Rio Tinto chief says Alcan price not too high because of China, India demand

Rio Tinto's chief executive is defending as good value the US$38.1-billion price his company has put on Canada's Alcan Inc. (TSX:AL), saying China's skyrocketing demand for metals justifies the takeover plan. The massive deal, which spurred gains on U.S., British and Australian markets when it was announced Thursday, will create the world's largest aluminum company, and ended U.S. rival Alcoa Inc.'s hostile bid for Montreal-based Alcan. Rio Tinto's price defied others in the sector and fell, amid profit-taking and as some analysts said the $101-per-share cash-only offer was too high. Rio Tinto closed 2.45 per cent down at 102.30 Australian dollars (US$88.29) in Australian trading on Friday. Alcan shares had reached a new high Wednesday on the Toronto stock market as speculation swirled over a possible deal with Rio Tint. On Thursday, they surged by 8.85 per cent, or $8.34, to C$102.75. Alcoa withdrew its offer for Alcan after the friendly Rio Tinto bid was announced. The price was about one-third more than Alcoa's $28-billion offer. Analysts said the huge price tag was designed to knock Alcoa out of the fight, though some said it may be too much. Rio Tinto chief executive Tom Albanese disagreed. "We're very comfortable with the fact that we've found the right balance between the compelling offer for Alcan shareholders and an offer that's consistent with our approach to value," Albanese told Australian Broadcasting Corp. in an interview broadcast Friday. The deal would put the Anglo-Australian diversified miner in a better position to capitalize on the rampant growth in China and India, he said. "This is a very important transaction for Rio Tinto," Albanese said. "As I look ahead ... what we see in China (is that) there are three metals that are really being driven off of the growth that we're seeing in ... the industrialization, the urbanization in China, and those would be steel, copper and aluminum." Resources stocks drove Wall Street and London markets higher overnight, and the Australian bourse surged when it resumed trading for the first time since the Rio Tinto-Alcan announcement. Shares in BHP Billiton Ltd., the world's biggest mining company, surged more than two per cent on Friday as the failure of Alcoa's bid reignited speculation that the hunter of Alcan could become BHP's prey. BHP closed up 1.14 per cent at A$39.16. The Alcan deal "reignited talk of further consolidation in the global resources sector," Josh Whiting, a senior dealer at CMC Markets said. "Other possible resource stock marriages ... include a BHP Billiton takeover of Alcoa, or locally an approach by Oxiana Resources for zinc miner Zinifex." Credit Suisse was another brokerage crunching numbers on a possible BHP tilt at Alcoa, saying such a tie-up could boost BHP's earnings by up to 25 per cent. "Aluminum has been the worst-performing base metal in the last five years, but its prospects appear to be improving as supply growth from both China and Russia appears to be more muted than first anticipated," Credit Suisse said. Withdrawing his company's $28-billion offer for Alcan, Alcoa chairman and chief executive Alain Belda said Rio Tinto's offer "strongly reinforces our view of the underlying value in the aluminum industry and its bright prospects for the future." "However, at this price level, we have more attractive options for delivering additional value to shareholders," he said. Rio Tinto's offer is 65.5 per cent more than Alcan's closing share price before Alcoa's May 4 takeover bid, and almost 33 per cent more than Alcoa's offer, which was rejected by Alcan's board as not enough. The offer is subject to conditions including gaining the support of 66.67 per cent of Alcan's shareholders and a break fee of $1.05 billion - payable by Alcan to Rio Tinto if Alcan pulls out. Under the deal, a new division named Rio Tinto Alcan would be based in Montreal, headed by Alcan CEO Dick Evans. Alcan chairman Yves Fortier said Rio Tinto's offer was "very attractive" and the board recommended it to shareholders. The deal resulted from a "rigorous and thorough process," he said. Alcoa and Alcan were the world's top two aluminum producers until March, when Alcoa was eclipsed by the Russia-based United Company Rusal as the biggest. Rio Tinto already has a major bauxite operation in Australia, as does Alcan, which would give the combined company a powerful hold over one of the key materials in aluminum production. Rio Tinto, based in London and Melbourne, is currently the world's eighth-largest aluminum maker and second-biggest iron ore producer.