Alumina Premium Disappears

Sydney Morning Herald

Thursday August 2, 2007

Jamie Freed

THE takeover premium added to Alumina's share price by a round of consolidation in the aluminium industry has evaporated.

There has been intense speculation that the Melbourne company could attract a bid from its joint venture partner Alcoa - or from a potential bidder for Alcoa - in the wake of the US aluminium producer's failed tilt at Alcan.

But after Alumina yesterday revealed its first-half underlying earnings had fallen 10 per cent to $271 million, its shares plunged 5.2 per cent. They closed 38c lower at $6.92 yesterday, the cheapest since March.

The lower profit was in line with the most recent analyst expectations, given Alumina last week lowered its annual underlying earnings guidance to $490 million, reflecting higher operating costs and a stronger Australian dollar.

The company disappointed the market with a 35 per cent cost blowout at a bauxite mine and refinery development project in Brazil. Alumina said the project's capital costs - of which it is responsible for 40 per cent through its stake in the Alcoa World Alumina & Chemicals joint venture - had risen $US600 million ($700 million) to $US2.3 billion.

Alumina chief executive John Marlay yesterday attributed the cost increase to the rising Brazilian currency, along with the expanded scope of construction and local development projects in the Amazon.

Mr Marlay noted the Juruti mine that forms part of the project was one of the few greenfield bauxite mines to be developed in the past 20 years. There was potential to expand the mine's output to 11 million tonnes a year, up from its initial 2.6 million tonnes, starting at the end of next year.

"This is going to be a very good strategic asset for us in the long term," he said. "We're not going to compromise. We're going to [build] it properly."

Given its increased capital expenditure profile, Alumina might issue a hybrid security of an unknown but "incremental" size to help fund the project.

BT Financial's Tim Barker said last week's profit warning had put a dampener on the stock and he did not think the share price was likely to turn around quickly.

"The predictions for second-half production are somewhat lower than what I think people were anticipating," he said.

Alumina declared a fully-franked interim dividend of 12c a share, up 20 per cent on last year.

© 2007 Sydney Morning Herald

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