Traders weigh mining sector consolidation

BHP Billiton Ltd.'s approach to rival Rio Tinto PLC with an all-share takeover proposal shone the spotlight on the resources sector, as traders weigh the likelihood of further consolidation.

Among those companies attracting interest was Phoenix-based Freeport-McMoRan Copper & Gold Inc. and the largest iron ore miner in the world, Brazil's Cia. Vale do Rio Doce.

CVRD has previously been the subject of rumors that it could join forces with BHP Billiton in a joint bid for Rio Tinto, while others have suggested Rio Tinto could merge its iron ore operations with CVRD.

Joe Kinahan, chief derivatives strategist for thinkorswim.com, said option traders focused more on Freeport, which closed its $26 billion takeover of Phelps Dodge in March.

He said speculation that Freeport itself could become a target, as the world's largest miners strive to become even bigger, underpinned trading of options on the stock.

As shares in Freeport rallied 3.2% to $111.60 after rising as high as $113.87, some 37,000 call options changed hands, compared with 25,900 put options, according to Track Data.

Some bullish traders zeroed on out-of-the-money November $120 calls, which expire on November 16, and December $120 calls. Almost 3,000 and 2,600 of these options changed hands respectively.

A spokesman for Freeport said the company doesn't comment on market rumors or speculation.

Meanwhile, options on Anglo-Australian mining giant Rio Tinto are lightly traded in the U.S., but Jon Najarian at OptionMonster said activity picked up before BHP Billiton revealed overnight that it had approached its rival with a takeover proposal.

Mr. Najarian said 1,338 call options on Rio Tinto's American depositary shares changed hands Wednesday, compared with 700 the previous day and 1,002 on Monday. It compares to daily average call volume in October of about 842.