Rio Tinto sets sights on Alcan

Rio Tinto Ltd has hired Deutsche Bank to advise it on a possible bid for Canadian aluminium producer Alcan Inc, the Sydney Morning Herald newspaper reported on Monday.

Rio Tinto is the latest mining house reportedly sizing Alcan up for takeover after the latter rejected a $28.4-billion bid by Alcoa. An Alcan-Rio linkup will 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 billion or $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. BHP Billiton Ltd, Companhia Vale do Rio Doce, United Company Rusal, Anglo American and Xstrata Plc 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 with 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,” he added.

Rio absence

Rio has been notably absent in the latest round of industry consolidation. Its last big acquisition was in 2000, when it purchased North Ltd, 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 per cent. Alcan, better known for mining and producing millions of tonnes annually of bauxite, alumina and aluminium, is also 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.

The company’s combined earnings from downstream operations before interest, tax and depreciation was $1.765 billion in 2006.