BHP Billiton (NYSE: BHP) is doing the one thing good bargainers never do. It is negotiating against itself. Today, it raised its bid for fellow metals company Rio Tinto (NYSE: RTP) from three shares to Rio’s one to 3.4 shares. RTP never made a counter to the original offer. It simply said it was too low.

BHP management says it can get $3.4 billion in cost savings and revenue gains out of a business combination. “The synergy from the cost and revenue side would be enormous,” said Simon Bonouvrie at Platypus Asset Management according to Bloomberg.

In takeovers, the aggressive party seems to think that a higher price makes for a better deal. Otherwise, why up the ante? The BHP offer will likely turn into a disaster if it works out.

RTP shares are up over 100% during the last year. Alcoa’s (AA) are only up 5%. It would be hard to make the case that Rio Tinto is that much better off. RTP trades at almost 6x revenue.

Metals prices, which are the largest factor in an ongoing share price rally in stocks like Rio, are based to a very significant extent on global demand. That, in turn, is based on the health of global GDP. China, will, of course, probably underwrite the high cost of metals for its industries to keep its economy moving. No other large country can count on that.

In much less than four years, RTP’s share price has quadrupled. It is a very, very long bet that the price of metals can keep that kind of momentum going.

A Viking funeral for shareholders in both companies.

Douglas A. McIntyre

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