Commodity Slump `Moves the Needle' on BHP Offer: Chart of Day

By Brett Foley

Aug. 6 (Bloomberg) -- Slumping commodity prices may be a boon for BHP Billiton's $134 billion hostile offer for Rio Tinto Group, the biggest mining takeover bid.

The S&P 500 Materials Index is within 1.7 percent of a bear market today. That may strengthen BHP's argument that its bid isn't too low, as Rio has claimed. Melbourne-based BHP, the world's biggest mining company by market value, says it can cut costs by combining the companies' headquarters and adjacent iron ore operations Western Australian.

The CHART OF THE DAY shows that Rio's stock trades in London at a discount of almost 10 percent to BHP's offer of 3.4 shares for each Rio share, plotted against the decline in the Materials Index. Rio last traded at a premium on April 6.

``You could argue that as commodity prices fall and margins come under pressure, the kicker you get from those synergies will become more attractive,'' says Simon Toyne, an analyst at Numis Securities in London. ``That could help move the needle a little bit more on the BHP offer.''

BHP Chief Executive Officer Marius Kloppers said he will deliver $3.7 billion in cost savings. Chairman Don Argus wrote last week to Rio shareholders for the first time, saying the offer would generate ``substantial, additional'' value for investors.

European Union antitrust regulators widened a probe of the BHP plan last month saying they have ``serious doubts'' about a combination that would control more than a third of the world's iron ore, the main ingredient in steel.

To contact the reporter on this story: Brett Foley in London at bfoley8@bloomberg.net