Prudential: Most major diversified resource firms won’t bid for Alcan

Prudential Equity Group said it isn't necessarily betting that diversified resource firms will bid for integrated Canadian aluminum producer Alcan or even U.S. competitor Alcoa, which has launched a $27 billion hostile takeover for Alcan.

In an analysis published Wednesday, Prudential metals analysts John Tumazos and Andrew Tseng suggested that new projects may offer better value than taking over existing operations.  Nevertheless, the analysts said they regard Russia's Rusal as the key potential competing bidder for Alcan "owing to the similarity of Rusal's integration into Ural hydro plants.

The analysts said they did not presume that BHP Billiton, Rio Tinto, CVRD Inco, Teck Cominco, Anglo-American, or Xstrata would bid for Alcoa. "These companies have five to 10 major product groups each, and some of the companies might like copper, nickel, platinum group, iron ore, tar sands, uranium or some other mineral better than aluminum."

"We believe anything can happen now that Alcoa is in play," they wrote. "We assign a 25% likelihood that Alcoa sweetens its bid 10% to win Alcan, a 25% likelihood that Alcoa sweetens a second 10% to win Alcan, a 10% likelihood that Alcoa remains alone, and a 40% likelihood that Alcoa's new owner ‘strips Alcoa' to equal its 60% share of alumina venture and 80%-90% of today's smelters divesting research, the highest cost smelters and all value-added units."

Prudential suggested that to be taken seriously by the Alcan board-which recommended against the Alcoa bid-Alcoa must demonstrate (a) the aerospace asset sale package necessary to satisfy Airbus and the European Union, (b) the Neuf-Brisach can sheet mill status, (c) approval to its pro forma 30% world metallurgical alumina output position, (d) approval to its less than 23% smelter output position and (e) that packaging sales make that produce class moot.

Their analysis asserted that Alcan's board may conclude that Alcan is much more valuable if they consider Alcoa's 2014 future profile rather than the current 2007 income profile. Future issues for consideration include the impact of the production of Alcan's five new smelters including planned 1.4 million-tonne mega-smelters in Dubai and Saudi Arabia; the upward repricing of 75% of Alcoa's smelter electricity; the possibility Alcoa's existing smelters might close rather than pay over 5-cents per kilowatt hour for power; and lower aluminum prices penalizing Alcoa's valuation.

Prudential said they also worry if current aluminum output, inventories, and planned global expansions are too much. Last March, Prudential downgraded the aluminum industry to "UNFAVORABLE" because of anticipated increased Chinese output this year, and projected 1 mmt increase in year-end 2007 aluminum inventories, and a forecast decrease in estimated U.S. aluminum consumption.