Rio to justify BHP bid rejection

A merger would create a firm with a powerful hand in the metals market

Mining group Rio Tinto is expected to staunchly defend its opposition to rival BHP Billiton's takeover bid at its annual investor seminar.

Rio rebuffed an all-share approach from BHP worth $140bn (£68bn) earlier this month, suggesting the price undervalued the firm and its prospects.

Analysts are expecting Rio to criticise BHP's bid for not giving enough credit for the firm's production record.

But many believe a deal could still be done if BHP sweetens its offer.

UBS has said BHP could afford to put a further $27bn in cash into the offer in addition to a promised $30bn share buyback.

China worries

A combination of the two Anglo-Australian mining firms would create a natural resources giant with a stronghold over the world's iron ore, copper and aluminium production.

Iron ore is the main component from which steel is made, a metal in strong demand in China and Japan.

Steelmakers in both countries have expressed concern that a merger between Rio and BHP would drive up the price of iron ore.

BHP's chief executive Marius Kloppers visited clients and government officials in China, Japan and South Korea last week to galvanise support for the merger, but observers said there was little sign that he made any progress.

A report in the state-owned China Business suggested that the Chinese government could even gatecrash BHP's takeover efforts with a bid of its own worth $200bn through its new sovereign wealth fund.

But, such a move was swiftly denied by a spokesperson for the agency tasked with managing Beijing's vast foreign exchange reserves.

Metals boom

Rio Tinto's refusal to team up with the biggest mining company in the world suggests that it expects mineral and metal prices to keep on rising on continued strong demand from emerging economies, such as China and India.

Tight supply due to significant underinvestment in the 1990s is also supporting prices.

"I think we need to see a lot more on the table than we've got at the moment," said Julian Chillingworth, chief investment officer at Rathbone Investment Management, which holds 4.7 million London-listed shares in Rio.

"Rio is a unique asset and as a shareholder I need to be persuaded in the form of a very decent offer so I want to sell."