Prudential not ruling out bid for Alcoa, Alcan by Anglo-American

Prudential said it would not rule out a bid for North American aluminium majors Alcoa or Alcan from Anglo-American after Anglo hired former Alcan senior vice president for primary aluminium ingot products, Cynthia Carroll.

Prudential said, "We believe the hiring of Cynthia Carroll from Alcan raises the possibility that Anglo-American will enter the aluminium business." Its larger competitors Rio Tinto, BHP Billiton and CVRD each produce bauxite, alumina and aluminium metal ingot. Anglo-American, Xstrata and Teck Cominco are smaller diversified mining houses without aluminium exposure.

"A takeover bid for Alcan, Alcoa or Century Aluminium cannot be ruled out," it said. "In our view, the retention of Cynthia Carroll's expertise and business experience provides Anglo-American with that option. We view Alcoa or Alcan takeover talk more seriously in this context."

Anglo-American's participation in a greenfield smelter construction project is another option, it said. Presently, projects in Saudi Arabia, Qatar and elsewhere are available, but have no industry partner. "Moreover, Alcan at Coega in South Africa, Alcan at Sohar in Oman, Alcoa in Iceland and Trinidad, and Rio Tinto in Abu Dhabi have driven 'hard bargains,' and it is possible that Anglo-American can promote itself as a better corporate partner," it said.

Prudential noted that Anglo-American has sold a portion of its AngloGold former 51% shareholding and plans to divest the remaining 40%. It plans to spin off its forest products division to the public as an IPO. "It is logical that it could also divest its platinum and diamond units Amplats and DeBeers," it said.

Prudential added that China's aluminium output is expected to rise to 10.4 million mt in 2007 from 9.2 million mt in 2006 to reach a 28,480 mt/day rate. Output for the rest of the world rises to 24.7 million mt in 2007 from 23.9 million mt in 2006. Prudential said its estimate of $1.05/lb London Metal Exchange price for next year is below the current $1.25 price.

"We have estimated earnings gains from lower costs and expiration of prior fabricated product contracts at prices nearer to 83 cents/lb, such as expiring beverage can sheet contracts," said Prudential. "We will watch Chinese output gains and potential restarts of these several older smelters very closely," it said, adding that "the odds of a spike to $1.50 or $2.00 aluminium clearly fall as metal output rises."

Prudential said, "We rate aluminium industry favorable as we are encouraged at the robust 5.5% demand growth in 2006 despite several adverse developments." The smaller auto mix is skewed away from SUVs with 600 lb of aluminium towards cars with 225-250 lb of aluminium each. "While new capacity from China, the Mideast, Russia, Iceland and other places is a concern, the larger Mideast smelters have not completed feasibility study nor ordered key infrastructure, like desalination plants. Lead times suggest output after 2010," said Prudential.