The effects of a BHP Billiton-Rio Tinto JV would be felt all around the world.
JUST a few months ago, Western Australian Premier Colin Barnett labelled the Oakajee port as the biggest development in Australia for the next 50 years.
While few doubt the importance of Oakajee in the longer term, a potentially more valuable opportunity for the state has just emerged, if the pure dollars involved are taken into account.
BHP Billiton and Rio Tinto are proposing an amalgamation of their iron ore operations in the Pilbara, a deal that is clearly momentous in more ways than one. It was certainly enough to knock Chinalco's offer to buy into Rio off the table, a move that has far-reaching impact on Australia's biggest customer.
The companies believe they can extract $10 billion in synergies, a number presumably net of the various costs that the deal might involve. Most of those costs are likely to relate to demands from government in WA.
Apart from an ambit claim of $1 billion for stamp duty over the transaction - a number many tax experts dispute - Mr Barnett has already done a back-of-the-envelope calculation on royalty rate concessions amounting to $330 million a year.
This relates to the concessional royalty rates paid on a type of iron ore called fines, once thought to be inferior and difficult to market but now a major output of WA mines.
In 2009-10, the industry is forecast to pay $2.1 billion in royalties on 387 million tonnes per annum of production. That is $5.42/t, even with the concession in place for fines.
That means, in theory, without the concessions a forecast royalty rate of around $6.30/t would be possible if budgeted prices and volumes were delivered. If Oakajee were operating at start-up capacity of 35mtpa and paid full royalties at this budget's theoretical rate, it would deliver just $220 million. Of course, Oakajee is years down the track. Even further away is its ability to lift throughput to as much as 100mtpa.
By then, proposed changes in the royalty concessions for the majors would probably have delivered billions in extra revenue.
And that is without factoring in the expected annual growth in production that could be delivered by the combined Rio Tinto and BHP operations. Of course, much of this is theory because few have seen any details and most have yet to digest the full ramifications of this deal.
With a state government facing the prospect of a difficult few years of financial pressure, the lure of increased royalties is certainly strong. Like other state governments, WA has few options when it comes to raising revenue in these dark days of fiscal gloom.
The state not only faces future deficits and higher debt, threatening its AAA rating, but the Labor opposition Treasury spokesman Ben Wyatt reckons the current budget is missing up to $1 billion in expenditure that has not been recognised, not to mention forward estimates of revenue of more than $500 million which may not be collectable.
The expenditure relates to projects, such as matching the Commonwealth infrastructure promises for Oakajee and Northbridge Link, finding the money to match state and federal promises with relation to hospitals, and funding its own promises at Esperance Port.
Opposition leader Eric Ripper adds that more than $530 million is in the forward estimates as a result of a deal struck by former premier, Alan Carpenter, to do away with royalty rate concessions on new iron ore developments. Mr Carpenter was voted out of office before that was signed.
Mr Ripper said Mr Barnett has not completed the deal, meaning that revenue will not flow through as the budget suggests it will.
"This gives Colin Barnett the opportunity to rectify the mistake and take it a bit further by ending concession rates overall," he said.
Treasurer Troy Buswell agrees there are pressing financial issues but disputes the scale of the opposition claims, especially as many of them relate to commitments outside the forward estimates or require significantly more planning. Mr Buswell added that the former Labor royalty concession gains had been revised down to $197 million, something which could easily be bettered in new negotiations with the companies.
Whatever the case, the state is certainly in a strong position to take advantage of the deal by extracting its fair share of the $10 billion in synergies that the companies expect to generate.
While few pundits believe Mr Barnett's view that the companies have structured the deal simply to avoid $1 billion in stamp duty, it is clear that the state is in a decent bargaining position.
The assets to be merged are covered by 14 tightly worded state agreements. The state's lawyers handle these issues regularly and will be more than a match for the corporate heavyweights' legal advisers when it comes to arguing what the agreements mean.
That said, some notable elements of the state agreements appear to have never been enforced.
Many argue the companies have failed to live up to the state agreements' requirements for rail access and value adding. Presumably, these demands can be more forcefully put when $10 billion is the starting point.
