BHP Billiton Ltd., the world's largest mining group, is considering a bid to rival a $28.7 billion offer for aluminum producer Alcan Inc., and has hired investment bank Merrill Lynch & Co., sources familiar with the matter said.

The emergence of BHP as a possible white knight in the face of Alcoa Inc.'s hostile offer for Alcan came as Alcoa's stock hit a six-year high on a report that the U.S. aluminum company, and not its Canadian rival Alcan, was a target of BHP. Alcoa stock eased to close less than 1 percent higher.

The sources told Reuters that BHP, which trades in Australia and London, has hired Merrill Lynch to explore the possibility of buying Alcan, but stressed that such a move is not definite.

A BHP spokeswoman in Sydney said the company did not comment on speculation. Montreal-based Alcan and Merrill Lynch declined to comment.

It depends whether or not (BHP) can actually see value in the deal, said John Colnan, an analyst at Shaw Stockbroking in Sydney, adding BHP would have no interest in Alcan's downstream manufacturing or extrusion businesses, and would only want the bauxite, alumina refineries and aluminum smelting operations.

BHP could run their scenarios, and Merrill could see if there is interest from third parties to form a consortium. But BHP would be continually running the ruler over every opportunity in the market, Colnan said.

BHP shares were trading up 0.87 percent at A$34.98 in Sydney at 0459 GMT on Tuesday.

BHP is one of a handful of mining companies, along with Rio Tinto, Anglo American, Brazil's CVRD and Russia's Rusal, that several other sources familiar with the matter have said might be interested in bidding for Alcan, which has rejected Alcoa's approach.

Other analysts said a bid for Alcan or Alcoa by BHP was unlikely as it was focused on expanding organically.

BHP has got a very big program of expansions across the board, not just in alumina, and it will probably focus on getting those right, including things like iron ore, Commonwealth Securities analyst Martin Petch said.

Monday's edition of the Times of London said BHP Billiton was targeting Alcoa, rather than Alcan, and had revived plans for a $40 billion takeover of the Pittsburgh-based company. It was the paper's second story in four months saying BHP was eyeing Alcoa.

NEW CEO

The unsourced newspaper report comes prior to Marius Kloppers taking over as BHP's chief executive in October, when Chip Goodyear retires. It was Goodyear who sidelined the initial Alcoa plan, preferring to return cash to shareholders, The Times said.

Kloppers, who heads BHP's non-ferrous materials group, joined Billiton in 1993 before the merger with BHP and was a core member of the team that created the firm's aluminum business.

Most analysts saw a BHP bid for Alcoa as unlikely and said even if there were some truth to the speculation, it would be a thorny deal fraught with operational and regulatory problems.

This is the same rumor that's been around for six months, said analyst Charles Bradford of Bradford Research/Soleil. The current story makes very little sense.

In an unsourced report in February, The Times said BHP and Rio Tinto Ltd. were both considering bids for Alcoa.

Most analysts agreed that anyone eyeing Alcoa would only be interested in its upstream, or mining and smelting, operations, rather than downstream businesses that make products such as kitchen foil.

Indeed, Alcan, which does not have the same type of downstream business as Alcoa, may be a more interesting takeover target for large mining companies looking to increase aluminum operations, sources told Reuters at the time.

Alcan has rejected Alcoa's May 7 cash and stock offer, which expires July 10 and, based on Alcoa's share price last Wednesday, was worth $75.20 a share. Last week, Alcoa CEO Alain Belda said he would hate to have to raise the bid.

Alcoa has said in securities documents that it will likely extend its deadline as it seeks anti-trust approval to put the two companies together.

Alcan argues that Alcoa's bid does not reflect the value of the company's assets, technology and growth prospects.

Alcoa's stock rose nearly 3 percent in New York in early Monday trading to reach $42.80, its highest since June 2001. But it eased later and closed up 0.7 percent at $41.88.

In Chicago, there was hectic options trading on Alcoa, because of The Times report of BHP interest, said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. More than two calls traded for each put as investors jockeyed for position should BHP decide to follow through with an actual bid, he said.

He said the most active options were the calls allowing investors the right to buy Alcoa shares at $50 apiece by mid-July. Those calls traded on volume of more than 6,247 contracts in afternoon trading and cost 25 cents a contract, down 10 cents on the day.

(Additional reporting by Victoria Thieberger in MELBOURNE, Eleanor Wason and Mathieu Robbins in LONDON, Lisa Lee and Steve James in NEW YORK and Doris Frankel in CHICAGO)

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