Chalco's Big Loss Puts Damper On Ambitions

China's biggest aluminum producer misses earnings forecasts in a big way and says it will rein in spending.

After suffering a fourth-quarter loss that was a whopping 10 times worse than expected, Chinese aluminum giant Chalco's appetite for acquisitions and capital spending seems to be waning.

In a further sign of the commodities bust, Chalco (nyse: ACH - news - people ), the listed unit of parent Aluminum Corp. of China and China's biggest aluminum producer, posted its first loss in a decade and warned of further losses in the first quarter of this year. Chalco's near-term outlook is uncertain, as supportive government actions counter a harsh cost and demand environment. The news sent shares plunging over 11%.

Chalco missed earnings expectations in a big way when it posted a net loss Sunday of 2.6 billion yuan ($376.2 million) from October through December. Analysts had forecast a 260 million yuan ($38.1 million) loss, according to a Reuters poll. Chalco earned 1.5 billion yuan ($219.6 million) in the fourth quarter of 2007.

In light of the difficult business environment, Chalco will sharply scale back on spending, after parent Chinalco embarked on a $19.5 billion proposed investment in mining giant Rio Tinto (nyse: RTP - news - people ) that is currently being reviewed by Australian regulators. Chalco will cut capital expenditures by 34%, to up to 13 billion yuan ($1.9 billion), scaling back domestic and foreign acquisitions and delaying planned projects, company executive director Luo Jianchuan said in a press conference Monday.

Chalco blamed its loss on the global financial crisis, raw material price hikes, and the slump in commodity prices. Benchmark aluminum prices tumbled 36% in the fourth quarter on the London Metal Exchange. Chalco still faces an "exceptional business landscape" and expects a loss for the 2009 first quarter, the company said.

The global demand slump could push down aluminum prices even further, and changes that Beijing makes to power tariffs could substantially affect Chalco's cost structure, a Citi note said Monday. However, the government may raise export rebates or lower export taxes to support the troubled export sector, and it's encouraging consolidation in the non-ferrous metals industry--both measures that would boost Chalco, the note added.

Chalco's 2008 profit tumbled 99.9%, to 9.2 million yuan ($1.3 million), compared with analyst expectations of 1.55 billion yuan ($226.9 million) profit based on a Reuters poll. Higher costs were a key issue as the company's full-year revenue only fell 9.9%, to 76.7 billion yuan ($11.2 billion). The full-year cash cost of alumina, a key input in aluminum production, was 18% higher than expected, and sales, general and administrative costs, and financing costs were 59% and 37% higher than anticipated, respectively, according to the Citi note.

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