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Commodities Trading: Aluminum’s Alcoa bribes (maybe) and buys

Posted March 21, 2008

"After naming Merrill Lynch CEO Stan O’Neal (yes, that Stan O’Neal, the one who was forced to step down after revealing $8.4 billion in mortgage writedowns for the investment firm last fall) to its board, Alcoa and Chinese competitor Aluminum Corporation of China, or Chalco, as it’s known, bought a 9% stake (12% of its London shares) in Rio Tinto." — Stephanie Grimmett

by Stephanie Grimmett

Baltimore – (TFN):  Despite record-breaking commodities prices, aluminum giant Alcoa (AA: NYSE) is not having the best of times right now.

The U.S. Justice Department just asked a judge in Pittsburgh to hold off on a lawsuit against the company.

The government of Bahrain is suing Alcoa for what it says was a 15-year pattern of bribing government officials and overcharging to Aluminum Bahrain BSC, a long-time Alcoa customer.

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But don’t get too excited. The DOJ is asking the civil court to take a break while it investigates a possible criminal case against Alcoa. Ouch.

The news hasn’t had too bad an effect on the company’s stock, but AA has yet to gain any new ground after its dramatic upsurge from mid-Janaury through February.

After naming Merrill Lynch CEO Stan O’Neal (yes, that Stan O’Neal, the one who was forced to step down after revealing $8.4 billion in mortgage writedowns for the investment firm last fall) to its board, Alcoa and Chinese competitor Aluminum Corporation of China (ACH: NYSE), or Chalco, as it’s known, bought a 9% stake (12% of its London shares) in Rio Tinto.

And the plot thickens: If you remember, BHP Billiton (BHP: NYSE) was, and still is, chasing after a Rio Tinto (RTP: NYSE) takeover since late last year. Even after sweetening its offer price, Rio Tinto hasn’t accepted BHP’s deal. And European and Chinese steel producers have been screaming to regulators that the merger will create a practical monopoly on iron ore.

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Chalco and Alcoa stole BHP’s thunder when they bought their stake in Rio for a higher share price than both the cost of Rio Tinto’s London stock and the rate BHP was willing to pay for it in a share exchange.

Neither Alcoa or Chalco has said whether the stake is an attempt to counter BHP or just a bet that Rio Tinto is going to come out a winner in its battle to prevent a takeover. But the two companies did announce their buy-in at the last minute before BHP came out with a larger bid for Rio Tinto.

And that’s it. Since the waters cleared after the investment in Rio Tinto, sometime around the end of February, Alcoa has seen only small movement in its share price. AA stock has bounced up and down between $39 and $34, but it hasn’t had the momentum to break out of that range.

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Chalco and Alcoa are currently in talks to discuss raising their stake in Rio Tinto since its recent stock slip of 5%. And we’ll see if a new buy on Rio shares is enough to move Alcoa out of its current doldrums.

If you’d like to take a bet on a higher Rio Tinto stake, Chalco and Alcoa both trade at about the same price. Personally, I favor Chalco in this deal, since it’s not currently sitting on a possible grand jury indictment (that we know of). But you should make your own decision as to which one is the better deal.

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Posted by Stephanie Grimmett · Filed Under Gold and Resources 

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