Rio Could Boost Profit With Alcan Takeover, Credit Suisse Says

Rio Tinto Group, the world's third- largest mining company, could boost earnings as much as 7 percent next year through a $40 billion takeover of aluminum producer Alcan Inc., Credit Suisse Group said. After buying Alcan, aluminum would account for 32 percent of Rio's 2008 earnings, up from 9 percent in 2006, Credit Suisse analysts led by Jeremy Gray said in a July 9 report. Alcan, the world's third-largest aluminum producer, in May rejected a $27.9 billion hostile offer from rival Alcoa Inc. and said it was in talks with other suitors. Rio Tinto, which hasn't made a major acquisition since 2000, this month approved a $1.8 billion expansion of an alumina refinery in Australia to meet rising demand from China. "Aluminum has been the worst performing base metal in the last five years," the analysts said. "But its prospects appear to be improving as supply growth from both China and Russia appears to be more muted than anticipated." Rio has hired Credit Suisse and Deutsche Bank AG to explore opportunities in the mining sector, including a possible bid for Alcan, the Daily Telegraph said July 6. Rio Tinto's spokesman Ian Head, based in Melbourne, declined to comment on that day. A fully debt-funded acquisition of Alcan would increase Rio's aluminum production to 4.2 million tons from 0.8 million tons, and raise alumina production to 7.5 million tons from 3.5 million tons, Credit Suisse said. The brokerage assumes there would be cost savings of $250 million and that Rio would pay a 20 percent premium to Alcan's share price. "The rationale of such a deal could be to combine the strengths of Rio Tinto (bauxite and alumina) with Alcan's strength (aluminum)," they said. Alumina is refined from bauxite ore. Four or five tons of bauxite yield about two tons of alumina, which is then smelted into the light silvery metal used in packaging and aircraft parts.