Anglo-Australian miner Rio Tinto Ltd/Plc has agreed to buy Canada's Alcan Inc. for $38.1 billion to create the world's biggest aluminum producer, the two firms said on Thursday.

Rio, the world's second-biggest miner, said it would pay $101 a share in cash, 13 percent above Alcan's closing price in New York on Wednesday and 33 percent above a rival $28.8 billion cash-and-shares bid for Alcan from U.S. group Alcoa Inc.

Rio said the deal was unanimously recommended by Alcan's board and would help it diversify from its strength in iron ore and copper, as well as boost its position in fast-growing aluminum markets. The two firms said they had also agreed a break fee of around $1.05 billion.

The mining industry is benefiting from soaring metals prices, and established players are seeking deals to fight rising competition from emerging markets.

Analysts were divided whether there would be a counterbid, but agreed the tie-up was likely to spark more deals.

A source familiar with the matter told Reuters that BHP Billiton, the world's biggest miner, and Brazil's Companhia Vale do Rio Doce (CVRD) had also made proposals and were prepared to make all-cash offers, but Rio's was the best deal Alcan was able to broker.

Numis Securities analyst John Meyer said Alcoa and Swiss-based Xstrata were possible counterbidders, but thought BHP might turn its attention to Alcoa.

It's a big improvement on the Alcoa offer, said Charles Stanley analyst Tom Gidley-Kitchin. It puts Alcoa strategy in question (and) makes them vulnerable to a BHP Billiton offer.

At 1000 GMT, Rio shares in London were down 1.8 percent at 3,922 pence. Kepler Teather & Greenwood analysts said the deal made it less likely that Rio could be a takeover candidate.

Shares in smaller London-listed miners -- Vedanta, Lonmin and Antofagasta -- rose strongly on hopes they might be the next targets in the sector.

There is a lot of cash in the market and a lot of cash being generated in the mining sector generally, so you'll continue to see M&A across the board, said Greg Goodsell, equity strategist at ABN AMRO.

ALUMINIUM

Rio Chief Executive Tom Albanese told reporters the firm saw a bright future for aluminum, which is used in products from drinks cans to airplanes.

The demand outlook (for aluminum) for the next 10 years is quite positive, with expected world demand growth to 2011 of over 6 percent and demand growth in China alone of over 15 percent per year, he told a conference call.

The combined group will have the capability to make around 4.4 million tons of aluminum a year, making it the world's biggest producer ahead of current leader, Russia's UC RUSAL.

Rio said it would fund the deal from newly committed bank facilities and sell Alcan's packaging business. It did not anticipate any problems with competition regulators.

Rio also said it expected the deal to boost earnings in the first full year of ownership and to achieve around $600 million of annual synergies, with about half that sum realized in 2009.

Numis Securities analysts estimated the deal would boost Rio's forecast 2008 earnings by 10-12 percent. They said Rio's offer was worth about 14.9 times Alcan's forecast earnings for 2008, a modest premium to the sector, but added that aluminum prices were closer to mid-cycle levels than many metals.

Alcan Chief Executive Dick Evans will head the combined aluminum business, to be called Rio Tinto Alcan and based in Montreal, reporting to Rio Chief Executive Tom Albanese.

Alcoa announced a unsolicited bid of $58.60 in cash and 0.4108 shares for each Alcan share on May 8, which was rejected by Alcan as inadequate. That followed nearly two years of talks that ended in November without a merger agreement.

Earlier this week, Alcoa secured a $30 billion line of credit from its advisers, Goldman Sachs and Citigroup, fuelling speculation it might improve its offer.

Rio said it had secured new banking facilities underwritten by Royal Bank of Scotland, Deutsche Bank, Credit Suisse and Societe Generale.

Rio's main advisers on the deal are Deutsche Bank and CIBC. Alcan is being advised by Morgan Stanley, JP Morgan, UBS and RBC Capital Markets.

(Additional reporting by Geraldine Chua and Michael Smith in Sydney, and Mathieu Robbins in London)

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