A takeover of Rio Tinto by BHP Billiton would create the world's biggest producer of valuable iron ore. The prospect of eclipsing Brazilian iron ore group CVRD was a likely key attraction for BHP Billion, which has put a merger proposal to the target's board.

Rio Tinto lucrative iron ore operations in the Pilbara region of Western Australia would have been a key reason for the proposed deal. Rio Tinto and BHP Billiton are the two largest producers of iron ore in the Pilbara, with a combined output of 277 million tonnes in 2006. Mr Gavin Wendt of Fat Prophets told AAP. "The obvious attraction for BHP is the iron ore tie up, the Pilbara tie up and the synergies and cost savings that present themselves.”

Analysts from Citigroup have estimated about USD 500 million in cost savings and synergies in the Pilbara could be extracted from a proposed merger.

BHP Billiton accounts for around 15% of world iron ore sales, while Rio Tinto is responsible for 24%, which would put the combined company at 39%. Rio produces around 140 million tonnes of iron ore a year and BHP is at around 100 million tonnes with their major operations in Western Australia. Brazil's CVRD is the top ranking producer of iron ore.

But its pursuit of Rio Tinto, which has rejected the approach, could draw out other predators, including CVRD. Fat Prophets Analyst Mr Gavin Wendt said that CVRD is the only other company with the firepower to deflect BHP Billiton's ambitions. He said "I think the other motivation for them would be to preserve their position in the iron ore industry, as number one.”