Australia state threatens Rio-BHP iron merger: report

SYDNEY (Reuters) - Western Australia state has raised the stakes in its demand for higher royalties from iron ore miners Rio Tinto (RIO.AX) and BHP Billiton (BHP.AX), telling them that it would not rubber-stamp their planned iron ore merger.

Western Australia Premier Colin Barnett told the chiefs of both firms in a meeting this week he wanted to double their royalties to put them on par with other miners in the state, Australian newspapers said on Thursday.

"The major point I stressed is I want to see full royalties applied to both BHP and Rio projects," The Australian quoted Barnett as telling reporters on Wednesday, a day after meeting the Rio Tinto and BHP Billiton chief executives.

The Australian newspaper quoted Barnett as saying both CEOs "drew breath" when he made this remark but they made no concession.

Rio Tinto and BHP Billiton, the world's second and third largest iron ore miners respectively, announced in June a plan to merge their Australian iron ore operations, all based in the west, in a joint venture valued at the time at $116 billion.

The plan is already under fire from steel companies that rely on ore from both companies who fear it will create an Australian oligopoly capable of unfairly influencing pricing and supply.

The plan needs a series of government approvals, including new legislation in Western Australia state.

Under agreements dating back to the 1960s, both companies pay the state a royalty of rate 3.75 percent. This is half the royalties that other miners pay, Barnett was quoted as saying, in recognition of their contribution to early development of the state's iron ore industry, based in the desert Pilbara region.

"I don't believe that anyone can argue today that BHP and Rio, the world's largest mining companies, the world's wealthiest mining companies, should pay half the royalty rate of small Australian companies," Barnett was quoted as saying.