S&P affirms Alumina Ltd. rtgs; off watch; outlook is negative

　　In our opinion, we don't expect the market dynamics to improve in the next two quarters. Therefore, if aluminum prices were to stay at about US$0.95 per pound and the Australian dollar remains above parity against the U.S. dollar for a prolonged period, they could significantly affect AWAC and Alumina's earnings in 2012. Under this pricing and cost assumption, we estimate that Alumina's funds from operations (FFO)/debt to fall to less than 20% and debt-to-EBITDA to increase to more than 3x in 2012, compared to 40% and 2.2x respectively in 2011.

　　Alumina's credit quality critically depends on the dividend stream paid by AWAC. The company relies solely on the cash flows from AWAC to meet its debt obligations and dividend payments. Although AWAC has a track record of maintaining a high dividend payout ratio, its dividend payment is sensitive to movements in exchange rates, aluminum and alumina prices, and lumpy capital commitments. We expect the unfavorable trading conditions to reduce AWAC's earnings in 2012 to less than that in 2011.

　　Furthermore, Alumina relies on Alcoa Inc. (60% shareholder and operator of AWAC) to respond to adverse trading conditions, due to its status as a 40% minority shareholder in AWAC.

　　Nonetheless, we believe AWAC--the world' largest alumina producer--has the size and scope to adjust its operations to respond to market conditions. The joint venture has a strict emphasis on efficiencies and cost reductions throughout its operations. Should the operating environment continue to be weak, we expect Alumina or AWAC to exercise their financial levers to protect Alumina's credit metrics.

　　Liquidity We consider Alumina's liquidity position to be "adequate", as defined in our criteria. Relevant aspects of our assessment of the company's liquidity profile are as follows:

　　-- We expect that sources of liquidity in the next 12 months will exceed uses by 1.2x.

　　-- The company maturities for the next two years will be manageable, with only US$53.6 million debt maturing in 2012 and US$160 million in 2013.

　　-- As at Dec. 31, 2011, Alumina had US$19 million cash and US$295 million in a committed undrawn bank facility.

　　Outlook

　　The negative outlook reflects our expectation that the current tough trading conditions of the alumina and aluminum industry are likely to worsen Alumina's financial risk profile in 2012.

　　The rating could be lowered if we expect that Alumina's FFO/debt will be less than 30% and debt-to-EBITDA will be higher than 2.5 x beyond 2012. This scenario could occur if there is no sign of recovery in the current market dynamics and Alumina failed to respond effectively to weaker-than-expected market conditions. For example, we believe if aluminum prices were to sustain at or below US$0.95 per pound and at the same time the Australian dollar stays at or above parity, it could strain Alumina's financial profile.

　　We could revise the outlook to stable if there is an improvement in AWAC's earnings profile, or Alumina exercises its financial levers such that its FFO/debt remains at more than 30% and debt to EBITDA is lower than 2.5x.