Anglo-Australian mining group Rio Tinto Plc, the world''s third largest mining company, has agreed to buy Canadian aluminium group Alcan Inc for $38.1 billion at $101 for each Alcan share.

The new company will be called Rio Tinto and have its headquarters in London. The group''s aluminium business, however, will carry the name Rio Tinto Alcan, with headquarters in Montreal.

Alcan''s current chief executive Dick Evans will lead the combined group, which will create the world''s No.1 producer of aluminium, eclipsing Russia''s UC Rusal. Last October, a three-way merger between Russian firms Rusal and Sual and Swiss company Glencore left Alcoa as the world''s second largest aluminium producer.

The price represents a premium of 65.5 per cent to Alcan''s all-time high closing share price of $61.03 on 4 May, before US miner Alcoa''s $27-billion bid afte almost two years of talks. (See: Alcoa makes unsolicited $26.9 billion offer for Alcan)

After being rebuffed by the Alcan board on the grounds that it undervalued the firm, Alcoa announced a hostile bid taking a slightly improved offer of $28 billion to Alcan''s shareholders.

Alcoa''s anxiety for a merger stemmed from being under pressure to either acquire or risk being taken over by a larger rival like Rio Tinto or BHP Billiton. A merger with Alcan would enable Alcoa to fend off the threat of being acquired.

The Canadian miner began a search for a white knight to stay out of Alcoa''s embrace and started exploring a merger with other mining companies. In early July reports quoting sources said Alcan had signed confidentiality agreements with at least two potential suitors who "are actively looking" at the company.

The rumoured bidders for Alcan were BHP Billiton PLC, Rio Tinto PLC, and Companhia Vale do Rio Doce of Brazil, with Rio Tinto being quoted as working on a $34-billion plan. (See: Alcan in merger talks with Rio Tinto, say reports)

Tom Albanese, chief executive, Rio Tinto, said, "This transaction will enable Rio Tinto''s shareholders to benefit from the favourable demand fundamentals of the aluminium sector and the synergies and enhanced development opportunities which the combination of our businesses will deliver."

Before the announcement, shares in Rio Tinto on the Australian exchange (it is listed on both the London and Australian stock exchanges) surged to record highs amid speculation that the world''s second-largest mining firm was going to confirm the friendly takeover deal.

Its shares peaked at an all-time high of A$105.19 before trading in its shares in Australia was halted pending the announcement.