Alumina’s Mixed Message

A week ago Alumina Ltd was warning about a downgrade in full-year earnings. Yesterday, it appeared to go against that lower guidance when it reported a 9% rise in first half net profit to $284 million.

But that was a bit of an illusion. Underlying earnings for the six months to June fell 10% to $271 million and Alumina repeated the warning last week that it expects full year underlying earnings of around $490 million.

The company said the first half of 2007 reflected "continuing strong global demand and higher prices for aluminium and alumina, but was impacted by a stronger Australian dollar and higher operating costs."

But it said that "underlying earnings after tax declined 10% to $271.0 million, which is calculated by deducting from Net Profit after Tax an amount of $13.3 million, representing the net total of non-cash charges in the half year for the revaluation of embedded derivatives and retirement benefit obligations, which do not reflect operations in the current half year."

Alumina said in last week's warning that underlying earnings of $490 million would be lower than the $569.4 million for 2006.

The new guidance was much lower than the $530 million to $540 million that analysts had expected.

But despite this downgrade, Alumina remains upbeat about the world markets for alumina and aluminium.

It sees world demand for alumina and aluminium rising by 10% over the rest of 2007 and it also believes there will be 30% growth in Chinese domestic demand for aluminium, year on year.

CEO John Marlay said in the profit announcement: "The fundamentals of this business continue to be very strong, with Chinese aluminium consumption continuing to be a strong driver of global demand.

"We are increasing investment in AWAC production capacity, at present through the growth projects in Brazil, to meet this growth in demand. AWAC has further options to increase capacity in Australia and elsewhere."

AWC said yesterday that the current earnings forecast assumes an average 2007 London Metals Exchange (LME) aluminium price of $US1.24 per pound, and an average 2007 US dollar/Australian dollar exchange rate of 0.83 cents.

LME aluminium prices averaged $US1.26 per pound in the first half of 2007, up 9% on the first half of 2006.

"The outlook for aluminium and alumina prices remains positive," Alumina said.

But the sharp rise in the Australian dollar, shaved $12.2 million off underlying earnings, from revaluing Alcoa of Australia's US dollar receivables in Australian dollars.

"The Australian dollar strengthened in 2007 with an average exchange rate of 81 cents for the half (2006: 74 cents).

"This exchange rate change resulted in a significant reduction to Alumina Limited's profit after tax for the six months to 30 June 2007.

"Underlying Earnings for the first half included a charge of A$12.2 million after tax from revaluing Alcoa of Australia's USD receivables in AUD at 30 June 2007 at 85 cents," Alumina said.

Alumina has declared a 12 cent interim dividend, fully franked, up 20% on the 2006 interim payout and has completed the $250 million share buyback announced in March.

AWC is a 40 per cent stakeholder in Alcoa World Alumina & Chemicals with US-based Alcoa; it gave a buoyant 2007 outlook for its products.

"In 2007, aluminium markets are expected to be in a modest surplus of up to approximately 300,000 tonnes by year end," Alumina said.

"Alumina market demand is also strong. The alumina market is forecast to be essentially balanced, with any surplus not expected to be greater than one million tonnes, dependent on the pace of construction and ramp up of new brownfield capacity expansions."

Alumina has been at the heart of takeover rumours, after the $US38 billion ($A44.75 billion) takeover of Canadian aluminium producer Alcan by Rio Tinto.

But BHP Billiton, Alcoa's possible suitor, seems to have gone cold, while the turmoil in global share and credit markets would rule out a bid for the time being.

Alumina's shares were down fell 38 cents at $6.92, its lowest level since early May.

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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