September 1, 2008

Profit Down, Chalco to Invest Abroad

Aluminum Corp. of China said it planned to raise capital in the next two years and diversify overseas after reporting a sharp drop in first-half profit.

The top Chinese aluminum maker, known as Chalco, said it would seek shareholders' approval for issuing up to 10 billion yuan worth of 10-year bonds in China in the next 24 months, raising the equivalent of $1.6 billion to restructure its debt and to increase cash flow.

Facing fierce competition and scarcer raw materials, Chalco said it would also ask shareholders to back a plan to start producing high-margin sulfuric acid.

Chalco reported late over the weekend that its first-half net profit fell by about two-thirds, dented by high production costs, output disruptions and oversupply in the aluminum market.

In response to the squeeze, the company is investing in the Aurukun bauxite mining project in the Australian northeast and in several smelter projects, including in Saudi Arabia.

It said it would take a 40 percent stake in an aluminum plant and a 20 percent stake in a power plant in Jazan Economic City in Saudi Arabia in a project with total investment of about $4.5 billion.

"The project is an important initiative for the group to shift to overseas areas with abundant energy sources, thus achieving strategic restructuring of the group," the chairman, Xiao Yaqing, said in a statement.

Xiao said that the company, the world's third-largest alumina producer after Alcoa and Alcan, would strengthen resource acquisition to enlarge the resource reserve.

The state-owned parent, Chinalco, teamed up with Alcoa of the United States to pay $14 billion for a stake in Rio Tinto, which is the target of a bid from the rival miner BHP Billiton that is worth nearly $150 billion.

Xiao said that a combination of global economic head winds and problems at home had weighed on the group's results.

"The U.S. subprime crisis, global inflation, depreciating U.S. dollar, natural disasters including snowstorms and a serious earthquake had a negative impact on China's economic development," Xiao said, adding that uncertainty still surrounded China's economic outlook.

Chalco reported January-June net profit of 2.41 billion yuan, down from a restated 6.97 billion yuan a year earlier and worse than suggested in the company warning in June that its interim net profit would fall by at least 50 percent.

"The production, operation and development of the company will face challenges, mainly due to the great cost pressure driven by high prices of mineral resources, coal, electricity, oil and other energy sources as well as transportation cost," Xiao said.

"The fierce competition in domestic mineral resources and nonferrous metals markets are bringing difficulties for production, supply and sales," Xiao added.

China's smelting capacity is expected to rise by almost a fifth this year to about 19 million tons, as smelters build new plants despite higher construction costs.

Chalco said the average price of alumina, one of Chalco's main products, that was sold to external customers fell 4.5 percent in the first half to 2,830 yuan per ton. The average aluminum price dropped 5.64 percent to 16,241 yuan a ton.

The company has cut spot alumina prices twice since June by a combined 24 percent due to increased production in China.

Chalco shares on Friday ended up 0.29 percent at 7.02 Hong Kong dollars, or $0.89, before the results were announced. The shares fell 44 percent in the first half of the year.

Originally published by Reuters.

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