China Aluminum Corp. (Chinalco) stunned the world with its high-profile $19.5-billion investment plan for Australian mining company Rio Tinto Group. But the aluminum giant's financial health may not be as sound as headlines suggest.

TRYING TO SHINE: Aluminum producer Chinalco faces reduced demand for its products, but still aims to make a 5-billion-yuan profit this year (CFP)

According to its annual financial report issued on March 30, the Aluminum Corp. of China Ltd. (Chalco), a Hong Kong-listed arm of Chinalco, said its revenue was 76.73 billion yuan ($11.2 billion) last year, representing a drop of around 10 percent year on year, while its profit plunged 99.9 percent to 9.23 million yuan ($1.35 million). The company's performance had largely held up by September, but took a sudden turn for the worse in the aftermath of the global economic crisis spillover into China, the report said. Chalco holds the bulk of the key assets of the parent company.

Aluminum prices on the Shanghai Futures Exchange had halved to a low of around 10,000 yuan ($1,463) per ton last December, much sharper than the price drop of alumina, the raw material used to produce aluminum. Worse still, a buildup of inventories also added to the industry's woes.

With domestic downturns and the financial crisis converging, the freefall in aluminum prices had slammed earnings, said Luo Jianchuan, President of Chalco, in a statement.

"The group will lean against some serious head winds this year because of the marked slack in domestic demand for aluminum," Luo said.

Given the depth of the downturn and looming overcapacity in the industry, analysts have also been quick to point out that the company will confront a bumpy road this year. By placing Chalco on its "credit watch negative" list, Standard & Poor's Ratings Services expressed concern over the company's weak balance sheet. It will in the following months determine whether to further downgrade its current long-term BBB-plus rating, the third lowest investment grade.

The rating agency's worries center on the parent group's debt burden which might grow now that the company will borrow $21 billion from a consortium of banks led by Bank of China Ltd. to finance its planned tie-up with Rio Tinto. The loan arrangement includes $19.5 billion in funding for the transaction and an additional $1.5 billion to finance ongoing working capital and other expenditures linked to the deal, Chinalco said.

Analysts cautioned that Chinalco's asset-liability ratio could rise to more than 100 percent from its current almost 60 percent after it completes the deal with Rio Tinto. The painful losses and debt pressure will squeeze its cash flows and weigh down operations, they said.

"Stumbling aluminum prices and a debt pile have called into question the future of the company," said Song Xiaolin, a Standard & Poor's analyst, in a report.

In defense

While the economic downturn continues to take hold in domestic markets, Chinalco has been trying to position itself for future uncertainties, although not always perfectly.