Rio Tinto and BHP Billiton signed a non-binding agreement to establish a production joint venture covering the entirety of both companies’ Western Australian iron-ore assets. The joint venture, formation of which is expected to be completed around mid-2010, will be owned 50:50 by BHP Billiton and Rio Tinto. It will operate as a cost center and deliver iron ore to ships designated by BHP Billiton and Rio Tinto to sell independently through their own marketing groups. BHP Billiton will pay Rio Tinto $5.8 billion for equity-type interests at financial close to take its interest in the joint venture from 45-50%. The companies said they expect the joint venture to unlock significant value from their overlapping resources, estimating the net present value of those synergies to be in excess of $10 billion. They added that the synergies would result from combining adjacent mines into single operations, which would result in shorter rail hauls and more efficient allocations of port capacity.

According to Rio Tinto and BHP Billiton, the joint venture would also provide blending opportunities that would help to maximize both product recovery and operating efficiencies, and it would also allow the development of consolidated, larger and more capital-efficient expansion projects. They also noted that the joint venture would allow them to combine management, procurement and general overhead activities into a single entity. This agreement comes shortly after Rio Tinto walked away from a proposed $19.5 billion deal with Chinalco, who had agreed to invest in the company in February.