iron demand may triple next 25 years

Rio Plans May Increase Value by $31 Billion, UBS Says (Update4)

By Rebecca Keenan

Nov. 27 (Bloomberg) -- Rio Tinto Ltd., fighting a takeover offer from BHP Billiton Ltd., may boost its value by $31 billion with plans to raise iron-ore output and get better-than-expected cost savings from the acquisition of Alcan Inc., UBS AG said.

``Higher iron-ore production could add around $28 billion in value,'' Sydney-based UBS analyst Glyn Lawcock said in a research note dated Nov. 26. The cost savings from Rio's $38.1 billion purchase of Alcan may bolster Rio's value by $3 billion, he said.

Rio Chief Executive Officer Tom Albanese outlined the plans yesterday as part of his attempt to repel BHP's unsolicited $129 billion all-stock takeover proposal, which he said undervalues the world's third-largest mining company. Its London stock is trading at a 9 percent premium to the offer, signaling investors expect a higher bid, possibly including cash.

``We could see a new bid in the next two months,'' Commonwealth Securities Ltd. analyst Juliana Roadley said in an interview today. ``If they throw in some cash I think the investors would be quite happy with that.''

Rio fell 66 pence, or 1.3 percent, to 5,166 pence in London. The London-traded shares have gained 19 percent since Melbourne- based BHP, the world's biggest mining company, announced its offer Nov. 8.

BHP could afford to offer $27 billion cash to sweeten the proposed three-for-one stock offer for London-based Rio, Lawcock said Nov. 14. BHP could pay as much as 7,100 pence ($147) a share for Rio and an offer of 6,300 pence may be high enough for Rio's board to recommend the proposal, Lehman Brothers Holdings Inc. said Nov. 23.

Alcan Acquisition

Iron-ore production could treble to more than 600 million metric tons a year, Albanese said yesterday. Cost savings from the Alcan acquisition may be $940 million, 50 percent more than forecast, Rio said. A review found possible assets sales of as much as $30 billion, Rio said.

``BHP will come back and make a firmer offer now Rio has outlined some developments and where they think the value lies,'' ABN Amro Holding NV analyst Warren Edney said in Melbourne by phone today.

Rio said yesterday that demand for iron ore, copper and aluminum may as much as triple over the next 25 years, driven by expanding economies in China and India. Rio is the world's biggest aluminum producer and second-largest supplier of iron ore, used in steelmaking.

The estimated cost of increasing iron-ore output to the target of 600 million tons could be $26 billion, Rio spokesman Gervase Greene said today. The company produced a total of 133 million tons of the ore in 2006.

Boosting the company's ore output in the Pilbara region of Australia to 320 million tons from 220 million tons will cost $10 billion, Greene said. A further rise to 420 million tons is being studied and ``while costs are not able to be calculated yet, it would be approaching that same figure,'' he said.

A $6 billion investment in the Simandou project in Guinea will add an initial 70 million tons, he said.

To contact the reporter on this story: Rebecca Keenan in Melbourne at [email protected]