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Merger Talk Heats Up Base Metals

Recent courting between metals producers provides a show of confidence in the sector.

Maybe it's a case of spring fever, but an impulse to pair off seems to have hit the base-metals patch again.

Shares of Britain's

Rio Tinto

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were rallying Wednesday on speculation that Australia's

BHP Billiton

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had attempted, but failed, to take over the diversified mining giant.

Both stocks were hitting all-time highs, with shares of BHP rising 5% and those of Rio Tinto up 13% in recent trading. BHP is already the world's largest miner, and the combination of the two firms would create a truly mammoth enterprise.

The conjecture over a possible wedding of the two comes hot on the heels of aluminum giant

Alcoa's

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unsolicited $27 billion bid for

Alcan

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, announced Monday. It is also reminiscent of last summer's war for control of Canadian nickel companies

Inco

and

Falconbridge

.

"The producers, who are in a good position to know the true state of the market, do seem to be very confident," notes William Adams, an analyst at

BaseMetals.com

in London. Last summer, he adds, some observers believed nickel prices were already "toppy," but prices for the metal have subsequently doubled, indicating at least some good judgment on the part of the eventual buyers of the two nickel firms: Brazil's

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Companhia Vale do Rio Doce

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and Anglo-Swiss firm

Xstrata

respectively.

Adams' positive view is echoed elsewhere, with the commodities team at Barclays Capital, also in London, outlining some of the benefits of merger.

"Economies of scale, purchasing power, price setting power, technology proliferation, portfolio diversification; these are just some of the advantages that can be attained," a recent report from the bank states.

The excitement over the possibility of more action in the base-metals patch was helping rally shares of CVRD, up 2%, as well as copper miners

Freeport McMoRan Copper & Gold

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, higher by 1%, and

Southern Copper

(PCU)

, ahead by 1.6%.

The strength across the patch belied modest underlying weakness in copper prices. Contracts for the metal were slipping 6 cents at $3.66 a pound on the Comex division of the New York Mercantile Exchange.

As for precious metals, gold prices were falling $2.50 to $684.90 an ounce on the Comex. Silver prices were lower too, off 15 cents at $13.46 an ounce, as traders remained cautious ahead of the

Federal Reserve

policy statement expected at 2:15 p.m. EDT. Economists will closely scrutinize the wording to look for hints of changes in policy stance, although most observers expect short-term interest rates to remain unchanged.

Elsewhere in the official sector, the European Central Bank says it sold 186 million euros' worth of gold and receivables last week, or more than 11 tons, slightly less than the previous week's sales of about 12 tons.

Central bank gold sales "have accelerated since the middle of March, perhaps related to the higher gold price -- both in USD and EUR -- but it is hard to make the case that the recent acceleration is anything other than a catch-up," writes John Reade, gold strategist at UBS in London, in a markets brief.

As for the gold miners, Prudential downgraded shares of

AngloGold Ashanti

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to a neutral rating from overweight, but the shares had barely moved in early trading.