Chalco looks to diversify into coal, rare earth

SHANGHAI (Reuters) - Aluminum Corp of China Ltd (2600.HK)(601600.SS)(ACH.N) aims to diversify its operations by buying into coal, rare earth, copper and iron ore assets, as core business margins remain pressured on ample global supplies.

Chairman Xiong Weiping of Chalco, the country's largest aluminum producer, told reporters that the Hong Kong-listed firm was well placed to expand into compatible materials production after reporting on Monday a loss in the second quarter.

"The listed firm is an important platform and component for Chinalco's diversification effort, and it is entering the coal and iron ore businesses," Xiong said on Tuesday.

Chalco is the listed unit of state-owned group Chinalco.

Chalco plans to build two to three coal production bases in the next three years, aiming to obtain "sizable" coal resources that could help boost electricity generation, Xiong said.

Chalco purchases more than 20 million tonnes of coal each year which accounts for about 40 percent of aluminum production costs, he said.

Rare earth is another priority for the diversification, and the firm is participating in the consolidation of China's rare earth industry, the world's largest.

The plans for further diversification follow Chalco's recent agreement to invest $1.35 billion in a Guinea joint venture of Simandou that partner Rio Tinto (RIO.L) (RIO.AX) claims to be the world's largest undeveloped iron ore deposit.

Xiong said Chalco was also in talks with the government of Australia's state of Queensland for a new development plan for the Aurukun bauxite deposits, after terminating in late June a $2.5 billion agreement to develop an operation there.

Chalco is also interested in high-quality copper resources at home and abroad as well, Xiong said.

"The purchase of Simandou iron ore assets marks the launch of the firm's effort to become a diverse conglomerate, and acquisition of quality assets will improve the company's profitability," said China International Capital Corp, the country's biggest investment bank.

But it said Chalco also faces the risk of sharp drop in aluminum prices, and slower-than-expected progress in projects.

Xiong sidestepped speculation that Chalco could emerge as a white knight bidder for Canada-based Potash Corp (POT.TO).

Potash said on Monday it had held talks with other possible suitors as it ratcheted up pressure on BHP Billiton to raise its $39 billion offer for the world's largest fertilizer producer.

"Chalco's investment should meet our investment criteria. We are not interested in just everything," Xiong said.

Aluminum PRICE FORECAST

Xiong expected aluminum prices in the global market to trade between $1,850 to $2,300 a tonne, and 14,500 yuan to 16,500 yuan in China's domestic market in the second half of the year.

LME aluminum was quoted at $2,018 a tonne around 0805 GMT. It hit its highest level since April this month at $2,236 a tonne. Shanghai aluminum closed at 15,305 yuan a tonne on Tuesday.

"Doubts about the global economic recovery are increasing, but the rebound in demand is sluggish. In addition, aluminum is facing oversupply, so aluminum prices will remain volatile," the company said in a statement.

Chalco revised upward its forecast on global aluminum production capacity, output and consumption for this year, but maintained its forecast on China's aluminum output at 17 million tonnes.

Chalco expected to cut its alumina production cost by 5 percent in the second half of 2010 from the first half, and to trim aluminum production cost by 2.4 percent from the first half, Xiong said.

In the first half, average production cost of alumina, a feedstock for aluminum production, rose 8 percent on the year to 2,403 yuan ($353.4) a tonne, as aluminum production cost rose 14 percent to 12,141 yuan a tonne, according to Reuters calculations based on figures released by Chalco.

Chalco expects to be profitable in the third quarter and the second half, said Chen Jihua, the company's chief financial officer.

Chalco's Hong Kong-listed shares fell 4.4 percent by 0813 GMT to HK$6.26.

($1=6.799 Yuan)

(Additional reporting by Ruby Lian)