Morningstar reported that falling aluminum prices and rising costs drastically reduced Aluminum Corporation of China's ACH results for the H2 of 2011 pulling the company back into the red with operating margin for the full year down 30 basis points to 2.5%, despite a 20% increase in revenue to CNY 145.9 billion.
The coming quarters look shaky as well with aluminum prices up marginally after bottoming in December. Sustained increases in power costs and the likelihood of overcapacity in China in 2012 present further challenges. Electricity price hikes in December increased the total cost of production by about 5%. Management expects to report another quarterly loss in Q1 2012 and a return to profitability will depend partly on China's ability to match production with demand.
We have seen substantial output cuts outside China but capacity in the country continues to grow. Chinalco, Chalco's parent company, expects China's aluminum consumption to rise 7% in 2012. This is a considerable slowdown from the last few years and weakness in the country's property market could weigh heavily on a price recovery. Unlike developed markets where construction plays a smaller role, the Chinese construction sector consumes more than one third of the country's aluminum demand.
Finally, the company has a cash flow deficit that it plans to close later this year by issuing CNY 8 billion in class A shares to help fund its alumina expansion projects at Xing Xian and Zhongzhou which are expected to cost around CNY 8.2 billion. The company has been evaluating an equity raise for nearly three years with an initial plan to raise CNY 10 billion that was later reduced to CNY 9 billion. The further reduction in the proposed offering size is more reflective of the uncertain returns to offset shareholder dilution rather than a reduction in capital needs, in our view.
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