Firing Up China's Foundry

12/07/2009 1:00 pm EST


Jim Trippon

Editor-in-Chief, China Stock Digest

James Trippon, editor of China Stock Digest, says Chalco, the world’s largest aluminum producer, is attractive again as China’s growth keeps surging.

Aluminum Corporation of China (NYSE: ACH), better known as Chalco, is recovering strongly after the difficulties caused by the world financial crisis.

Because the company is cash-rich, government-backed and dominant in China, we see the firm’s revenues rising strongly with the world-beating growth of the Chinese economy, especially its booming auto industry.

China has now become the world’s largest producer of primary aluminum and the fastest growing aluminum market on the planet. Chalco is uniquely positioned to take advantage of the rebounding Chinese industrial growth curve.

Initially a government umbrella corporation, the Aluminum Corporation of China (or CHINALCO) was formed in 2001 to own and operate 12 state-owned entities engaged in the production and distribution of alumina (an intermediate product in the refining of aluminum), primary aluminum, and other products. Remarkably, CHINALCO quickly transferred to Chalco almost all of its assets in the aluminum industry in return for shares of Chalco, [which] operates as an independent company.

In China’s rapidly expanding economy, Chalco’s growth potential depends on its leading status as a major producer of aluminum and alumina. The company was introduced to the New York Stock Exchange as an ADR in 2001, and it has experienced a stellar rise in the following years despite a sharp dip during the worst of the global crisis.

Chalco made major news earlier this year when it was rebuffed in its attempts to take over the global mining giant, Rio Tinto (NYSE: RTP). Nevertheless, Chalco remains an attractive company because of its revenue recovery in a market that demands ever-increasing supplies of aluminum for its growing domestic market and reviving export sector.

China Dailypredicts that aluminum prices will be supported for the next three years by rising production costs in China, and a recovery in global demand. The aluminum market may expand to between 42 million and 45 million metric tons by 2012, according to Macquarie Securities.

China [recently] raised power prices, which account for about a third of aluminum output costs, to help utility companies curb losses. Aluminum prices, lagging behind other metals, may rise as producers pass on costs.

The company is buying up power-generating assets. Electricity is one of the major components in the smelting of aluminum ore. Because of its energy needs, Chalco has also has teamed up with Malaysia’s MMC Corp and Saudi Binladin Group to invest in a $3-billion dollar aluminum-smelter project in the Middle East. Energy is a major component in the cost of refining aluminum. The cost of energy in the planned Saudi Arabian smelter is projected to be half the cost of energy in China.

We’re bullish again about the long-term prospects of this company, which is so fundamental to China’s economic expansion. The company says it expects to return to breakeven status by the end of the year and become profitable again in 2010. Buy up to $28, with a price target of $35. (It closed below $29 Friday—Editor.)

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