A year after Tom Albanese, chief executive of Rio Tinto, paid $44bn (£23bn), including debt, to buy Alcan, he says critics of the deal have been proved wrong, with the business becoming an important part in Rio's defence against a takeover attempt by BHP Billiton.
"In July last year we saw energy costs going up and slower Chinese aluminium output, and that this would push up aluminium prices," says Mr Albanese in defence of his purchase of the Canadian aluminium producer at $101 a share against charges that he overpaid.
In the early months of this year power crises around the world disrupted metal production and caused forward aluminium prices to surge.
Dick Evans, chief executive of Alcan at the time of the friendly deal and now head of Rio Tinto Alcan, Rio's Montreal aluminium division, agrees that the price now looks modest. "If I were doing the deal today, I would get more than $101 a share."
Aluminium production is very energy intensive, with electricity accounting for about a third of costs, so aluminium companies stand or fall on the competitiveness of their energy supplies. What attracted Rio to Alcan was its hydro-electric powered smelters in Quebec and British Columbia.
Rio says these assets will become more valuable as fossil fuel costs continue to rise and the idea of carbon-pricing takes hold. "The business has a unique set of physical conditions that would be difficult to replicate," said Mr Albanese.
Rio's trumpeting of its aluminium business is one of the three main planks, along with promotion of its iron ore and copper businesses, of its defence against a $160bn hostile takeover attempt by BHP Billiton, the world's largest mining company.
Rio has rejected BHP's offer of 3.4 shares for each Rio share as too low, saying it does not recognise its growth prospects.
BHP, which has a much smaller aluminium business than Rio, has been arguing that aluminium production, because of its high energy costs, is a low-margin business. But Rio says that by expanding its production in Canada, where energy costs are low, and moving into oil and gas-rich countries such as Oman, Saudi Arabia and Algeria, it can make good money.
Rio Tinto Alcan's hydro-electric dams in the Lac Saint Jean-Saguenay region of Quebec harness the power of rivers draining a watershed twice the size of Switzerland.
Its six smelters in the area produce 1.1m tonnes of aluminium a year, about a quarter of the group's total, which is set to rise after the fast-tracking of expansion plans. Alcan had already pledged to spend $1.8bn in Quebec, but since the takeover by Rio this has been increased to $3.5bn.
The mining industry has a record of responding to high metals prices with a glut of new production, but Mr Albanese says the growth of China and India will be more than enough to justify his group's expansion plans.
"It is not hard to see a doubling of demand [for aluminium] between now and 2022, meaning that the world will need 31 more Saguenays," he says.
Source: FT.com
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