Cheap power and its fine-tuned sensitivity to rising aluminum prices have helped make Montreal's Alcan Inc. the belle of the aluminum ball lately, with one suitor already scorned and three global metals firms said waiting to cut in.
Alcan's U.S.-listed shares closed 1.2% higher Wednesday after reaching another record high Tuesday. The moves followed separate reports in Canadian and Australian newspapers over the Memorial Day weekend that Norway's Norsk Hydro and Britain's Rio Tinto were preparing bids for the company.
Australia's BHP Billiton Ltd.also has been reported to consider a bid. See full story.
Intense speculation over Alcan's future has followed a $27 billion hostile offer by rival Alcoa . During the course of turning down this offer as too low and too uncertain, Alcan revealed that it too has been talking to other companies about a possible transaction.
What's more, Alcan has yet to rule out its own bid for would-be acquirer Alcoa -- a scenario that analysts say could happen with the right amount of debt. In pursuing a deal for Alcoa, Alcan would take on a company with about 55,000 more employees, 29% more revenue and a slightly higher market capitalization than its own.
Either way, the linkup would create the world's largest producer of aluminum and its feedstock alumina and rejoin two companies broken apart for regulatory reasons in 1928.
The possibility of sweeter premiums has enticed investors, who have bought up Alcan shares to 78% more than their price at the start of the year and more than double their value at the end of 2005.
Even before Alcoa launched its formal offer for the company, analysts had flagged Alcan as a company likely to ride high along with an expected climb in aluminum prices after the lightweight material lagged other metals last year.
he price of aluminum for delivery in three months rose 23% on the London Metal Exchange last year, compared with a 144% increase in the price of nickel and 122% increase in the price of zinc.
By Wednesday, aluminum futures were trading slightly down from where they started at the beginning of the year. But analysts are still optimistic about gains to be made from pricier metal.
Banc of America Securities analyst Kuni Chen on Tuesday raised his spot price forecast for aluminum to $1.25 a pound on average for 2007, up 3 cents from a prior forecast, and representing a 7% rise from 2006.
"While recent M&A speculation has been a distraction, aluminum fundamentals remain quite solid," Chen wrote in a note to investors.
Pricey aluminum, cheap power
Alcan gets a bigger earnings-per-share boost when aluminum prices climb higher than rival Alcoa. That's because Alcan's share count is much smaller than Alcoa's, while total aluminum output at the two companies is similar.
Alcan has 367.9 million shares outstanding, or 40% of Alcoa's share count. But Alcan's output of primary aluminum is 80% of Alcoa's production level.
The result is that if aluminum prices rise by a penny in one year, Alcan's earnings per share should rise by 10 cents, estimates Citigroup. At Alcoa, that sensitivity is more muted: For every penny increase to the light metal, Alcoa's earnings per share get a six-cent boost.
Another mark in Alcan's favor is its access to low-cost hydropower in its home province of Quebec. Some 50% of its power is self-generated, according to the company.
The cost of power has been a worry for companies that sell into global commodities markets. They compete on price and are increasingly vying for market share with producers in such countries as Russia that can tap into their nation's deep energy reserves.
Aluminum makers are especially sensitive to the need for cheap, reliable power. Electricity is used to heat alumina powder to 1,700 degrees Fahrenheit, an energy-intensive process that Alcoa estimates at 30% of the total cost of making aluminum.
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