August 27, 2008

Alcan Deal Helps Lift Profit at Rio Tinto

By David Jolly

Rio Tinto, the global mining company, posted record first-half profit Tuesday, bolstering its effort to fend off a hostile takeover by BHP Billiton.

Rio Tinto said results had been lifted by booming demand for iron ore from steel makers in Asia and by the acquisition of the Canadian company Alcan for $38 billion in October.

Net income more than doubled in the January-June period to $6.9 billion from $3.3 billion a year earlier. Revenue rose to $27.2 billion from $12.1 billion. Rio Tinto also raised its interim dividend by 31 percent to 68 cents .

Rio Tinto's underlying earnings, which exclude interest and taxes, rose to $5.5 billion in the first half from $3.529 billion a year earlier. Analysts polled by Reuters Estimates had, on average, expected underlying earnings of $5.1 billion.

Shares of Rio Tinto, which have risen more than 54 percent during the past year, were down 29 pence, 0.56 percent, at pound(s)51.50, or about $95.80, in London.

The declines were part of a broad fall in mining stocks as commodity prices slipped. Baoshan Iron & Steel, the largest Chinese steel maker, said it would cut prices for some steel products on expectations that demand from automakers and appliance makers would slow. Resource company investors are concerned that the slowdown in the global economy will weigh on raw materials prices.

In June, Rio Tinto announced an 86 percent increase in the price of its Australian iron ore in the belief that demand from Asia would remain high.

Shares in BHP, the world's largest mining company, were down 20 pence, or 1.18 percent, at pound(s)16.78, in London.

BHP, which last week posted annual net income of $15.4 billion, wants to buy Rio Tinto to cut costs, obtain a bigger share of metals markets and increase its pricing power. It has offered 3.4 BHP shares for each Rio Tinto share, a bid that valued Rio Tinto at about $137 billion, based on the BHP share price Monday in London.

Rio's board has rejected the BHP offer as too low. Tom Albanese, the Rio Tinto chief executive, said Tuesday during an interview by phone that the bid remained "a long way off" from what Rio Tinto believed to be a reasonable offer. He noted that Rio's top investors had been raising their stakes in the company, suggesting that shareholders "are comfortable with the position we've taken."

Tobias Wrner, an analyst at MF Global Securities in London, said BHP Billiton would need to raise its offer to win a deal, considering the strength of the recent earnings and Rio Tinto's growth potential. The Rio Tinto shares are worth "at least" pound(s)69 on a standalone basis, he said in a research note.

"We've put a very compelling offer on the table," Alberto Calderon, chief commercial officer for BHP, said during an interview by phone. "Nothing has changed" with Rio Tinto's strong first half, he said.

Calderon said that if Alcan's contributions were removed from Rio Tinto's latest numbers, the companies' latest results would look equally good. Rio Tinto would contribute about 36 percent of net profit from a combined BHP-Rio Tinto, he said, and that figure has been fairly constant.

Any combination would have to clear significant regulatory reviews in major markets.

A takeover of Rio Tinto would give BHP control of almost half the Asian supply of iron ore, the main ingredient in steel, and analysts say there could also be antitrust issues in the areas of titanium, uranium and aluminum production.

Rio Tinto's acquisition of Alcan created the world's largest producer of bauxite, the main raw material for making aluminum.

U.S. regulators in July gave the BHP-Rio Tinto deal their provisional approval, but European Union regulators have widened their investigation and are expected to rule by Dec. 9.

Australian regulators, who have noted concerns about pricing power in the iron ore market, are expected to rule on Oct 1.

The bid has been complicated by Aluminum Corp. of China, or Chinalco, which in February joined with Alcoa, the U.S. aluminum company, to buy a 12 percent stake in Rio Tinto. Chinalco's move was seen as an effort to fend off BHP or to position itself to pick up valuable pieces that might be divested to meet regulatory demands.

On Sunday, Chinalco won approval from Wayne Swan, the Australian treasurer, to increase its stake in Rio Tinto's London arm to 14.99 percent, which would give it about 11 percent of the group, Swan said.

Originally published by The New York Times Media Group.

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