Aussie Bites Alumina

By Glenn Dyer | More Articles by Glenn Dyer

The surging Australian dollar (or is it the plunging US dollar) has bitten another mining company.

Alumina, a maybe takeover target, revealed that earnings for the year to December would be down around 14 per cent because of strikes, lower production, and currency changes.

And by that it means the surge in the Aussie and the weakness of the greenback.

Last week, the mineral sands group Iluka revealed a sharp slump (30 per cent or so) impact its 2007 earnings forecast because of the rising Aussie dollar.

And, if the Aussie goes to 90 USc between now and the end of 2007, Iluka and AWC might have to downgrade because their new estimates are at rates well below where the dollar is at the moment.

Alumina (AWC) told the ASX yesterday that underlying earnings fell to $490 million for fiscal 2007, primarily due to a stronger Australian dollar.

It is the second earnings downgrade in as many years for AWC.

"The additional increase in AWAC (Alcoa World Alumina & Chemicals joint venture) refining costs of $US20 per tonne includes $US8 per tonne due to the exchange rate impact of a lower US dollar in 2007," Alumina said in a statement.

Other factors include: "strikes at Compagnie Des Bauxites de Guinee bauxite operations and power outages at the Kwinana and Pinjarra refineries in January and February, higher freight, maintenance and contracts costs and lower than expected production at Pinjarra".

Pinjarra Alumina Refinery in Western Australia is now expected to produce four million tonnes in 2007.

Alumina said the revised guidance also includes a $12 million after tax impact of revaluing its US dollar receivables in Australian dollars as at June 30 at 85 cents. (The rate yesterday was 88.56USc in Australia)

Alumina also said that a one US cent per pound movement in the average 3-month London Metals Exchange aluminium price is expected to impact underlying earnings by about $10 million. Furthermore, each one cent movement in the average Australian dollar/US dollar exchange rate will impact "underlying earnings by about $7 million, excluding any effect of revaluing US dollar receivables at the end of the period".

AWAC is the joint venture with Alcoa in which Alumina holds 40 per cent.

Following the $44 billion agreed bid by Rio for Alcan, there has been speculation that the world's biggest miner, BHP Billiton, or other mining players might bid for Alumina or Alcoa.

BHP has ruled out any play (it would have competition problems in alumina), but the likes of Xstrata and CVRD are still rumoured to be sniffing around.

The market took fright in a down day anyway yesterday and sold down AWC by 65c to a low of $7.50. They closed at $7.59, compared to the all time high of $8.80 a week ago.

It isn't the first recent profit warning from Alumina.

Last November, it said that the 2006 profit would be cut by higher costs and lower prices. (Alumina prices are linked to the metal price.)

AWC said it expected the 2006 result to be between A$565 million and A$585 million, assuming 2006 year to date average aluminium prices and foreign exchange rates prevail for the remainder of the year.

"The lower full year Underlying Earnings, compared to Alumina Limited's previous guidance, is the result of increased AWAC production costs due to higher raw material usage and increased maintenance and contractor costs; AWAC production volume at 14.3-14.4 million tonnes including the effect of the previously-advised Pinjarra expansion at 90% by the end of the year; and the impact on realized alumina prices of the mix of AWAC sales during 2006.

"The sensitivity of Underlying Earnings to changes in the LME aluminium price has been lower than our previous guidance," AWC said.

The actual 2006 result came in at the bottom end of the range at $569 million, so the latest warning for the 2007 result could see around $79 million wiped from the result, a substantial amount given that the aluminium market is buoyant.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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