Alcan-Alcoa saga will feature a global cast

This is the summer of the sequel. Shrek the Third. Spider-Man 3. And now screening in the mining sector: Inco/Falconbridge 2.

Alcoa, clearly feeling the heat as a takeover target, decided yesterday to take control of its destiny by tabling a $27-billion (U.S.) hostile bid for Alcan. The plot line will develop on this thriller when rivals come diving in with their own offers for both these metal miners.

Yesterday, the hedge fund crowd was abuzz at the prospect of a summer that features bids and counterpunches, a corporate drama along the lines of the Inco and Falconbridge affair, which saw the two set a wedding date, then get picked off on the way to the altar.

To understand this script, step back and consider how the world's largest mining concerns now see the world.

Market leaders such as BHP Billiton, Rio Tinto and of late Xstrata are no longer about a single metal. They are run by financiers, not geologists, and the underlying strategy is to leverage massive cash flow from commodity sales into debt, then use that debt to buy a dominant position in every major base metal.

The most important number for this crowd is not the percentage of aluminum in a bauxite deposit. It's EBITDA as a percentage of debt - the company willing to borrow the most wins, unless the commodity cycle turns. (EBITDA represents earnings before interest, taxes, depreciation and amortization.)

Like private equity funds, and U.S. homeowners, the largest mining companies have embraced credit as a tool for building empires. Right now, strong markets in copper, zinc and nickel mean the handful of leading mining companies are all awash in cash, and itching to redeploy that money on diversification. No company wants to be debt-free these days, as an underleveraged balance sheet opens the door to a takeover. Merrill Lynch published a report last week highlighting BHP Billiton, the world's largest miner, as a potential private equity target because of its incredible energy to generate cash.

So now both Alcan and Alcoa, mid-tier players on the global scene, are being stalked. These are once-in-a-lifetime assets. Alcoa's stock price was actually up yesterday, an unusual move for a company making a massive cash-and-shares takeover offer. In this takeover battle, which is likely to play out for months, Citigroup, Goldman Sachs, BMO Nesbitt Burns and Lehman Brothers are advising Alcoa.

Like the Inco/Falconbridge drama, the Alcan and Alcoa takeovers will have an international cast. Russia's Rusal may try to step up for one of the two companies, as it stands to be knocked out of top spot among world aluminum producers. Rusal would have a strategic interest in acquiring a North American beachhead, but would struggle to get an acquisition past competition watchdogs.

The script on Alcan is now being rewritten; as in the past, the company's long-term power contracts with the Quebec government were previously seen as poison pills. After all, the province could negate the electricity agreements if Alcan changed hands.

In a deft bit of stick handling that likely takes Quebec politicians out of the game, Alcoa opened negotiations with a plan to transfer head office jobs to Quebec. The U.S. company promised: "Montréal will become the combined company's global headquarters for primary products (bauxite, energy, alumina and aluminum), as well as for related research and development." They even got the accent right in the French spelling of Montréal.

Alcan's board of directors will step into the spotlight in coming days, likely opening the company up to a full-scale auction that includes a data room, where all the details of its power contracts will be revealed. At that point, all the major players in mining will again take the stage in a Canadian takeover.