Most on Wall St. believed that Alcoa (AA) was the odd man out in the metals industry. It missed out on buying Alcan. It has been nowhere to be seen in the big takeover tussle between large rivals Rio Tinto (RTP) and BHP Billiton (BHP).

What a difference a day can make. Alcoa and China metals company, Aluminum Corp of China, have picked up 14% of Rio Tinto (RTP) shares. They obviously did it very quietly. The move clearly has the backing of the Chinese central government, which means the money is sitting around to make a full-fledged bid. All of this has to be bad news for BHP Billiton (BHP) which hoped it would get the prize of owning Rio. Maybe its will raise its offer and create an all-out war for RTP.

If it does nothing, BHP may get off easy. Shares in Rio Tinto are already up about 80% over the last year. That puts its market cap at around $140 billion or 5.5x sales. Alcoa trades at less than 1x sales. Being a takeover target obviously has its advantages.

Buying Rio Tinto at these prices would be a huge risk for anyone. Its share price is up about 80% over the last year. Part of that is due to M&A activity, but most is because of the rising price of global commodities.

Commodities prices could be knocked back if the worldwide economic slowdown gets much worse. A prolonged recession may move metals values way down. The stock price of Freeport McMoRan (FCX) has already started to fray. Wall St. liked its deal to buy Phelps Dodge. That is no longer true.

Alcoa’s share price may be the best proxy for what a big metals company is worth. It is down over 15% over the last three months.

A year from now, Rio Tinto’s premium may well look like folly.

Douglas A. McIntyre

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