Rio Tinto shares fall 4.2% in Australia on Alcan deal worries

Shares in Rio Tinto Ltd. (RIO.AU) fell 4.2% in Australia Monday as some investors and analysts raised concerns the mining giant is paying too much too late in the cycle with its US$38.1 billion takeover offer for Alcan Inc. (AL). Rio Tinto shares ended the day down A$4.20 at A$97.10. Citigroup, which has cut its rating for Rio to Hold from Buy, said it recognizes the Canadian group has quality bauxite and alumina assets, low-cost hydropower and leading-edge technology, but says there are still question marks over the deal. "We question why Rio has waited this long to move, given this deal could have been done two years ago at half the price," Citigroup analysts said in a client note. ABN Amro has also cut Rio to Hold from Buy and said that, while it recognizes the deal is accretive in the first year, very favorable aluminium market conditions will be needed to make it pay off in the long term. Investors also voiced concerns that Rio Tinto may have paid too much at the top of the cycle. While aluminium has underperformed other metals in the China-driven commodities boom, Rio Tinto is betting that this boom will follow the pattern of others with aluminium coming to the fore later in the cycle. Equity Trustees portfolio manager John Guadagnuolo said many shareholders have invested in Rio Tinto for its copper and iron ore earnings and are worried the miner has "bet the house" on a big drive into aluminium despite an uninspiring mid-term outlook for the metal. "It is a leap of faith," he said. "It does seem a long time away and it is not without risk." Rio Tinto has in the past come in for criticism for being too conservative and sitting out the consolidation in the mining industry despite its strong cashflow and balance sheet. With the Alcan deal, the biggest takeover yet seen in the mining industry, new chief executive Tom Albanese has lived up to an expectations of a more aggressive approach and some investors are welcoming the move. Aspect Huntley fund manager Ian Huntley backs the Alcan deal and said some of the fall in Rio Tinto shares is a natural retracement after recent gains. "Some people might be disappointed that there might not be larger buybacks but I think it is very positive to see them doing something with the money," he said. And many analysts are also backing the deal for the scale, diversity of earnings and synergies it offers.