Noranda Aluminum on credit watch with negative implications

Ratings Agency Standard & Poor's said Thursday it was putting Noranda Aluminum on credit watch with negative implications, pending a review to be completed in several weeks.

S&P like Platts, is a division of the McGraw Hill Companies.

Noranda was increasingly likely to fall short of its previous EBITDA expectations for 2012 and 2013, as aluminum prices are under pressure due to concerns about Chinese demand growth, the weak Eurozone and a stronger US dollar, the ratings agency said.

S&P had earlier expected Noranda to generate EBITDA of between $150 million and $200 million, based on an assumed average London Metals Exchange aluminum price of $0.95/lb and a Midwest premium (the cost of freight and handling to ship aluminum from LME warehouses to the US Midwest) of $0.05/lb.

It noted that while Midwest premiums have recently been higher than its previous expectations, LME aluminum prices have been $0.85/lb or lower. "This could cause Noranda's adjusted leverage to exceed 5x in 2012 and 2013, which we may consider to be in line with a lower rating," the ratings agency said.

S&P has had Noranda's foreign and local long-term corporate ratings at B+ since May 2011. The ratings were affirmed in February, and reflect Noranda's business risk profile as "vulnerable" and financial risk profile as "significant", S&P said.

The ratings agency noted Noranda's limited operating diversity, exposure to the highly cyclical aluminum industry, and its relatively high-cost position.

Noranda on July 25 reported a second-quarter net income of $25.3 million, down 47% from $47.4 million in Q2 2011, but up from $16.2 million in Q1 2012.

The company also announced plans in July for a $45 million rod mill in Jamaica, for which spending is slated to start in 2013 and full production scheduled for 2015. The new rod mill's value creation will be largely independent of LME aluminum prices, president and CEO Layle Smith said at the time.