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RIO $73.60

possible merger between Alcoa and Rio Tinto

  1. tobyjack

    9,236 Posts.

    It’s out there

    Posted on Jan 31, 2015Written by Paul Adkins
    Finally someone has run the story.
    Today’s Australian newspaper has a story about a possible merger between Alcoa and Rio Tinto, where the two company’s aluminium smelters would be spun off into a new company.

    I first heard the rumour in November, leading me to write this cryptic post. There’s been circumstantial evidence, but no smoking gun.
    • Alcoa CFO William Oplinger told a Goldman Sachs conference last month “There’s no such thing as a core asset.” And he was quoting Alcoa President Klaus Kleinfeld. Was this a clue?
    • Alcoa is reorganising its internal structure, creating separate departments along divisional lines.
    • Rio has been making some internal changes as well. Perhaps a wise move to keep certain key people to yourself, and to make the transition to a new entity a little cleaner.
    This story has been widely discussed, and it’s been a surprise that it hasn’t appeared in the press before now. I have had people from all corners talking to me about it – USA, Moscow, Sydney, London and Europe. I decided not to run it, given the implications for shareholders and employees.

    Of course, all this is not to say that it is true. One source told me that the story doing the rounds in London was that the merger was between Rio and BHPB.

    The Australian article says that Rio has said it is simply not correct. Time will tell. The article also says that it’s only smelters in Europe and North America, but that makes no sense, since it would leave RT holding the Australian assets that it tried to spin off just 3 years ago under the Pacific Aluminium brand. All or nothing, surely.

    The article also says it’s about countering China, but this makes even less sense. Alcoa has been positioning itself as a provider of engineering solutions, and any spare capital it has is going downstream, not into maintaining expensive smelters. Divesting itself of the burden of primary metal would free it to pursue its target markets in auto and aero. Besides, China is not a great threat to the rest of the world in the long term, despite the recent flurry of semis exports.

    Would such a play help RT in the war against Glencore? Glencore would certainly be interested in RT’s aluminium assets, primarily for the trading and premiums available. But I am not sure that spinning them off into a JV with Alcoa is enough of a defensive play, though it is probably not the only arrow in Sam Walsh’s quiver.
    I am told the new entity would come pre-equipped with long-term supply contracts for alumina, and long-term sales contracts for the metal. After all, the last thing Alcoa would want to do in its exciting new world is lose supply of metal.

    Here’s the transcript of the story. I can’t find a hot link to the newspaper, as I am not a subscriber, and I thank MK for sending this to me. Now that it’s out there, we will get a lot more information.

    SPECULATION about the defensive manoeuvring possibilities of Rio Tinto ahead of Ivan Glasenberg’s Glencore being able to step up its takeover stalking of the mega-miner has gone in to overdrive.

    A phoney war exists between the pair because under British takeover laws, Glencore is banned until April from saying anything about its ambitions after its initial approach for a “merger’’ with Rio was rejected last July. That has not stopped chatter around the next move by either party, notwithstanding the developing theme that the ambitions of the smaller and more leveraged Glencore no longer match its capability because of the severe crash in commodity prices.

    The latest talk has been of a planned aluminium metal merger between Rio’s Alcan and US major Alcoa. Industry gossip has been that the pair are planning to combine their aluminium smelting assets in Europe and North America in an attempt to counter the rise of the Chinese aluminium industry, as well as blindsiding Glencore. China has come to dominate the global aluminium industry in the space of 15 years, so there is a requirement for a pushback by Western producers, so the chatter goes.

    Given antitrust regulators forced the separation of the Canadian focused Alcan from its US parent Alcoa in the 1940s, there is some irony to the speculation. Such is the dominance of the Chinese industry in the lightweight metal that antitrust concerns no longer matter, or so they say.

    The second theme goes directly to the stalking of Rio by Glencore, with a pre-emptive aluminium metal merger (the talk has been that bauxite and alumina operations would be excluded) seen as something of a poison pill to Glasenberg’s ambitions. Like much of the chatter around what will happen come April, the Alcan-Alcoa smelting merger is a bit of phoney war. So much so that Rio this week went beyond the standard “We don’t comment on speculation’’ to say that the rumours on the smelting merger were simply “not correct’’.

    Promoters of the talk nevertheless point to Alcoa’s interest in bidding for Alcan before Rio knocked out all-comers with its over-the-top $US38 billion takeover of Alcan in 2007. Along with its Comalco aluminium interests, the Alcan acquisition propelled Rio in to the top four of the world’s biggest aluminium producers along with Chinalco (its biggest shareholder with 9.8 per cent), RUSAL and Alcoa. The Alcan acquisition was horribly timed and prompted massive writedowns since it was made.

    Rio also recently planned to rid itself of the underperforming parts of the business in Australia and New Zealand through the float or trade sale of Pacific Aluminium. That fell victim to poor market appetite for the assets caused by high labour and energy costs plaguing the local operations, and weakness in metal prices. The sale was abandoned in August 2013.

    The now-rejected speculation that Rio and Alcoa are planning a merger of their North American and European interests goes to the Australian/NZ operations continuing to be a slog at current metal prices. In recent Rio briefings, it has become clear the company is increasingly comfortable with its broader aluminium exposure, to the point at which it would argue that merging the smelting assets with those of Alcoa would be going backwards in terms of quality.

    While the theme of the US chatter is that Alcoa alone could knock the Alcan smelters in to shape, Rio would strongly argue that a smelting combination would make no sense at all. Apart from anything else, a painful restructuring of its aluminium interests now has 80 per cent of its smelters in the first cost quartile of the global cost curve, with the remaining 20 per cent in the second quartile.

    Meanwhile, Glencore is an aluminium producer itself, if not to the same scale. While Rio’s iron ore, copper, aluminium, mineral sands and coal are all of interest, the trading opportunities in aluminium metal would have particular appeal to Glencore. So it can be said that a Rio minus its aluminium smelting interests would be less appealing to Glencore with its marketing arm.

    Increasingly, there are doubts Glencore will be able to return with anything meaningful come April. In a January 23 note, JPMorgan said Glencore looked to face the “most painful choices’’ of the mining heavyweights in dealing with the crash in commodity prices. It said because Glencore’s credit rating was crucial to supporting the trading business, capital expenditure cuts, assets sales and a cut in its dividend were all possible


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