BHP hits record on Rio/Alcan

BHP's Australian-listed stock closed up 1.14% at A$39.16 (US$33.70) after reaching an all-time high of A$39.79 in the wake of Rio's offer for Alcan on Thursday, the mining industry's biggest-ever acquisition.

Rio Tinto slumped A$2.54 or 2.45% to A$101.30 as the Anglo-Australian's chief executive Tom Albanese sought to assure nervous investors that it was not paying too much for Canada's Alcan.

"We are very comfortable with the fact that we have found that right balance between a compelling offer for Alcan shareholders and an offer that is consistent with our approach to value," Albanese told Australian public radio.

Rio on credit watch negative

But international ratings agency Fitch Ratings said it was placing Rio Tinto on credit watch negative, noting the proposed transaction was highly leveraged and taking place "at the top of the current commodity price cycle".

Fitch said the proposal contained risks and required greater clarity regarding the combined group's financial future, describing it as only "modestly positive" for Rio Tinto.

The agency added that a bidding war could still break out for Alcan, which attracted a hostile Aus$33bn cash-and-stock offer from US firm Alcoa before Rio Tinto came in as a 'white knight' saviour.

"Fitch considers that there remains the possibility of competing bids given the attractiveness of Alcan's operations in a consolidating aluminium sector," it said.

Albanese admitted, aside from Alcoa's offer, there had been behind-the-scenes competition when it was holding discussions with Alcan about the deal that will create the world's largest aluminium company.

BHP in line if Rio fails?

Analysts said there was market speculation that BHP Billiton, which had been regarded as a more likely bidder for Alcan than Rio Tinto, may be lining up an offer for Alcan's failed suitor Alcoa.

Alcoa's Australian joint venture partner Alumina rose 15 cents or 1.8% to a record $8.55 on the speculation.

CMC Markets senior dealer Josh Whiting said more consolidation was expected in the global resources sector, where companies are scrambling for scale to take full advantage as unprecedented demand from China drives up prices.

"These speculations are exciting investors further in an environment where many are already bullish due to a rosy outlook for base metals," Whiting said.

"Traders are scared of missing out on the next big takeover announcement in the materials sector."

China factor

Shaw Stockbroking senior resources analyst Ted Lescheke said China was a major consideration behind Rio Tinto's bid, which creates a merged company called Rio Tinto Alcan with headquarters in Montreal.

"Acquiring Alcan's alumina and aluminium operations puts Rio in a solid position to supply China where the average consumption per capita is growing strongly but is still low when compared to most industrialised countries," he said.

"Alcan is well positioned with long-term power contracts whereas China's aluminium smelter costs remain high and rapidly increasing demand for electricity means China's cost issues won't be solved easily."