Rio On The Road To Spruik Aluminium

The Age

Wednesday April 30, 2008

Barry FitzGerald

RIO Tinto gets the chance today to lend some weight to its claim that it would rather be the world's No. 1 aluminium producer than the 60th-ranked oil producer like its hostile takeover suitor, BHP Billiton.

The dig at BHP's globally small but highly profitable oil division infuriated BHP chief Marius Kloppers. He responded last week by claiming Rio had missed the boat on both China and booming oil prices.

Rio nevertheless gets the chance to ram home its point in investor and media briefings on its aluminium division, now known as Rio Tinto Aluminium (RTA) after last year's $US38 billion acquisition of Alcan.

RTA's Montreal-based chief executive, Dick Evans, heads up the roadshow, which will take in Melbourne today, followed by Sydney. It will come as no surprise to BHP that Mr Evans will talk up the fact that key assumptions in the Alcan takeover - most notably the aluminium price and synergy benefits - are being exceeded.

Aluminium prices have improved sharply from the (calendar) 2007 average of $US1.20 a pound. It is now trading at about $US1.34 a pound, and forecasters including Barclays Capital and UBS say the metal could be on its way to $US2 a pound.

Rio will be hoping it does as a movement of US10? a pound from the 2007 average could boost its earnings by $US620 million. But exchange rate movements, such as the strong Canadian and Australian dollars, can take back much of that gain .

Mr Evans could also highlight the "clean and green" component of much of RTA's aluminium production thanks to its access to hydro-electric power in Canada, as well as pass comment on the situation in South Africa where BHP's aluminium unit is having to deal with mandatory power cuts to its smelters because of southern Africa's power crisis.

His arrival comes as BHP's share price continues to outperform Rio's because of strength in oil prices, fuelled by strikes affecting North Sea oil output and attacks on facilities in Nigeria. BHP's spurned 3.4-for-1 scrip now values Rio shares at $149.22 compared with Rio's market price of $141.20, a BHP share ratio of 3.2 shares.

Not too much is being read into the 5.6% premium implied by the BHP offer as the group has yet to lodge its application for anti-trust clearance with European regulators. When it does, the regulator can take 90 days to make a decision beyond a preliminary assessment period of 25 to 35 days. Even then, the regulator could extend its deliberation.

Meanwhile, Rio has had some success in its BHP-criticised development pipeline by securing a tax deal with Indonesia for the proposed $US2 billion development of an initial 45,000-tonnes-a-year mine in Sulawesi.

The president of Rio's Indonesian unit, Mike Jolley, said that agreement was based on a combination of fixed rates and prevailing regulations, without saying what they were. "This will provide sufficient certainty to the company to support a multibillion-dollar investment," he said.

To complete the "contract of work" covering the development Rio still needs to secure agreements from the regional and provincial governments.

Once that is achieved, the contract will be submitted to the Indonesian parliament for review.

Rio said it believed the Sulawesi deposit was one of the best undeveloped nickel resources in the world. The eventual aim is to increase annual production to 100,000 tonnes of nickel.

The reporter owns BHP shares.

KEY POINTS

? Rio Tinto Aluminium is briefing investors and media in Melbourne today.

? Aluminium prices are on the rise after Rio's purchase of Alcan last year.