The state also has the political issues of expected job losses, something the shattering closure of BHP's Ravensthorpe nickel mine serves as a very recent reminder.
The state is believed to want to the Ravensthorpe mine reopened, even if that means BHP sells it to another operator. The Andrew Forrest-chaired Poseidon Nickel is one company known to be in the market for this kind of asset, but it is thought BHP has not yet decided what it will do with the plant.
Mr Barnett did discuss the issue of Ravensthorpe with BHP CEO Marius Kloppers when they met last week but his office has made it clear that the issue is not being used as bargaining chip in the merger discussions.
"The issue of Ravensthorpe did come up but it was quite separate to the whole deal with Rio Tinto," a spokesperson told WA Business News.
Many in business are concerned about the consequences that may flow from the merged entity, to be chaired by Rio Tinto's Sam Walsh and run by BHP's Ian Ashby.
Cutting costs means more than just mine site job losses, either now or in the future. It means service providers see two big competing customers become one Pilbara monopoly.
While many extrapolate that on to government services in the region, Pilbara locals are less concerned, noting that BHP and Rio Tinto are both monopolies in their spheres of influence already - BHP in the east largely between Newman and Port Hedland, while Rio Tinto rules over the west spearing down from Dampier. Only Woodside Petroleum has any serious alternative clout in the area, with its coastal presence at Karratha.
Roebourne Shire president Brad Snell said it was too early to tell exactly how the merger might affect local government across the region, but shows little concern.
He said limited information suggested the adoption of the Rio Tinto model involving fewer contractors and a greater permanent workforce, a move that could prove a catalyst to reducing reliance of fly-in, fly-out operations.
"Whatever the scenario in terms of workforce composition we would like as much as that to be residential as possible," Mr Snell said.
Believers in the concept of Pilbara City, a big population centre in the north-west, also see the merger as a potential driver - creating an home for the region's services and providing the scale to attract new employment in the area.
With some $2.4 billion or so in royalties, the joint venture will also represent a huge chunk of the state's revenue, which carries risks of its own. Big companies aren't necessarily better managed, and the world has seen recently how governments can get into trouble when badly run companies become too large to fail.
Nevertheless, the state also has to weigh up the sovereign risks associated with this deal.
In the first instance, too much grandstanding risks alienating big companies, which see themselves as the only ones that can deliver the capital and expertise to proficiently extract WA's resources and get best value for themselves and the state.
The BHP-Rio Tinto joint venture is not just an iron ore story. Many of the world's biggest resources companies are cosily involved in joint ventures involving oil and gas off our northern shores. Bashing the big miners won't help us win their investment.
"It is the perception of the state as a secure place to invest," said one observer.
"Not one that is an easy touch, but it doesn't change the rules precipitously."
Then there are the customers. China Inc is already miffed at the rejection of the Chinalco deal to favour the joint venture. They perceive a xenophobic reaction to their new financial muscle.
Many forward-looking pundits believe that the iron ore joint venture creating a global duopoly with Brazil's Vale will spur China to redouble its efforts to generate supply from elsewhere, potentially watering down the significance of WA's geographically convenient resources.
This would be a mirror of history. The Japanese underwrote the development of Brazil's iron ore when it found Australia's supply increasingly insecure. In those days the issue was industrial relations, these days it will be price and accessibility. In the end, this is pretty much the same thing.
However, investment in rivals to the BHP-Rio Tinto joint venture may not necessarily be a negative.
Already WA's iron ore juniors have seen encouraging interest in their own fledgling operations as the market predicts customer investment to head in their direction.
Growing Chinese and Japanese investment, coupled with potentially better access to rail, may provide a catalyst for exponential growth among the bit players of the WA iron ore scene. The beneficiaries will not just be in the Pilbara but also in the Mid West, where Asia's investors already have a strong interest.
The irony of that may well be that the funding required to push Oakajee to 100mtpa may well be driven by a customer scramble to secure their supply lines in the wake of the BHP-Rio Tinto marriage of convenience.
