Alumina : Long term credit rating

Microsoft Word - ASX announcement 2016 - Long term credit rating

ASX Announcement 5 February 2016

Long term credit rating

Standard & Poor's today advised that Alumina Limited's long term credit rating has been affirmed at BBB-.

Alumina Limited Chief Executive Officer, Peter Wasow, commented, "We are pleased that Standard & Poor's have affirmed the Company's investment grade rating. The change from stable to a negative outlook recognises that credit ratings are impacted by the current volatility and uncertainty in commodity markets. The Company continues to maintain a low net debt level of US$101.2 million and gearing of 4.8% as at 31 December 2015".

Stephen Foster Company Secretary

5 February 2016

For investor enquiries: For media enquiries:

Chris Thiris Charles Smitheram Nerida Mossop

Chief Financial Officer Manager - Treasury & Investor Relations Hinton and Associates Phone: [phone] Phone: [phone] Phone: [phone]

[e-mail] [e-mail] Mobile: [phone]

STANDARD & POOR'S RATINGS SERVICES

McGRAW HILL FINANCIAL

RatingsDirect®

Research Update:

Alumina Ltd. Ratings Affirmed At 'BBB-', Outlook Revised to Negative On Low Metal Price Assumptions

Primary Credit Analyst:

May Zhong, Melbourne (61) 3-9631-2164; [e-mail]

Secondary Contact:

Sam J Heffernan, Melbourne (61) 3-9631-2231; [e-mail]

Table Of Contents

Overview Rating Action Rationale Outlook

Ratings Score Snapshot Related Criteria And Research Ratings List

Research Update:

Alumina Ltd. Ratings Affirmed At 'BBB-', Outlook Revised to Negative On Low Metal Price Assumptions

Overview

• Ongoing excess supply and lower-than-expected demand from China and other developing markets have dampened alumina prices, and led to a revision of Standard & Poor's price assumptions for aluminum.

• We therefore expect Alumina's rating buffer to reduce in 2016 if alumina prices do not recover, placing downward pressure on the rating.

• As a result, we are revising the outlook to negative.

• We have affirmed the issuer credit rating Alumina and its associated issue ratings at 'BBB-', reflecting the company' s conservative balance sheet and modest level of cash flow leverage.

  
  

  Rating Action

  On Feb. 5, 2016, Standard & Poor's Ratings Services revised the rating outlook on Alumina Ltd. (Alumina) to negative from stable. At the same time, we affirmed the 'BBB-' issuer credit rating on the company and its associated issue ratings.

  
  

  Rationale

  The outlook revision reflects our view that Alumina' s rating buffer will reduce if low alumina prices were to persist for a prolonged period. In line with most metals, ongoing excess supply and lower-than-expected demand from China and other developing markets have materially reduced alumina prices to about US$200 per ton in January 2016, from about US$350 per ton in January 2015.

  
  

  Alumina critically depends on the dividend stream paid to it by Alcoa World Alumina and Chemicals (AWAC) for its operations. Alumina is a minority (40%) stakeholder in (AWAC). Although AWAC has a track record of maintaining a high dividend payout, the current low alumina and aluminum prices have strained AWAC's ability to distribute a dividend to Alumina that would support

  Alumina' s financial metrics being consistent with our expectations for the 'BBB-' rating.

  
  

  Furthermore, Alumina' s status as a minority shareholder of AWAC is a key constraint to the rating, as it relies on the 60% shareholder and operator of AWAC, Alcoa Inc. (Alcoa; BBB-/Stable/A-3) to respond to the current adverse

  Research Update: Alumina Ltd. Ratings Af firmed At 'B BB-' , Outlook Revised to Negative On Low M etal Price

  Assumptions

  
  

  trading conditions. However, we believe that AWAC will take steps to further cut costs such as its overhead expenditure. As evidenced in the past, AWAC could curtail higher cost refiners such as Suralco and Point Comfort to conserve cash. In addition, we believe that AWAC and Alcoa have an incentive to pay sufficient dividends to ensure that Alumina can meet its fixed obligations even during periods of weak commodity prices.

  
  

  We continue to view Alumina's business risk profile as fair, reflecting AWAC's good business position as the world's largest alumina producer; as such AWAC has the size and scope to adjust its operations to respond to market conditions. Tempering these strengths is Alumina's minority shareholding in AWAC and Alumina's critical dependence on the dividend stream paid to it by AWAC.

  
  

  In late 2015 Alcoa announced a proposal to split the company into two independent upstream and downstream businesses. At present the credit impact on Alumina is not certain. We are conscious that the counterparty's credit quality will be a key determinant affecting Alumina's ability to influence

  AWAC' s operating strategy, shareholder control, financial policy, and ultimate capital structure of the de-merged upstream business.

  
  

  Our base-case scenario for Alumina is based on the following assumptions:

  • Price assumptions for aluminum of US$1,500/ton over 2016, US$1,550/ton over 2017, and US$1,650/ton in 2018;

  • Australian dollar/U.S. dollar exchange rate average of US$0.68 in 2016 and 2017; and

  • AWAC producing between 13 and 15 million tons over 2016 and 2017.

    
    

    Liquidity

    We consider Alumina's liquidity as being adequate, based on our expectation that the sources of liquidity including cash, funds from operations, and undrawn bank lines, will exceed liquidity uses by greater than l.2x in the next 12 months.

    
    

    Principal liquidity sources:

  • Funds from operations (FFO) of about US$40 million-US$80 million over the next 12 months; and

  • Undrawn credit lines maturing beyond 12 months of about US$290 million.

    
    

    Principal liquidity uses:

  • Dividends in 2016.

Outlook

The negative outlook on Alumina reflects the ongoing challenging commodity market conditions. In our view, if there is no sustained improvement in alumina prices, Alumina' s ratings buffer in its financial metrics will likely reduce, potentially placing downward pressure on the ratings.