A year ago this week that BHP, the world’s largest mining company, went public with its bid for Rio Tinto, the world’s second-largest mining company. The offer allotted three BHP shares for each share of Rio Tinto – a deal that valued Rio at roughly $127 billion.  Rio rejected the offer, but BHP returned in February with a sweetened offer of 3.4 BHP shares for each share of Rio Tinto. That offer, worth about $147 billion, was also rejected.

Rio insisted that both BHP offers “significantly undervalued Rio Tinto and its prospects,” particularly iron ore. Rio Tinto Chief Executive Officer Tom Albanese noted in January that his company achieved record high production for iron ore, alumina, aluminum, bauxite, gold and copper in 2007. The company said it produced 145 million tons of iron ore last year, a 9% increase over 2006.

However, commodity prices across the board have retreated from the record highs reached earlier this year, which might make BHP’s offer slightly more appealing.

Stock valuations have plummeted as well. And at current prices, Rio Tinto is trading at a 24% discount to the value of BHP’s all-share offer.

Rio Tinto has given no indication that it has warmed up to the BHP bid, but Albanese did acknowledge a significant decline in demand from China. During a mining trip in Africa, Albanese told Bloomberg News that the slowdown in China’s economy has been more pronounced than initially thought.

“[China’s economy] is decelerating more in the fourth quarter than we saw in the third quarter,” Albanese said in an interview at the company’s ilmenite mine in Madagascar. “That is going to lead to a deferred pickup in cumulative demand for most of the things we produce during the course of 2009.”

China’s economy registered a solid GDP expansion of 9% in the third quarter – a noticeable step down from the torrid 11.9% pace set in 2007.

If BHP succeeds in its takeover attempt, it would gain control of the largest aluminum producer in the world, which Rio became by successfully bidding for Canada’s Alcan Inc. for $38.1 billion last year.

It would also control 14% of the world’s thermal coal and 13% of the worldwide copper supply. More importantly BHP-RioTinto would dominate 38% of the seaborne iron ore trade.

That’s why regulators would like to see BHP divest some of its current iron ore holdings before it approves any merger. After a five-week preliminary review in July, the commission said that it had “serious doubts” about a combination that would control more than one-third of the world’s iron ore exports.

Some analysts have pointed out that the EC has previously approved takeovers after sending a list of objections and without demanding changes or divestments. But this is not likely to be one of those cases given the global magnitude of this particular merger.

“I think BHP will review the objections and seek remedies for them,” Tobias Woerner, an analyst at MF Global Securities told the New York Times. “At least BHP hasn’t rejected the objections out of hand and walked away from the deal. The objections should be manageable, but we don’t know what other factors will be at play here.”

Source: European Commission Voices Antitrust Concerns Over BHP’s Bid for Rio Tinto

The $140bn BHP Billiton move on Rio Tinto first appeared on the boards back in February. “Await documents” has been flashing ever since. There is absolutely no hope of BHP’s offer for Rio even reaching official posting stage for months.

Like any frustrated traveller, investors need some idea of what is happening. Actually there is more hope here than with BAA. At last there has been one decisive step. Being loudly broadcast is the fact that a vital regulatory stage has been reached. Permission is being applied to remove a major block from the wheels.

BHP Billiton, the world’s biggest mining group, has at last formally filed with the European Commission for clearance to take over rival Rio Tinto. This showed up in a Commission list of M&A cases last Friday.

The Commission, the European Union’s executive arm and also its antitrust regulator, set a deadline of July 4 for consideration of the deal. By that date the Commission must either approve the deal on competition grounds, open an in-depth investigation, or permit a short extension.

All sorts of points could give the Commission problems. Combining a number of BHP and Rio’s businesses would bring market dominance. So, Competition Commissioner Neelie Kroes is expected to be brought in.

Rio Tinto spurned BHP’s all-share offer very shortly after BHP announced it. The Rio line has consistently been that the bid is “ballparks” away from a fair offer.

The two companies have sparred over who had the better growth rate. Rio maintained that it expected to grow at a compound annual growth rate of 8.6% for the next seven years. BHP countered that it did not believe those numbers. In its view Rio would growth by 6% a year for the next five years. BHP, on the other hand, says it will grow at 6.9%.

Lots of people are unhappy – mainly customers

This, for sure, is no friendly takeover – the atmosphere is strongly hostile. And not just from Rio. All sorts of interested parties are doing their best to block the bid, too.

Major objectors are customers. The fear is that without competition, BHP will be able to charge whatever prices it likes. It would become a super mining major with sway over the global supply of a large number of minerals and metals.

The Chinese have taken their concern as far as buying a chunk of Rio to protect it. Earlier this year Chinalco and the US aluminium giant Alcoa bought 9 per cent of Rio in a $14bn raid. This is the largest single shareholding.

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Things had gone quiet for weeks before the EU story broke. Having started the bid with some pretty public rows, both companies went behind the scenes for the various talks that have been going on non-stop.

Informal talks have been held with regulators, and these had begun to leak out. The EU, for instance, is said to believe that the market strength of the combined company would inevitably lead to price hikes. This would slow economic growth even further. The Wall Street Journal put the cat among the pigeons by saying that the EU was really unhappy.

