Shares in mining group Rio Tinto surged on Wednesday on talk that bigger rival BHP Billiton was planning a bid which would create the world's fifth biggest company, although Rio denied it had been approached.
Talk swept Australian markets that BHP was readying a hostile bid for Rio after it had rebuffed a friendly offer of A$100-A$110 per share, a premium of up to 23% from Tuesday's close, traders and analysts said.
But Rio later issued a statement denying there had been an offer. "Rio Tinto is not aware of any takeover approach from BHP Billiton," it said in a statement. BHP declined to comment.
Rio shares were up 5.2% at 3,501 pence in London, after hitting a record high of A$99.69 in Sydney and closing there up 6.5% at A$95.50.
BHP shares were up 2.2% at 1,211 pence, having hit a record high of A$32.58 in Sydney and closing up 2.4% at A$31.93.
The DJ Stoxx European mining sector index was up 1.7%.
Based on the Sydney closes and latest London prices, the combined market value of BHP and Rio is about $250 billion, which would make it the world's fifth largest company behind Exxon , General Electric (parent company of CNBC), Microsoft and Citigroup .
"Combining the two groups would result in significant balance sheet and head office cost savings as well as greater purchasing power," Numis Securities analyst John Meyer said in a note, adding he would expect significant regulatory opposition.
"A combined group might see savings in the order of the $1 billion indicated in the Alcoa offer for Alcan ," he said.
The mining and metals sector has profited handsomely from a prolonged boom in mineral commodity prices after years in the investment backwaters and consolidation activity has been rife.
On Monday, U.S.-based aluminium giant Alcoa said it would make a hostile bid for Canadian rival Alcan for nearly $27 billion, after talks between the two failed.
BHP Billiton resulted from the merger of Australia's Broken Hill and London-listed Billiton in 2001.
Since that time, it has made only one major purchase, buying Australian nickel, copper and uranium miner WMC for around $6 billion, despite widespread consolidation in the sector.
BHP has chosen instead to reward shareholders with billions of dollars in share buybacks.
Rio is the product of a merger of RTZ of Britain and CRA of Australia in the 1990s.
Leadership of both companies is in flux, fuelling the speculation of a link-up.
BHP Chief Executive Chip Goodyear, who helped transform the company into the world's biggest mining house, is leaving by year end. A successor has not been named.
Rio's chief executive Tom Albanese, a New Jersey-born geologist, has been in the job less than two weeks and is regarded as having an appetite for growth.
Citigroup said in a broker note this week that Rio's hefty cashflow made it an attractive takeover target for private equity firms, although BHP would be a more likely bidder given synergies that exist between the two companies, particularly in iron ore and copper.
While BHP and Rio compete head-to-head in iron ore, aluminium and derivative products, copper and uranium, the pair are also partners in the giant Escondida copper mine in Chile.
A marriage of the companies would assemble a force in iron ore mining -- each digs millions of tonnes of ore annually from neighbouring lodes in far western Australia -- to rival the top producer, Brazil's CVRD.
In copper mining, the enlarged company would rival Codelco of Chile, which mines around 1.3 million tonnes of copper in concentrate per year, though the combined entity would lag the Chilean state-owned producer in refined output.
BHP-Rio would account for 6.6% of world primary aluminium production and 9.75% of alumina output.
Rio showed a 2006 profit of $7.8 billion. Macquarie Bank sees 2007 profits around $7.4 billion, giving it a trading multiple of around 12 times earnings, compared with BHP at 11 times and Xstrata at 8.6 times.
BHP Billiton made $10.45 billion in net profit last year and this year could earn $13.2 billion, according to ABN Amro.
Both Rio and BHP are dual listed on the Australian and London bourses. The Australian government would be unlikely to interfere in a bid by BHP, analysts said.
The cost to insure BHP's dollar debt against default jumped on the report, with its five-year credit default swap spread up 5 basis points to 17 basis points.