most ‘susceptible’ to the risk of a de-rating.

Brazilian iron ore giant Vale is reported to be preparing a bid for Xstrata. It may face competition from Anglo American, although analysts are divided as to whether this business is a predator or a target itself.

Xstrata is more likely to be taken over this year than Rio as it looks open to a deal ‘We predict further M&A given continued, indeed rising, forward metal prices and the better risk/reward profile of buying existing mining capacity rather than building new operations,’ said stockbroker Evolution.

Shares says: Seek management capability and asset quality than quick bid gains.

BUY Anglo American, BHP, Xstrata

HOLD Rio Tinto

SELL Lonmin