Both companies have also been going the round of shareholders, putting their cases directly. Some shareholders had been thinking the offer would be increased before now. No sign of any hike yet, however.

A case for asset upgrades here?

The battle moved back into the open last week. Rio held a marathon seminar in London. The aim was to show BHP’s bid as far, far too cheap. Rio wants the market to revalue its assets too, in the light of a forecast that world demand for its metals will double by 2022. Chinese growth is major factor in its new predictions.

Managing director Tom Albanese said that with each passing year “people have been taking what we believe is a more realistic view of the total China story”.

“In that environment, greenfield projects are becoming more valuable. And I think they will continue to be more valuable in the future,” he said.

Rio has been trading at a discount to the bid

His comments come as Rio’s share price traded at a discount of over 8% discount to the implied value of BHP’s offer. Mr Albanese blamed this on uncertainty about when the bid would proceed. But he stopped well short of saying that BHP’s 3.4-for-1 offer was nearing the ballpark in terms of value.

“We’ve said in the past that the board has reviewed the BHP Billiton pre-conditional takeover offer,” he said. “We took it seriously. We rejected it. We rejected it on the basis of value. Rio Tinto as a stand-alone company is worth much, much more than anything that we’ve seen presented to us.”

But he did not succeed last week in propelling the Rio share price to above the bid level.

BHP will probably wait until the regulatory processes are all finished before adding any sweeteners. Anyway, the current view is, it won’t put up its offer until posting formal offer document.

Timing? Probably late 2008 at best!

Keep mining.

Erin and Isabel

Source: Rio Investors Should Continue Waiting in the Hall

Washington will be asked this week to answer allegations that subsidies amounting to 11p a litre on B99 [biodiesel with up to 1% petroleum added] exports from the US, plus “splash-and-dash” operations being conducted through the US, represent unfair competition.

The European Biodiesel Board lodged a formal complaint against the US with [the European commissioner] at the end of last month after a disastrous period for British, German and other biodiesel producers.

D1, one of the leading UK firms, announced in April that it would be closing its newly built refineries and laying off all its staff there because it could not compete against cheap US imports. Elliott Mannis, D1’s chief executive, said it was an “unbelievable situation” that Europe had sat on its hands so long and let B99 cause turmoil in a market that has opened up to huge new demand.

The case against the US will not be one-sided. Manning Feraci, of the US National Biodiesel Board, has said: “It is hypocritical for the EBB to cry foul while they benefit from a blatant trade barrier.”

Byron King in Energy and Oil is bullish on another alternative energy source: coal to liquid or CTL.

“The US will adopt CTL, because it has to do so,” says Byron. “There are few other large-scale industrial alternatives. Windmills, biofuels, conservation and every other energy-saving and energy-extending idea will help. But the world we live in is built to run on oil, and nothing else will cut it for some things when it comes to running a fast-transforming economy. So stand by for CTL.

“It is not a question of if the US will adopt CTL. It is a question of when. And looking ahead, every month is precious. As I said above, we are running out of time. So it will matter greatly how much will we as a nation fool around with our national obsession of navel-gazing over ancillary issues before we get around to making a decision to bend steel.”

“The biofuels debate is interesting from a number of angles,” says Merryn Somerset Webb in Money Week. “Firstly, it is not absolutely true to say that the commitment of land to the production of biofuels automatically reduces food production everywhere (although that hardly makes the European Union’s full-on encouragement of plant-derived fuel right).

“Supporters of biofuels tend to use the Brazilian experience as justification for the dash to plant-derived fuel alternatives, not that that country’s success should detract from the fact that there are a lot of other places where land which would otherwise have been used to grow food for human consumption has now been given over to the production of biofuel to feed machinery!

“The EU could, for example, call a halt to its pre-announced intention to derive 5.75% of petrol and diesel to be manufactured from plants, although we understand the EU’s difficulties given growing stresses in the oil market too.”

When the moment is right, will you be ready? A lot of men are about to be. Any time. Any day. Every day, in fact. That’s because the Food & Drug Administration is expected to grant Eli Lilly (NYSE: LLY) approval for a daily version of its erectile disfunction drug, Cialis. This comes after the European Commission approved it in June.

Okay, first things first: Who the heck are these guys married to? Seems to me they have lofty and unreasonable expectations!

But it’s not just in the boudoir where expectations are high. The stock market lives on expectations. And at this time of year, many of them are unreasonable, too. For investors like us, it means we have to navigate a tricky minefield.

Here’s how to do it, I’ve said it here before – and I’ll say it again. I can’t stress to you enough how important it is to have a contrarian investing approach.

The Market Loves Forward Growth Not Past Results

The market is a forward-looking mechanism. Forget “What have you done for me lately?” Investors want to know, “What are you going to do for me tomorrow?” For the most part, stock valuations are based on forward growth and earnings, not on past results.

If you don’t believe me, just take a look at the next time a stock gets crushed – despite meeting or beating analysts’ earnings expectations. If a company does so, but also provides future earnings guidance that is below estimates, it’s Goodnight Irene!

