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BHP, Rio to Generate Enough Funds for Takeovers, Merrill Says

BHP Billiton Ltd. and Rio Tinto Group will individually generate enough funds in the next three to five years to acquire additional assets or return more cash to shareholders, Merrill Lynch said in a report.

The world’s two biggest mining companies will have free cash flows of about $20 billion this year alone because of “buoyant commodity prices and delivery of growth projects,” Merrill Lynch analysts led by Peter O’Connor wrote in the report today. “With continued strong cash flow generation for both companies, we believe the potential exists for additional capital-management plans and mergers-and-acquisitions firepower, even given the aggressive expansionary” capital spending.

BHP, based in Melbourne, has bought $9.6 billion of its own shares under its $10 billion additional buyback program, while Rio Tinto has completed 46 percent of the London-based company’s $5 billion buyback plan, according to the report.

“Whilst BHP has reiterated a focus on investing in existing organic opportunities, opportunities may emerge as price expectations for tier-1 assets are normalizing,” the analysts said. “In terms of M&A, petroleum appears a logical and strategic growth option with large capital commitment.”

Last week, Credit Suisse AG wrote that Woodside Petroleum Ltd. may become a more attractive target for BHP if its shares remain “depressed” in Sydney following its announcement on a cost increase and delay at its Pluto gas venture.

Samantha Stevens, a spokeswoman for BHP, and Bruce Tobin, a spokesman for Rio, declined to comment on the Merrill Lynch report when contacted today.

Rio Tinto will remain “prudent” on mergers and acquisitions, Merrill Lynch said in the report. The company will continue to focus on “low to middle single-digit deals that can bolt on well with the existing asset portfolio,” according to the report.

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