HONG KONG (Standard & Poor's) Sept. 28, 2011--Standard & Poor's Ratings Services affirmed the 'BBB+' foreign currency long-term corporate credit rating on China-based aluminum producer Aluminum Corp. of China Ltd. (Chalco). The outlook is negative. We also affirmed our 'cnA+/--' Great China credit scale rating on Chalco. "We affirmed the rating on Chalco to reflect our expectation that the company's financial performance will improve in the second half of 2011.
Our view is based on higher aluminum prices and stronger end-market demand over this period," said Standard & Poor's credit analyst Lawrence Lu.
"Nevertheless, we are uncertain about the sustainability of Chalco's financial performance in 2012, given the current volatility in the global economy."
We see little likelihood that the company will be able to reduce its high debt levels if profitability remains low. Chalco's cash flow coverage ratios are likely to remain at weaker levels than its peers'.
Nevertheless, we expect its ratio of funds from operations (FFO) to total adjusted debt will improve to about 10% in full-year 2011 from about 8% in the first half of 2011. The rating on Chalco continues to reflect our expectation that the company will receive extraordinary timely and sufficient support, in the event of financial distress, from the government of the People's Republic of China (AA-/Stable/A-1+; cnAAA).
The government effectively controls 42% of Chalco through the company's parent, Aluminum Corp. of China (Chinalco; not rated) and Chalco's own subsidiary. In accordance with our criteria for government-related entities, we have assessed that there is a "high" likelihood that the government would extend extraordinary support to Chalco based on the following characteristics:
-- "Very strong" link with the Chinese government. The government owns 42% of Chalco through its 100% ownership of Chinalco. The State-owned Assets Supervisory Commission appointed Mr. Xiong Wei Ping as chairman of both Chinalco and Chalco. The Chinese government has a strong influence on the company's strategic and financial planning through the commission and Chinalco.
-- "Important" role in China's economy and to the government. Chalco has a dominant share of the domestic bauxite, alumina, and primary aluminum markets. In our opinion, the company has also played a role in helping the government secure China's access to various global natural resource bases, including coking coal and iron ore.
We view access to natural resources as particularly important to the government, given China's rapid industrialization. "The outlook on the rating is negative. Although Chalco's financial performance is likely to improve in the second half of 2011 compared with the first half, we are uncertain about the sustainability of the improvement in 2012," said Mr. Lu.
We may lower the rating if the stand-alone credit profile on Chalco does not continue to improve due to prices declining again and the operating environment remaining weak in the next couple of years.
That could happen if the ratio of FFO to total debt stays below 10% for a prolonged period. We could also lower the rating if we view the likelihood of extraordinary government to be less than our current assessment.
The rating upside potential is currently limited. However, we could consider revising the outlook to stable if the company's stand-alone credit profile improves and stabilizes such that its ratio of total debt to EBITDA drops below 5x and the ratio of FFO to total debt rises above 15%.