Rio Tinto thwarted Alcoa's plans to wrap up Alcan, yet lower aluminum prices may ultimately foil the union.
"Rio way overpaid for Alcan," Tom Winmill, portfolio manager for the $200 million Midas fund, says of the $38 billion deal. "The new CEO at Rio says it's all about China, but China will be a net exporter of aluminum in a few years. This is more of an ego play for Tom Albanese, who is trying to make his mark."
According to Morningstar, Winmill's fund is up more than 24% year-to-date and has an average return of more than 40% annually over the past three years.
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Winmill is negative on aluminum prices due to increased supply, expecting the metal to drop to $1.10 a pound from $1.25. He maintains a bearish opinion even as merger-and-acquisition activity has elevated stock valuations among the dwindling number of producers.
"This is a short-term negative for Alcoa, which has always been a struggling producer," says Winmill. "The question is whether they will be taken out at this price, which I view as a bit high." Alcoa's stock, which has been buoyed by rampant rumors about a buyout from Melbourne-based mining giant BHP Billiton, currently trades at 14.5 times 2008 estimates.
Winmill's cheaper and better-run alternative is Century Aluminum, which sports a forward multiple of just under 11.
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Prospectus
