We have been paying close attention to the world third largest maker of alumina and the largest aluminum maker in China, Aluminum Corp. of China (NYSE:ACH) or Chalco. This time another analyst, Alfurqan Suranta (307103) took a close look at the company from a fundamental point of view. Find his short summary of findings below.

ALUMINIUM CORPORATION OF CHINA Ltd. (NYSE)

Company Summary

Aluminum Corporation of China Limited and its subsidiaries engage in bauxite mining, alumina refining, and aluminum smelting businesses in the People's Republic of China. The company's Alumina segment involves in mining and purchasing bauxite and other raw materials, refining bauxite into alumina, and selling alumina. This segment also produces and sells chemical alumina, including alumina hydrate, alumina chemicals, and gallium. Its Primary Aluminum segment engages in procuring alumina and other raw materials, supplemental materials, and electricity power smelting alumina to produce primary aluminum; selling primary aluminum products; and producing and selling carbon products and aluminum-fabricated products.

Aluminum Corporation of China also engages in designing production process; providing repair and maintenance services for electrical plant and machinery; manufacturing and distributing ceramic products and electronic products; alumina importing and exporting operations; and trading of colored metallurgy materials and bauxite, as well as offering technical consulting services. The company was founded in 2001 and is headquartered in Beijing, the People's Republic of China. Aluminum Corporation of China Limited is a subsidiary of Aluminum Corporation of China (http://finance.yahoo.com/q/pr?s=ACH).

Balance Sheet

Debt ratio calculation shows that Chalco financed 38.6% of its assets with debt in 2007 and 45.3% in 2006. The ability of the company to pay long-term debt (debt-equity ratio) also declined from 0.83 in 2006 to 0.63 in 2007.  It means that in 2007, the business decreased the proportion of assets financed by lenders.

Revenue and Earnings Growth

The company experienced a decrease of profit margin from 2006 to 2007 from 18.08% to 15.26 % although it had better revenue in 2007. The decrease might be caused by the more absorption of expenses at that year.  Up to 31 March 2008, Chalco’s profit margin was 11.23% that decreasing rather than 2007. Earning growth for the company was -63.50% that probably affected by the cut in production output.

Price and Supply/Demand of Aluminium/Alumina

Up to August 1 2008, the world aluminium price was closed at price around $3,052 per ton (www.basemetals.com).  However, in China, Chalco (ACH) lowered its aluminium price by cutting the spot price. The decline was caused by rumours that it may extend beyond this month the output reduction planned to help reduce air pollution during the Beijing Olympics. It also means that the supply of Alumina will also decrease since there is also a rumour that after Beijing Olympic the cut in Chalco production will be extended because the outlook  for the whole industry remains bad. For information, last month, the 20 largest aluminium smelters in China, including Chalco, agreed to cut output by 5 to 10 percent in an attempt to lower power consumption and push up prices.

Chalco said it has cut the alumina spot price by  8.6 percent to 3,200 yuan per ton with immediate effect, as overcapacity  continues to depress prices of the raw materials used in production of finished aluminium (Xinhua Newsfeed). In addition, this was the second cut since June 3 2008 when alumina spot price was reduced by 16.7 percent to 3,500 yuan per ton.

An analyst said that the cut price would hurt Chalco’s revenue, but the company is in much better shape that its rivals. As an illustration, Chalco’s production cost is around 3,100 yuan per ton so it is still making some money in spite of the price cuts.

Furthermore, she generally said the outlook for the whole aluminium industry is negative as supply exceeds demand and production costs rise.