Chalco Faces Downgrades After Rio JV -S&P

HONG KONG. Aug. 4 -- International credit rating agency Standard & Poor's said on Tuesday it has put Aluminum Corp of China Ltd (2600.HK: Quote) on watch for possible downgrades after it announced it would invest $1.35 billion in a joint venture with Rio Tinto (RIO.AX: Quote).

S&P said it has put the company's long-term corporate credit rating of BBB+ on watch with negative implications, following announcement of the joint venture last week.

China's largest aluminium and alumina maker, also known as Chalco (601600.SS: Quote), said it would invest in a Guinea joint venture that partner Rio (RIO.L: Quote) claims is the world's largest undeveloped iron ore deposit.

"The rating action reflects our view that the stand-alone rating profile of BBB- could be lowered by more than a notch as a result of the proposed acquisition," said Standard & Poor's credit analyst Judy Kwok-Cheung in a statement on Tuesday.

This is Chalco's first venture into the iron ore industry, indicating a change in its business strategy, it said.

BBB- is the lowest level of investment grade of long-term bonds under Standard & Poor's rating, and any downgrade could put Chalco's stand-alone rating at non-investment grade or "junk" status.

The slower-than-expected recovery in prices of alumina and aluminium in the first-half of 2010 would continue to pressure the company's already-aggressive financial risk profile, which adds to the downward pressure on the company's stand-alone credit profile, the agency added.

However, it also said there is a high likelihood that the Chinese government would extend extraordinary support to Chalco, which is controlled by state-owned Aluminum Corp of China (Chinalco).