Alcan sees aluminum prices staying firm

MONTREAL - Alcan Inc. posted record third-quarter earnings Tuesday as it reaped the benefit of higher aluminum prices and strong demand fuelled by massive Chinese economic growth. Its shares rose 3.2 per cent to a two-month high of $52.83 in Toronto.

Net profit in the third quarter was $456 million US, or $1.20 a share, up from $81 million, or 21 cents a share, a year earlier. Sales were $5.77 billion US, up $882 million reflecting a 33 per cent surge in aluminum prices year-to-year.

Alcan generated record cash flow of $803 million to back its ambitious smelter programs and continue the delicate dance of closing high-cost operations in Europe, said CEO Richard Evans.

The fourth quarter, normally Alcan's best, will be very strong, he said. With world demand and supply in rough balance in 2007 and Asian growth continuing, the outlook is "very good."

Alcan's 33 per cent quarterly dividend hike and a $750-million US share buyback starting this week reflect confidence in the future, he added, but Alcan will continue cost-cutting in its raw materials, smelting and downstream packaging and fabricating businesses to improve returns.

Evans said Alcan is "very close" to a decision on the $2.7-billion US smelter project at Coega in South Africa with 700,000 tonnes annual capacity. The key is a long-term power contract but "there's a high probability it could be done ... possibly in the fourth quarter."

Alcan would supply its latest technology to Coega, but would own only one-third of the project. The South African government and other partners would own the rest.

The tripling of copper prices is music to Alcan's ears. Its cable business is "booming with prices and volumes (that are) way up from levels of the past two years" as electric transmission and other markets switch from copper to lower-cost aluminum, Evans told analysts.

The Vlissingen smelter in The Netherlands is in danger because lengthy negotiations with energy suppliers have failed to yield lower power costs. "The risk is too great should aluminum prices retreat."

Alcan is seeking a site "in Canada or elsewhere" to build a special plant to prove its latest energy-saving technology researched in Quebec and France, Evans said, and it could represent a $500 million US investment. Alcan became the world leader in smelting technology with the 2004 acquisition of France's Pechiney.

In the second quarter, Alcan earned $455 million US, or $1.20 a share, as world prices soared. But they peaked in May and declined in the summer under Chinese export pressure. Recently, prices began a rebound.

Alcan runs a close second to U.S.-based Alcoa in smelting capacity, but both are surpassed by Rusal, the newly minted Russian giant with four million tonnes of capacity.

Evans said China and other emerging markets are displacing the U.S. and Europe as the dominant forces in world aluminum. China's consumption will be up 20 per cent this year, against two per cent in the U.S. But China's tripling of its export tax to 15 per cent to restrain its aluminum producers may lessen price pressures.