Alcan Net Falls 3.7% on Dollar's Slump, Energy Costs

July 31 -- Alcan Inc., the aluminum producer being acquired by Rio Tinto Group for $38.1 billion, said second- quarter profit fell 3.7 percent as energy costs rose and the Canadian dollar gained against the U.S. currency. Net income dropped to $438 million, or $1.17 a share, from $455 million, or $1.20, a year earlier, Montreal-based Alcan said today in a statement. Per-share results were after payment of preferred dividends. Sales rose 8.2 percent to $6.61 billion from $6.1 billion. Alcan, led by Chief Executive Officer Dick Evans, said aluminum demand in 2007 will climb at the fastest rate in at least 27 years. The metal's price gained 5.8 percent in the quarter. Still, profit at the primary-metals unit fell 3.9 percent as raw-material and electricity expenses eroded profits and the loss on foreign currencies widened to $193 million from $100 million. "This is very disappointing," said Charles Bradford, an analyst at Soleil Securities Inc. in New York. "A weaker dollar is not good for a metals company. Their costs are in the local currency, and the selling price is in dollars. Alcan is much more exposed" than U.S.-based rival Alcoa Inc., he said. Bradford had projected profit of $1.60 a share. The company was expected to report net income of $1.77, the average estimate of seven analysts surveyed by Bloomberg. A dollar index that measures the U.S. currency against a basket of currencies, including the Canadian dollar, dropped 3.7 percent on average in the second quarter from a year earlier. Shares Rise Shares of Alcan fell 1 cent to C$103.61 at 4:26 p.m. in Toronto Stock Exchange trading. The shares have doubled in the past year. The company is the world's third-biggest aluminum producer by current output behind Russia's United Co. Rusal and Alcoa. Rio Tinto, led by Chief Executive Officer Tom Albanese, agreed to buy Alcan for $101 a share in cash on July 12. That topped Alcoa's hostile bid by 33 percent. Rio Tinto, the world's third-largest mining company, is acquiring 3.5 million metric tons of aluminum capacity and low-cost power rights in Canada to overtake Rusal. London-based Rio Tinto is planning to sell some businesses to help pay for the transaction, including Alcan's packaging unit. Alcan considered selling the unit before Rio's offer and has received interest from both private-equity firms and other buyers, Evans said today in a phone interview. Counteroffer Considered Alcan was considering making a bid for Alcoa "until near the end" of a review that followed the larger competitor's offer, Evans said. Analysts have said taking over Alcoa would be difficult because the company is governed by Pennsylvania law, which deters hostile bids. Alcan will focus on developing its aluminum-smelting projects after the combination with Rio Tinto brings more resources in bauxite and alumina, which are used to make aluminum. Alcan has been investing in projects such as the Gove alumina refinery in Australia's Northern Territory to cut its dependence on outside purchases of alumina after prices rose. The refinery should produce about 3 million tons a year of the ore by the end of 2007. Evans, who will lead the combined company's aluminum business, said "considerable confidential discussions" are being held among Alcan's managers about positions after the merger is completed. Financial compensation from the change of control over Alcan gives some executives "a certain optionality" to leave, he said. Consumption Forecast Global aluminum consumption will increase 10.1 percent this year, up from a forecast of 8.9 percent, Alcan said. Production will gain 11.2 percent, up from a 10 percent estimate, the company said. Alcan projected a surplus of 200,000 tons this year, compared with a 162,000-ton deficit last year. Demand from the cable and electric-conductor markets is "very strong" as industrial users substitute aluminum for copper, Alcan has said. The price of copper has surged more than fourfold in the past four years. Aluminum prices have doubled in the past five years. China, the world's largest consumer of the lightweight metal, may use 20 percent more this year. Aluminum shipments during the quarter were little changed at about 1.1 million tons, while the company received $2,866 per ton of aluminum sold, compared with $2,709 a year earlier. Profit at the primary-metals business, the company's largest, fell to $744 million from $774 million. Results for the third quarter will also be "somewhat lower" than the three months through June after Alcan sold its Vlissingen smelter in the Netherlands. Head-office costs increased about $70 million to $229 million, including about $14 million for legal and advisory fees related to its strategic review after the hostile Alcoa bid and a $27 million charge reflecting higher share-based compensation.