China, India will drive aluminum giant's success

Mining giant Rio Tinto Group yesterday defended the price it has offered for Canada's Alcan Inc., saying the robust economic growth of China and India would see the business prosper. The US$38.1-billion bid for the aluminum producer, the mining industry's biggest-ever acquisition, would secure "a first-class, tier-one asset," said chief executive Tom Albanese. "There aren't many of them out in the mining sector and in the market right now," he told the Australian Broadcasting Corp.'s Inside Business program. The creation of the world's largest aluminum company, to be called Rio Tinto Alcan, would benefit from the rapid economic growth of China and India, Mr. Albanese said. India's growth was five years behind China's, but gross domestic product in both countries was expected to increase at almost 9% annually until 2015, he said. "In a metal like aluminum, which is very much going to benefit as we see China continue to grow, we have found that confluence point where we are able to provide an offer which fully met the needs of the Alcan shareholders." The offer was also "in the mantra of value that we have within Rio Tinto and very much consistent and complementary with our strategy." But international ratings agency Fitch Ratings said it was placing Rio Tinto on credit watch negative, noting the proposed transaction was highly leveraged and taking place "at the top of the current commodity price cycle." Mr. Albanese said Rio Tinto's strong cash flows would help drive down higher debt levels. "We have a strong, robust set of cash flows within Rio Tinto, with cash generated from operations running at roughly US$1-billion a month," he said. Proceeds from the sale of Alcan's packaging unit, which was a large part of its business, would be used to pay down some of the debt and other potential asset sales could be possible after a sweeping review of the new, larger Rio Tinto operation, he said. Rio Tinto has hired Royal Bank of Scotland Group PLC, Deutsche Bank AG, Credit Suisse Group, and Societe Generale SA to finance the transaction. The offer for Montreal-based Alcan will be funded from banks, Moody's said, which would make it the second-biggest loan in Europe. Mr. Albanese said Alcan's hydro-power contracts were an important part of the acquisition. "I think it was very important in our recognition that the access to long-term, low-cost, sustainable energy with essentially a zero-carbon footprint, very much puts the Alcan aluminium production in a competitive advantage," he said. That advantage was certain to grow in the future "when energy becomes more expensive, and potentially energy becomes car-bon-constrained." Fitch Ratings also noted that a bidding war could still break out for Alcan, which attracted a hostile US$33-billion cash-and-stock offer from U.S. firm Alcoa Inc. before Rio Tinto came in as a "white knight" saviour. Mr. Albanese stressed the importance of the deal being on friendly terms and said it was preceded by discussions that "literally go back decades." With the threat of rival offers it was important to get in early. "I think it was important for us to get an early foot in the door, but of course, it was very difficult set of negotiations and it's been a very competitive process over the past several months." The acquisition still needs to be approved by regulators.