IN keeping with the size of the prize, BHP Billiton’s pursuit of rival mining group Rio Tinto looks set to be a marathon affair.

Last week Marius Kloppers, BHP’s chief executive, finally took the wraps off the £76 billion takeover offer.

If successful, the deal will create the world’s-largest mining group by some distance (a title at present held by BHP itself) and one of the five largest companies in the world by stock-market capitalisation, ranking alongside the likes of Exxon, Microsoft and General Electric.

It will also have a profound say in the running of the world economy. Its commanding position in key resources, including iron ore, copper, nickel, aluminium and uranium, will give it control of the basic ingredients needed by manufacturers, and in particular China, if that country is to continue its rapid economic growth and urbanisation programme.

But it will be some time before we know whether Kloppers’ ambitious gambit has paid off. The offer has been rejected by Rio’s directors, meaning it is, in City parlance, a hostile bid. BHP has also said that it is conditional on receiving clearance from myriad competition regulators around the world, most important of which may be the European Union.

Analysts at the investment bank Credit Suisse believe the effect of this is that the battle could drag on for more than a year – and perhaps even 15 months.

The Credit Suisse team points out that regulatory clearance is likely to take six to nine months, with three to six months added by the strict hostile-takeover timetable dictated by City watchdogs and the necessary welter of shareholders’ meetings.

“All up, the process is likely to run into the last quarter of this year and quite possibly the first quarter of 2009,” the investment bank said in a research note.

The length of the fight means that BHP could be beaten to the punch in its grand plan to create a titan of world mining.

Two other big players are making plans for their own wedding. Vale, the Brazilian group formerly known as CVRD, is plotting an offer for Xstrata. The combined group would unseat BHP as the world’s largest miner, but would still be smaller than BHP-Rio.

City sources say Vale is planning an offer of between $42 and $44 per share, valuing Xstrata at $42 billion (£21.5 billion). The bid could be announced within the next few days, although it is understood that negotiations with Glencore, the Swiss trading house that is Xstrata’s largest shareholder, are continuing. The backing of the Brazilian government will also be crucial if the merger is to go ahead.

The likely timetable for the BHP-Rio bid has had some other consequences. Most analysts, shareholders and bankers – and the Rio board – believe that last week’s offer will be increased.

BHP, led by Kloppers and chairman Don Argus, originally tried to lure Rio investors by offering three of its shares for every one Rio unit.

This offer was made in November, some seven months after the companies are understood to have held informal talks about a merger, and was roundly rejected by Rio, led by executive chairman Paul Skinner and chief executive Tom Albanese.

Last week BHP sweetened the terms, offering 3.4 shares. Kloppers said the terms represented a 42% premium to Rio’s share price on October 31 – the day before BHP’s interest in a takeover became public knowledge. If Rio shareholders were to accept, they would end up owning 44% of the combined company, with BHP investors holding the remainder.

It was not enough for Rio to come to the party. Skinner said the offer “while improved, still fails to recognise the underlying value of Rio Tinto’s quality assets and prospects. Our plans are unchanged”.

Analysts and bankers think that BHP still has headroom to increase the offer. “If you are presented with a takeover battle as lengthy as this one is going to be, you don’t fire your best shot straightaway,” said one City source. In research notes, several analysts highlight Kloppers’ careful response when asked if the offer was final. He said the offer was compelling, but did not say it was the last.

Kloppers will be optimistic, however, that playing the waiting game will pay off. BHP and its advisers believe that a looming US recession will harm the demand for materials such as iron ore, copper and nickel, and send their prices down from their current record highs. If this transpired – which the Rio camp think highly unlikely given China’s continuing boom – the BHP offer will become relatively more attractive.

Senior BHP executives say they are watching in particular the performance of Rio’s aluminium assets. Rio made a big play in aluminium earlier this year when it trumped Alcoa’s planned purchase of Alcan, the American group. Rio paid $40 billion, and the BHP executives are hoping that Alcan’s exposure to North American markets could help drag down Rio’s prospects.

Meanwhile, Rio executives are poking holes in BHP’s record, gleefully seizing on its having narrowly missed earnings estimates with its annual results last week. An acid test looms for Rio this week, when it releases its own results. It is expected to report underlying profits of $7.1 billion, a smidgen down on the previous year.

There is another potential threat to the BHP takeover. Ten days ago China entered the fray. Chinalco, a state-owned aluminium group, took a 12% stake in Rio. Its partner was none other than Alcoa, still smarting from having been thwarted over the Alcan deal.

China has made no secret of its opposition to the BHP plan. A combined BHP-Rio would control about 40% of China’s sea-borne imports of iron ore, a proportion that is forecast to rise to 60% within a few years as domestic supplies dry up.

While most consider that the Chinese are unlikely to make a full bid for Rio – the Australian competition authorities would probably block such a move – they have the financial firepower potentially to thwart BHP.

Bankers also say that given the deal frenzy surrounding the mining industry, other combinations cannot be ruled out. Anglo American, once the undisputed king of the mining world but now in third place, has sat on the sidelines, while others believe that Vale and Xstrata could still have some say in the outcome.

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