This exact scenario actually happened yesterday to Crocs (Nasdaq: CROX), the makers of those funky foam shoes that everyone seems to be wearing. Propelled by the immense popularity of the shoes, the stock had soared from $37.50 a year ago today to $74.75 on Wednesday.

Happy Halloween, right? Not so much. Shares got absolutely mauled yesterday, plunging $27.01 (36.1%) to close at $47.74.

What could possibly have happened to cause such a drop? Did the CEO get arrested for cooking the books? Did somebody find lead paint in their new pair of Crocs?

Nope. Crocs actually beat analysts’ third-quarter earnings estimates and then raised full-year earnings guidance. Woo-hoo! Break out the champagne! On second thought, keep it on ice. The problem was that Crocs didn’t raise guidance high enough to meet analysts’ lofty expectations.

Tough break for them – and for shareholders. So how do we protect ourselves from unreasonable expectations?

Wanna Cash In? Have A Contrarian Investing Approach

I can’t begin to tell you how important it is to have a contrarian investing approach. If the fickle market loves a stock too much, you can bet that the majority of analysts will slap a fat “buy” rating on it, coupled with pie-in-the-sky earnings projections. They did exactly this for eToys back in the dot com boom days (and I still have the analyst report to prove it) that promised the company would be a “category killer” with huge profit assumptions. But the only thing eToys killed was its shareholders.

But if you invest in stocks that are out of favor, you’re likely to avoid those gut-wrenching 30% falls that result from failing to meet estimates. After all, out of favor stocks already have low expectations. So when they miss estimates, Wall Street simply shrugs it off and says, “What did you expect?” They barely give it a second thought.

But let me tell you something: Those stocks’ declines are far less than their well-loved counterparts.

The Father Of Contrarian Investing

David Dreman is known as the “father of contrarian investing.” And to prove how effective this contrarian investing approach is, he conducted a study that showed stocks with price-to-earnings (P/E) ratios in the bottom 20% (unloved) were down just 0.1% for the full year after they had a negative earnings announcement.

Alternatively, well-loved stocks with P/E ratios in the top 20% endured an 8.9% drop.

While that proves the point, how do we avoid or mitigate the risk that comes from earnings announcements? The simple solution is to use sell-stops. This eliminates emotion from your sell decisions.

Many times, investors freeze up when one of their stocks is plummeting. Emotions and pride take over and they can’t seem to sell while prices are falling. Instead, they wait for the rebound to kick in and end up watching the stock tank further. It’s a great way to lose money.

Use a stop-loss! When you do, the sale is automatically triggered when the stock hits a preset price that you’ve determined in advance (this can be anything – but is usually 20% or 25% lower than your entry price). This way, it’s much easier to cut your losses and move on to the next investment instead of waiting for your stock to bounce back.

But in a stock world where expectations can be so high, how do you get around this without paying over the odds and losing money? There’s a professional strategy for it…

Steer Clear Of Analysts High Expectations

If some analyst has clearly placed overly high expectations on a certain company, you should probably steer clear until the price declines to a more comfortable level for you.

But while most ordinary investors simply do this and then move onto the next candidate, there’s a way you can actually walk away with some money while you wait.

I employed this contrarian investing approach on a flourishing medical device company for Xcelerated Profits Report subscribers in the most recent issue. And my colleague Lee Lowell has also used it twice in recent months.

In my case, I liked the prospects of the company, but because the stock had taken off recently, I argued that there was actually too much optimism. This made buying the stock outright a much riskier bet.
Instead, I suggested selling put options at a lower strike price, thus giving the buyer the right to sell us the shares at that strike price. If the stock retreats to that level, we’ll own it at the lower price we wanted. Not only that, we get to keep the premium that we received for selling the put. And if the stock continues to rise, we still don’t buy it, but we do keep the premium.
Bottom line: We like the company but we don’t chase it when the share price goes up. But we do get free money for trying to own it at the price we want.
Today, the company I recommended issued a stellar earnings report. It really knocked the cover off the ball. However, the stock didn’t rise that much because those expectations I talked about a moment ago were already sky-high.

Find out what this company is here. And if you want to know what this approach is – and how to employ it in your investing – check out today’s “Action Center” below.

Know The Expectations… Know The Limits

When you’re evaluating stocks, make sure you use all your regular methods of due diligence:

Look at the company’s fundamentals,
See what the technicals show you,
Know what projects/products it has and what its future prospects are.
But make sure you also understand what kind of results Wall Street analysts are predicting.
As much as we like to make fun of them for being a bunch of lemmings, it’s their estimates that the Street uses as a guidepost as to whether a company is missing, meeting or exceeding expectations.

Yep, life would be much simpler if expectations were more reasonable – whether we’re talking about individual relationships like a marriage, diplomatic relations between countries or the stock market. But understanding and knowing how to deal with those expectations, especially the unreasonable ones, can keep you out of trouble – with your spouse and your portfolio.

Hoping your longs go up and your shorts go down,

Marc Lichtenfeld