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bhp and aluminium from todays age

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    BHP faces alumina bid hurdles

    Barry Fitzgerald
    July 16, 2007

    BHP Billiton's possible competitive response to Rio Tinto's $44 billion takeover of Alcan would push the mining giant into anti-competition rows with regulators worldwide, analysts warn.

    Shares in Alumina were up sharply last week on news of the Rio bid, in expectation of BHP Billiton responding with a $70 billion tilt at Alcoa and Alumina, its partner in the global Alcoa Worldwide Alumina and Chemicals alliance.

    It would give BHP Billiton access to coveted aluminium capabilities amid bullish forecasts, and allow it to match its rival.

    But analysts say a BHP-Alcoa-Alumina deal would create a giant entity controlling as much as 35 per cent of global production of alumina, the key ingredient in aluminium.

    The Rio-Alcan combination does not have the same alumina competition concerns for global regulators as its output would be about half of that of a BHP-Alcoa-Alumina combination.

    Analysts warn BHP Billiton could be tied up in knots trying to placate competition regulators if it were to make the plunge, and it could even find some of its own arguments used against it.

    In 2000, South Africa's Billiton — it had yet to merge with BHP — led a campaign with competition regulators that succeeded in having alumina divestment orders issued against Alcoa following Alcoa's acquisition of another US aluminium group, Reynolds.

    Successful lobbying by Billiton prompted US and European regulators to withhold approval for the Reynolds takeover until the Alcoa-managed AWAC reduced its dominance in alumina by selling its 56 per cent stake in the big Worsley alumina refinery in Western Australia.

    The buyer was Billiton, already a 30 per cent partner in Worsley, at a cost of $US1.49 billion. Competition regulators in the US and Europe would still be holding files on the forced divestment of Worsley, including the submissions from Billiton arguing against the very sort of concentration of alumina production that a BHP takeover of Alcoa and Alumina would now cause.

    Despite the regulatory hurdles that BHP would face, speculation that it had Alcoa and Alumina in its sights intensified last week when Alcoa walked away from its hostile $32 billion takeover bid for Canada's Alcan after Rio Tinto launched a friendly $44 billion Alcan offer.

    Shares in Alcoa rose another $US2.06 to $US47.35 in New York and Alumina closed 15¢ higher at a record $8.55 on the local market on Friday. There was speculation that hedge funds that had taken up big positions in Alcoa would now press its management to put it up for auction, with Brazil's Cia Vale do Rio Doce seen as the main competition to BHP.

    Like Rio Tinto, BHP is a super-bull on the outlook for aluminium. It told investors recently that even at modest economic growth, the world will need to build at least one 500,000 tonne-a-year aluminium smelter each year to keep up with China-led demand.

    Alumina is also super bullish, telling investors that alumina/aluminium consumption was forecast to double by 2020 and that the growth in supply needed would be three times the growth rate of the past 20 years.

    The value of Rio's takeover of Alcan represents about 40 per cent of Rio's market value. And while a BHP takeover of Alcoa and Alumina would be much bigger at $70 billion, it would represent about 30 per cent of its market value.

    According to Credit Suisse, a $US48 billion cash bid for just Alcoa could add up to 9 per cent to BHP's earnings, although like Rio's bid for Alcan, BHP's gearing would rise from less than 20 per cent to more than 60 per cent. Rio has said it expects to defray the cost of its Alcan acquisition by asset sales.
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