Chalco to Expand to Coal, Iron Ore as Costs Rise (Update2)

BEIJING, Aug. 24 -- Aluminum Corp. of China Ltd., the nation's biggest maker of the metal, plans to expand into coal, iron ore, copper and rare earth as rising costs for its smelters led to a second-quarter loss. Shares fell.

The company, which last month agreed to pay $1.35 billion for part of the Simandou iron ore project in Guinea, wants to build as many as three coal production bases in three years, Chairman Xiong Weiping told reporters in Shanghai today.

Chalco, as the Beijing-based company is known, swung to a loss in the second quarter after China raised rates for power, which accounts for more than a third of the output costs of aluminum plants. Chairman Xiong is seeking to reduce dependence on smelting, which he says faces overcapacity, as losses exceeded 500 million yuan ($74 million) in June alone.

"Diversification is a clear strategy for Chalco, as the company's aluminum business suffers from high costs and poor margins," said Owen Liang, an analyst with Guotai Junan Securities Co. "Chalco has lagged behind industry peers in securing coal assets, and rare earth prices may be too high to invest in now. Iron ore is a good prospect."

Chalco dropped 3.7 percent to HK$6.31 at 12:29 p.m. in Hong Kong trading. The stock has declined 26 percent this year, making it the second-worst performing company on the benchmark Hang Seng Index. The shares fell 0.6 percent to 10.33 yuan in Shanghai. The results last night came after the market closed.

July Losses

Losses narrowed in July from June, Chief Financial Officer Chen Jihua said at the conference. Based on current metal prices, the company expects to make a profit for the second half, he said. Power costs jumped 20 percent in the first half.

"Our profit in June was squeezed on both sides, one is higher power costs and the other is lower metal prices," Chen said.

Chalco posted a net loss of 96 million yuan for the three months ended June, according to numbers derived from the company's half-yearly statement released last night. That's a fourth loss in six quarters. The loss per share of 0.01 yuan was "well below" the consensus of earnings per share of 0.05 yuan, Morgan Stanley analysts led by Charles Spencer said in a note.

"We will need three years to achieve our strategic shifts into the various businesses from only aluminum," Xiong said. "Acquisitions of natural resources and expansion of our own mines will be our focus. We are already moving into coal and iron ore. A surge in coal prices have largely eaten into our profits. Therefore we must boost our control of coal resources."

'Unsatisfactory'

The competitiveness of Chalco's existing aluminum assets is "unsatisfactory," Xiong said. The company buys 20 million metric tons of coal a year, he said.

In March, Xiong said the company is seeking investment in coal and studying building plants in Saudi Arabia to benefit from cheaper power. Metals demand and prices were hurt in the second quarter after China, the world's biggest consumer, introduced measures to curb property speculation.

Asked if Chalco would be interested in bidding for Potash Corp. of Saskatchewan Inc., Xiong said the company isn't interested "in all investment projects." Investments must meet the company's development strategy, he said.

Potash Corp yesterday said it was speaking with other parties on alternatives to a takeover bid from BHP Billiton Ltd.

Simandou Iron Ore

Xiong said he is "confident" the Guinea government will approve the Simandou iron ore project operated by Rio Tinto Group. The company is also looking at buying copper resources at home and overseas, he said.

Chinese aluminum demand may rise 20 percent to 16.5 million metric tons this year, while production will gain 30 percent to 17 million tons, Chalco forecast. Capacity will reach 21.5 million tons by the end of 2010, it said.

Global demand for the metal may expand 20 percent to 41 million tons while output grows 12 percent to 42.3 million tons, Chalco said. Aluminum prices may average between $1,850 and $2,300 a ton in the second half, Xiong said.

Chalco's cash costs of aluminum production rose 14 percent to 1,491 yuan a ton and alumina costs gained 8 percent to 178 yuan in the first half as fuel prices jumped, it said. The utilization rate at its aluminum plants was 94.5 percent by the end of June, Chalco said, without providing a comparison. Utilization rates for its alumina plants were at 92.8 percent.