Alcoa Play Gives Alumina A Lift

Sydney Morning Herald

Wednesday June 6, 2007

Jamie Freed

ALUMINA chief executive John Marlay said it was too early to determine whether Alcoa's $US27 billion ($32.6 billion) hostile bid for Alcan would succeed, as brokers yesterday upgraded their valuation of the Melbourne company.

Meanwhile, industry sources emphasised rival aluminium players, diversified miners and private equity groups were also taking a close look at a potential bid for Alcoa, which could have the knock-on effect of placing Alumina in play. Alumina's 40 per cent stake in the Alcoa World Alumina and Chemicals joint venture with Alcoa means it could gain control of Alcan's bauxite and refining assets, should Alcoa's bid succeed.

Alcan's refineries are on average more costly to operate than those of AWAC, but Alumina managing director John Marlay told the Herald the Alcan assets were "very attractive" due to strong long-term demand for aluminium and the increasing cost of building new bauxite and refining operations.

Analysts estimate Alumina could have to pay about $US2 billion for its share of the Alcan assets. Mr Marlay said a deal of that scale would likely require a mixture of equity and debt.

Alumina completed a $250 million off-market buyback just two weeks before Alcoa announced its bid for Alcan.

Mr Marlay said he did not regret the buyback even in hindsight, because it improved Alumina's capital structure.

He added it would likely take months before the outcome of the proposed Alcoa-Alcan merger was known.

As reported last week, the Herald understands Rio Tinto has appointed Deutsche's investment banking arm to advise it on a possible bid for Alcan.

Industry sources have since told the Herald Alcoa was also in play and that private equity had already expressed interest in buying the downstream assets which were not coveted by diversified miners such as Rio and BHP Billiton.

A source said private equity could either partner a miner in a joint bid or the downstream assets could be auctioned by the miner at a later date.

Deutsche analyst John Mackinnon told clients that, under the AWAC agreement, any future owner of Alcoa would be forced to offer a 40 per cent interest in its own bauxite and refining assets to Alumina. "This raises the likelihood of Alumina being a target," he said.

Deutsche yesterday raised its valuation of Alumina to $7.50 from $7.10 and increased its share price target by 22 per cent to $8.65, based on higher alumina prices and potential merger and acquisition activity.

Goldman Sachs JBWere increased its valuation of the company to $8.44 from $8.35, based on slightly higher aluminium price forecasts.

Alumina shares closed 1c higher at $7.89 yesterday, having risen 7.6 per cent since Alcoa announced its bid for Alcan on May 8.