By James Regan
SYDNEY (Reuters UK) - Miner BHP Billiton (BHP) (BLT) raised estimated reserves at its biggest iron ore operation by a quarter on Tuesday, a day after rival Rio Tinto (RIO) set a lofty new benchmark price for the commodity.
Rio (RIO) agreed a near-doubling of prices with China's biggest steel-maker, Baosteel , on Monday, lifting the share prices of both Rio and BHP, though BHP has yet to agree a new price on its own contract renewals with Asian steel mills.
"This is an indication of the future potential of these assets," Marcus Randolph, head of BHP's ferrous and coal division, said after the company raised its ore reserves estimate at its Western Australia Iron Ore operation by 23 percent.
"Iron ore (division) is seeking to triple its capacity between 2007 and 2015," he told reporters on a conference call.
The valuation of Australian iron ore mines are at the centre of BHP Billiton's $167 billion (84.9 million pounds) all-share bid for Rio Tinto, which has dismissed the approach as too low.
BHP is smaller in iron ore mining than Rio but larger overall. Rio argues that BHP's bid of 3.4 BHP shares for every Rio share discounts the value of its growth prospects and, in particular, its potential in iron ore.
BHP's Randolph said his company had not yet settled on contract renewals with its own Asian customers, but industry analysts said BHP may have to follow Rio's lead.
BHP has been pushing its own alternative pricing blueprint which analysts say could have reaped even higher returns but looks to have been overtaken by Rio's deal with Baosteel, which represents a jump of up to 96.5 percent over last year's price.
BHP favours a new over-the-counter market to sell ore on the spot market instead of under long-term contracts.
Rio shares ended up 3 percent in Australia and were up 2.6 percent in London at 0752 GMT (8:52 a.m. BST). BHP ended up 2.9 percent in Sydney and were trading 2.3 percent higher in London.
"BHP was traditionally the one that signed first, then Rio followed," said James Wilson, an analyst for DJ Carmichael & Co. "But now the shoe's on the other foot and maybe Rio is trying to show BHP who's boss in iron ore," Wilson said.
Rio's deal with Baosteel deal eclipses the 65-71 percent price increase that Chinese mills agreed with Brazilian miner Vale (VALE5) earlier this year.
"The Rio agreement shows the benchmark system is alive and well at least for another year, which could leave BHP no choice but to go along," Wilson said.
Both Rio and BHP are relying on strong demand for ore in China to justify the billions of dollars each has earmarked to dig more mines in Australia. Rio forecasts Chinese iron ore imports will double over the next six years.
($1=A$1.05)
(Additional reporting and writing by Mark Bendeich; Editing by James Thornhill)
