Australia's Alumina cuts 2007 guidance as costs, currency hit

Australia's Alumina Ltd. (AWC.AU) Wednesday issued a profit downgrade citing rising costs and the impact of the strengthening Australian dollar. Shares in the Melbourne-based company sank 6.9% to A$7.59 as it said it now expects underlying profit for the year ending in December to be A$490 million. While the company had not previously given hard profit guidance, it had given its sensitivity to price and currency movements, which analysts said had led the market to expect a full-year net profit of about A$570 million. Chief Executive John Marlay said the company had seen consensus for the company getting ahead of its expectations, and decided to update the market on the impact of currency movements, rising refining costs, strikes and power outages. "We felt that it was important to get out and provide an update," he told Dow Jones Newswires. Alumina shares had been boosted in recent weeks by speculation of further M&A activity in the aluminum sector, but have fallen back from an intraday high of A$8.87 on July 16 as the takeover talk has eased. Alumina said costs at the refineries that are part of its Alcoa World Alumina & Chemicals joint venture with Alcoa Inc. look set to rise by US$24 a metric ton in 2007, where previously an increase of US$4 per ton had been expected. Strikes during the first half at AWAC's bauxite operations in Guinea also had an impact as did higher freight, maintenance and contractor costs. Power outages affected the Kwinana and Pinjarra alumina refineries, and full-year output for Pinjarra, AWAC's biggest refinery, is set to be about 100,000 tons lower than previously expected at four million tons. "The biggest individual impact is the likelihood that the Australian dollar is going to be much stronger in the second half," Marlay said. The impact of revaluing U.S. dollar denominated receivables in Australian dollars would shave A$12 million from underlying profit, Alumina said. The soaring Australian dollar has been tipped by analysts as a threat to earnings for many of Australia's miners. "It does have a direct impact on profitability, but does it threaten the long term viability of our business operations? No, I don't believe so," Marlay said. Alumina doesn't hedge against currency movements and Marlay said it has no plans to begin doing so. The Rio Tinto Ltd. bid for Canada's Alcan Inc. has sparked speculation of a BHP Billiton Ltd. bid for Alcoa and Alumina, or even an Alcoa bid for its joint venture partner, but Marlay would not be drawn on the takeover talk. "We don't have any comment on rumors and speculation," he said. "The AWAC business is a very good business, that's our sole focus." Marlay said he expects the aluminum market to stay tight through 2007 and 2008. "We feel very positive about the demand outlook and we also believe that the market is going to remain tight so that would tend to be supportive of prices at similar levels to what we are experiencing today," he said. One analyst said the savage market response to the downgrade was in part a reflection of how much hot money was still in the stock in the wake of the recent takeover speculation.