The Next Big Metals Merger?

An article I chanced upon Thursday was poignant, dealing with couples remaining together because they simply can't afford to split in the current economy. But what it didn't touch on was the possibility of two corporations being forced together by the same atrophying economics.

You know about the tattered courtship of mining giants BHP Billiton (NYSE: BHP  ) and Rio Tinto (NYSE: RTP  ) . BHP had been preening its feathers and unsuccessfully courting its British rival for about 18 months. But last month it backed off on the basis of plunging commodities prices.

But fear not. Their failed dating game could result in another corporate marriage. I'm willing to crawl out on a limb and predict at least the strong likelihood that, largely because of the BHP-Rio Tinto non-merger, aluminum producers Alcoa (NYSE: AA  ) and Aluminum Corp. of China (NYSE: ACH  ) -- Chinalco to its friends -- could ultimately be headed down the isle.

You may recall that, because it was able to outbid Alcoa for Canada's Alcan last year, Rio Tinto is now the world's second-largest aluminum producer. And you probably also remember that earlier this year, Chinese steelmakers were concerned that a BHP-Rio Tinto combination could push then-skyrocketing iron ore prices to the vicinity of the moon. In part as a result, Alcoa and Chinalco teamed up for a 9% stake in Rio Tinto.

Their obvious objective was to position themselves to thwart the big mining combination. More recently, however, it had appeared that Alcoa was ideally positioned to acquire some or all of Rio Tinto's aluminum assets in the event the two bigger companies got together.

Now, though, all that is history. Aluminum prices have plummeted almost overnight, Alcoa's shares are down 80% from their 52-week high, and the value of a Rio Tinto stake has plunged by about the same amount. So what's a good aluminum producer to do?

Alcoa, like metals and mining companies across the globe -- including copper producer Freeport-McMoRan (NYSE: FCX  ) -- is cutting production and endeavoring to ride out the storm. But something tells me that it's not crazy to imagine a Chinalco-Alcoa wedding.

Oh sure, there'd be the need to gain approval for a Chinese purchase of major U.S. assets, but even that doesn't appear to be an insurmountable obstacle. The combination would provide the pair, who already have a history of cooperation, with an opportunity to cherry pick their most efficient operating facilities at a time when cost cutting is the name of the game.

This possibility appears to be well worth Foolish scrutiny. Indeed, it could even provide an eventual means to strengthen your portfolio. For now, however, please limit your role to observation. The metals sector has been too badly pounded to warrant the commitment of your investment pesos.

For related Foolishness:

Fool contributor David Lee Smith doesn't own shares in any of the above companies. He does, however, welcome your questions or comments. The Fool has a disclosure policy that'll never be pounded.


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