Rio Tinto may join Alcan race, Norsk Hydro also in the fray

Rio Tinto has hired Deutsche Bank to advise it on a possible bid for Canadian aluminium producer Alcan, the Sydney Morning Herald newspaper reported on Monday. Rio Tinto is the latest mining house reportedly sizing Alcan up for takeover after Alcan rejected a $28.4-billion bid by Alcoa. An Alcan-Rio link-up would create the world’s largest aluminium company.

Rio was unlikely to retain Alcan’s downstream aluminium rolling and packaging arms, which it could sell for more than $8 billion and take some of the sting out of having to fork out possibly over $30 billion for Alcan, analysts said. “With debt capacity of $15-20 billion, Rio’s got the firepower to make a bid,” said Shaw Stockbroking analyst John Colnan. “It could get cheaper than it looks if Rio was to come in with a partner who would take the downstream and leave Rio with the mines and smelters,” Colnan said.

Neither Rio nor Deutsche Bank would comment on the Sydney Morning Herald report. Separately, Canada’s Globe and Mail newspaper, citing a banker close to Alcan, said on Monday that Norway’s Norsk Hydro was gearing up for a run at Alcan. BHP Billiton, Companhia Vale do Rio Doce, United Company Rusal, Anglo American and Xstrata are also seen as potential bidders.

Alcan was last trading at around 16 times earnings. Australia’s Macquarie Bank sees Rio’s 2007 profit at around $7.4 billion, giving it a trading multiple of around 12 times earnings, compared to BHP at 11 times and Xstrata at 8.6 times. In the case of a joint bid, private equity funds were seen as likely candidates to assume the downstream assets. “Any of the guys outside of Alcoa will probably sell the downstream operations,” Global Mining Research analyst Tony Robson said. “So, you really won’t know the bid price until you sell the downstream.”

Rio has been notably absent in the latest round of industry consolidation. Its last big acquisition was in 2000, when it purchased North, making it the world’s second-largest miner of iron ore. In Australia, Alcan and Rio are equal 40-40 partners in the world’s biggest alumina refinery — Queensland Alumina — with Russia’s United Company Rusal holding the other 20%.

Alcan, better known for mining and producing millions of tonnes annually of bauxite, alumina and aluminium, also is a substantial provider of engineered and packaging materials. Thanks in part to its 2003 acquisition of France’s Pechiney that led to savings of around a quarter billion dollars in the packaging division alone, Alcan makes packaging for everything from cigarettes to shampoo from 180 manufacturing facilities in 26 countries.

It also rolls, extrudes and flattens much of the aluminium it smelts for use by engine makers, oil drillers and aeroplane manufacturers. Combined earnings from downstream operations before interest, tax and depreciation was $1.77 billion in 2006. Global Mining’s Robson estimates the divisions could sell for as much as $8.1 billion.

Rio’s name emerged as a suitor for Alcan two weeks after speculation that it was being targetted in a $100 billion-plus takeover attempt by BHP. Rio’s shares zoomed to a record at the height of the frenzy before recoiling as the speculation faded. “Mergers and acquisitions have become a recurring theme in the mining sector and will continue,” Rob Nachum, an Adelaide-based analyst for Minalysis said.

A Canadian press report last week said Alcan was in talks with BHP as it considered alternatives to the Alcoa bid. However, the Sydney Morning Herald said on Monday, citing an unnamed source, that BHP had progressed no further than other companies that had made a preliminary expression of interest.