BHP Billiton sizes up prey in race to expand

WITH Rio Tinto almost certain to complete the $44 billion transaction to buy Alcan, BHP Billiton is not far away from making an even bigger purchase. With Rio Tinto almost certain to complete the $US38.1 billion ($44 billion) transaction to buy Canadian aluminium producer Alcan, BHP Billiton may make a company-transforming announcement such as bidding for US giant Alcoa or Anglo, or something smaller such as a tie-up with Oxiana and Zinifex. There is even a suggestion it is doing the numbers on Woodside Petroleum. Welcome to the new game in mining: getting big enough to control capacity so you can have a big influence on price and being diversified rather than a specialist resource house. In the next few years, two to three players will account for 60 per cent to 70 per cent of global industry capacity, giving them a powerful position in price negotiations. Rio's acquisition of Alcan catapults it from the eighth largest aluminium producer in the world to the biggest, putting pressure on BHP and CVRD to move up the ladder. If BHP buys Alcoa, it will overtake Rio and become the biggest aluminium producer in the world. The upshot is rapid consolidation and as the big players buy up the aluminium and alumina, they will reinforce the next round of consolidation of copper and other commodities. The only fly in the ointment in all this consolidation is whether these companies have the management capacity to drive implementation. In the case of Alcoa, most members of its senior management team are approaching 60 and so whoever buys it will have to either put in place big retention packages or find new operators in a short time. The Alcoa board is even older, dominated by people in their 60s and 70s, compounding a takeover risk. If BHP makes a tilt at Alcoa, it will have to make sure it has management depth to pull off the integration, given the age of Alcoa directors and executives, and BHP's recent changing of the guard. For starters, BHP will have a new chief executive in Marius Kloppers and a new senior management team since the departure over the past seven months of some senior executives. These include group president of carbon steel materials and an executive director Chris Lynch, chief legal counsel and head of external affairs John Fast, group president of energy Phil Aiken, executive president of BHP and a member of the office of the chief executive and a director of the board Mike Salamon, and president of carbon steel materials Bob Kirkby, who retired in December. Although a changing of the guard is not a bad thing, it exposes a company to some leadership risk.