Australia's Alumina warns of earnings fall

Potential takeover target Alumina Ltd is anticipating underlying earnings of $490 million for fiscal 2007, lower than many analysts had expected and a significant step back from its 2006 result, as the stronger Australian dollar bites into earnings. Analysts had been expecting 2007 underlying earnings of between $530 million and $540 million from Alumina, which reports its half-year results next week. This compares with $569.4 million for calendar 2006. Alumina chief executive John Marlay declined to comment on whether the profit warning would increase Alumina's chances of becoming a takeover target. The marketplace has been abuzz with rumours after Rio Tinto Ltd's $US38 billion ($A43.18 billion) takeover bid for Canadian aluminium producer Alcan sparked hopes the next target in the sector would be Alumina or US-based Alcoa. The Alcan takeover was sparked by a rival offer from Alcoa, Alumina's joint venture partner in Alcoa World Alumina & Chemicals (AWAC), but the offer was withdrawn after being resoundingly trumped by the whopping price tag Rio Tinto offered. "We don't comment on rumour and speculation, so I don't really have any comment on how people might perceive this," Mr Marlay said. "We will release our half-year results next Wednesday and we thought it was important to provide this initial information. "AWAC is a very good business, it's the largest Alumina producer in the world. "We've got very committed shareholders and quality of assets, such as the ones we have, will be difficult to replace, so I think that's reasonably well understood by the market." Alumina's announcement was sparked by a rising Australian dollar, which is eating into the bottom lines of companies that earn their living overseas. "The additional increase in AWAC refining costs of $US20 a 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 expected to produce 4 million tonnes in 2007. Alumina said the revised guidance includes a $12 million after tax effect of revaluing its US dollar receivables in Australian dollars as at June 30, at US85 cents. Alumina said that a one US cent a pound movement in the average three-month London Metals Exchange aluminium price was expected to affect underlying earnings by about $10 million. In addition, each one cent movement in the Australian dollar/US dollar exchange rate was expected to affect underlying earnings by about $7 million, excluding any effect of revaluing US dollar receivables at the end of the period. SHAW Stockbroking’s resources analyst, Ted Leschke, said that aluminium, from which alumina's price is largely derived, has been the laggard of the base metal suite due to fears that China’s aluminium smelting capacity would over supply the market. Mr Leschke advised that factors such as increasing power costs are highly likely to drive China's already high cost aluminium production even higher, resulting in a significant amount of forced closures. “Eventually, reduced Chinese capacity should see aluminium and alumina prices rise to the benefit of AWC,” Mr Leschke said. After Rio's takeover bid for Alcan, there has been speculation that the world's biggest miner, BHP Billiton, or other mining plays, may make a grab for Alumina or Alcoa. Alumina shares ended down 56 cents, or 6.9 per cent, at $7.59 on Wednesday.