BHP Likely to Keep Alcan Smelter Projects

BHP Billiton's proposed takeover of Rio Tinto will likely not affect several billion dollars' worth of planned aluminum investment that Rio inherited when it took over Alcan this year, analysts say.

Expansion projects in the Canadian provinces of British Columbia and Quebec, as well as in Iceland, South Africa, Saudi Arabia and Oman are expected to proceed as part of a top aluminum portfolio for BHP if its proposal -- valued at around $120 billion -- succeeds.

"The aluminum, the alumina, the bauxite and all that, that will be kept. That's the business BHP and Rio are in. They're not going to dispose of those assets," said Ian Howat, analyst at National Bank Financial.

His comments echo those of other observers who believe the timing of BHP's stated interest in Rio -- announced a day after Rio completed its own $38 billion acquisition of aluminum producer Alcan -- is a sign BHP sees the business as an opportunity for growth, rather to shed costs.

"Nobody makes an acquisition in order to destroy what they acquire. If anything they'd want to add to it," said Charles Bradford of Soleil-Bradford Research.

The bid, which has been rejected by Rio as too low, should produce $3.7 billion in annual cost savings after seven years, BHP has said.

It is expected to see scrutiny on the iron ore side, where the combined company would dominate the global market, a concern for buyers worried about pricing competition.

But BHP's aluminum presence would not be as commanding as those of other global players such as Alcoa and Russian producer RUSAL.

"There's a lot of fairly big players and a lot of competition there," said David Whetham, a fund manager at Scotia Cassels.

BHP has said the aluminum business would account for 16 percent of the combined company's pretax earnings.

Cash Added to Bid?

On the cost side, the offer is all stock, and even if BHP is driven to add cash to the offer, it has lined up a $70 billion financing package.

A majority of analysts polled by Reuters last week predicted BHP will have to add cash to the proposed 3-to-1 share offer.

Rio has taken a $40 billion loan to finance the Alcan takeover, and plans to sell at least $15 billion of assets, including Alcan's packaging business.

Analysts doubt the expansion projects would be part of that sell-off.

In addition to a planned 150,000-tonne-a-year smelter expansion at Kitimat, British Columbia, Rio has the 720,000-tonne-a-year Coega smelter project in South Africa, the 350,000-tonne Sohar smelter joint venture in Oman, and a joint venture with Saudi Arabian miner Ma'aden to develop a $7-billion integrated aluminum-making operation.

Rio also has Alcan's planned expansion of the ISAL aluminum smelter in Iceland, which has run into local opposition, and commitments to expansion in Quebec's Saguenay region.

While BHP hasn't spoken specifically about plans for the projects, it did list Kitimat, Coega, ISAL, Ma'aden, and Sohar as tier 1 assets of a potential combined company.

BHP spokesman Illtud Harri said he could not comment on individual assets or on whether BHP would keep Rio's head office for aluminum operations in Quebec, which is a requirement to maintain cheap power deals with the province.