^[1]By Melissa Pistilli-Exclusive to Iron Investing News

BHP Billiton's ^[2] hostile takeover bid for rival Rio Tinto ^[3] finally came to an end last week.

On November 25, BHP announced it was dropping its $66 billion bid for Rio due to the current global economic crisis and Rio's $42.1 billion in debt.

The takeover process had begun last November and resulted in an immediate rejection by Rio Tinto. The London-based miner felt BHP was low-balling with the then $142 billion offer.

The merger was especially criticized by the steel industry ^[4] worldwide as a threat to fair pricing and against anti-trust regulations. If successful, the takeover would have given a BHP-Rio alliance and mining giant Vale a 70 per cent stake in the global seaborne iron ore market and incredible power in contract negotiations.

Although the deal is dead in the water for now, it's an idea that will no doubt remain in the minds of BHP management for the future. The desire to merge BHP and Rio began in the 1990s and was first tried in 2001 by former BHP CEO Brian Gilbertson ^[5].

This time around, after much speculation in the market that such a merger might be in the works, BHP CEO Marius Kloppers went public with the company's takeover plans on November 9, 2007. The initial bid was three BHP shares for every Rio share, which Rio quickly rejected.

After the British Takeovers Panel gave BHP a six week deadline to submit a formal bid or stand down, the company changed their offering February 6 to 3.4 BHP shares for every Rio share. Next came the long process of convincing anti-trust regulators around the world to sanction the merge, which was not easy given the open hostility to the bid by leading steel manufacturers.

BHP was in the process of awaiting a decision from the EU's regulatory body due out early next year, however the current global economic crisis and sinking commodity prices have forced BHP to trash the takeover itself.

"The events that we have seen over the last six weeks, perhaps since the Lehman's scenario started unfolding, and all of these subsequent events have clearly impacted our cashflows," said Kloppers ^[5].

The volatility in the markets isn't the only factor in BHP's decision to scrap the bid. The over $40 billion in debt Rio has racked up after its takeover of aluminum producer Alcan ^[6] has made the company a much less attractive target. Purchasing Rio now, says BHP, would raise its own debt to "unacceptable levels" ($78 billion) during a period where economic uncertainty remains high.

"A heavily geared position and reduced capacity to deal with that debt, creates unacceptable financial risks for BHP Billiton shareholders," said BHP Chairman Don Argus ^[7].

Although BHP's decision to scrap the takeover may be viewed by many as a sign BHP is worried about the future of the iron ore market, the company is still moving forward with its Rapid Growth Project. Kloppers said BHP will continue investing in projects during "challenging times."

"The pursuit of Rapid Growth Project 5 is a sensible strategy, few competitors in the next two years will have the balance sheet capability or equity project financing to bring iron ore to market," said Andrew Keen ^[7], Sanford C. Bernstein & Co. analyst. "Having lagged Rio Tinto's growth in iron ore in recent years, BHP Billiton is likely to use its balance sheet capacity to grow its market share."

The company recently approved $4.8 billion for expansion of iron ore operations in Western Australia. BHP anticipates a boost in production capacity by 50 million metric tons to 205 million tons by the second half of 2011 after the expansion.

Shares in Fortescue Metals Group Surge

Australia's third largest exporter of iron ore, Fortescue Metals Group Ltd ^[8]. [ASX: FMG], experienced a newsworthy surge ^[9] in its share price on Monday. Shares in the Perth-based miner rose 21 per cent on the Australian Stock Exchange (ASX), their highest in four weeks.

Fortescue couldn't explain the jump when questioned by the ASX. Under exchange regulations, any changes in shareholdings of 5 per cent or more must be disclosed to the exchange within three days.

Andrew Sekely, head of Australian equities at Intersuisse Ltd. said, "There was a very big seller out there whose order has been completed and the stock, without that heavy weight of selling over, it has bounced up." He also commented that there is some speculation that Magnitogorsk Iron & Steel ^[10], Russia's third-largest steelmaker, has been selling off its 150 million shares over the last few months.

Magnitogorsk owns a 5.4 per cent stake in the Australian iron ore exporter and rumours are circulating the Russian company may be looking to cash in its holdings to fund other operations and investments.

However, Magnitogorsk denies it has sold any of its shares. "The broker who supposed a large shareholder had sold its stake may have gotten a bit confused. We've had no change," said company spokesman Yevgeny Kovtunov ^[11].

There is also speculation that Fortescue is in the midst of a takeover by BHP Billiton or perhaps is selling shares or a stake in its Pilbara operations to Chinese firms.

Fortescue didn't confirm or deny the rumours, but did say it "does from time to time hold discussions with industry entities regarding product supply and investment opportunity," however such talks "are confidential in nature and there are none that are progressed to a level that could be considered complete."

Further adding to the surge in price, short sellers are believed to have ran to cover their positions. At one point shares ^[12] were up 42 percent but ended the day up 44 cents to $2.50 after a turnover of 33 million shares.

The surge prompted a run on some of Western Australia's other iron ore miners. Atlas Iron ^[13] was up 9.4 per cent, BC Iron ^[14] rose 15 per cent, Brockman Resources ^[15] jumped 4.2 per cent, Gindalbie Metals ^[16] climbed 6.1 per cent, and Aurox Resources ^[17] rose 8.3 per cent.