Report on Aluminum Corp. of China Ltd.

The rating on Aluminum Corp. of China Ltd. (Chalco), a China-based aluminum producer, reflects the company's important role and very strong linkage to the government of China. In addition, Chalco has a leading position in the Chinese aluminum market and access to the country's rapidly growing economy. Chalco's exposure to the highly cyclical alumina and aluminum markets and high leverage moderate these strengths. The company is also exposed to overcapacity in the domestic aluminum market.

We assess Chalco's stand-alone credit profile at 'bb-', which reflects our view that the company has a "satisfactory" business risk profile and "highly leveraged" financial risk profile, as our criteria define these terms.

The rating on Chalco includes a three-notch uplift over the SACP to reflect our expectation of a "high likelihood" that the company will receive extraordinary timely and sufficient support from the Chinese government, in the event of financial distress. In accordance with our criteria for government-related entities, our assessment of government support is based on the following Chalco characteristics:

-- "Very strong" link with the Chinese government. The government owns 42% of Chalco through its 100% ownership of Chinalco. The State-owned Assets Supervisory Commission appointed Mr. Xiong Wei Ping as chairman of both Chinalco and Chalco. The Chinese government has a strong influence on the company's strategic and financial planning through the commission and Chinalco.

-- "Important" role in China's economy and to the government. Chalco has a dominant share of the domestic bauxite, alumina, and primary aluminum markets. In our opinion, the company also plays a role in helping the government secure China's access to various global natural resource bases, including coking coal and iron ore. We view access to natural resources as particularly important to the government, given China's rapid industrialization.

Chalco benefits from its integrated operations and a strong market position. The company controls more than 30% of China's alumina market and over 30% of the aluminum market (through its trading segment). As a China-based company, Chalco has access to end-use markets that are growing faster than the markets in which its global peers compete. Higher transportation costs and additional taxes prevent foreign aluminum producers from selling more to China, somewhat protecting Chalco's competitive position.

The government's decision to increase electricity prices by an average Chinese renminbi (RMB) 0.03 yuan per kilowatt in December 2011 significantly affected Chalco's performance. The company's energy consumption is extremely high with electricity costs accounting for about 40% of its aluminum production cost. Chalco buys most of its electricity from the state grid. We expect the company to diversify its electricity sources and reduce its reliance on the state grid in the next 12-18 months. In addition, slowing demand curbs Chalco's ability to pass on the cost increase to end users.

Weak demand and lower selling prices also contributed to Chalco's poor performance in the first half of 2012. Low aluminum prices and high production costs have resulted in losses for about 60% of Chinese aluminum producers in the first half of this year. We do not expect this situation to change significantly in the rest of the year. Chalco and other large domestic aluminum producers announced that they would cut production by about 10% in May due to restrictions on the export of Indonesian bauxite and an oversupply of alumina. The measure was aimed at stabilizing downstream aluminum prices. But the visibility on the effects of the measure remains low. However, we believe any further decline in prices could push companies to cut production further and this could bring stability to the market.

We expect Chalco's cash flow coverage to remain very weak in the next 12-18 months, and its debt to increase. We anticipate that the company's negative free operating cash flows will remain sizable in the next 18 months at least. Our base-case estimate for negative free operating cash flow (after capital expenditure) in 2012 is about RMB20 billion. Chalco's debt level remains higher than peers'. We expect the company's ratio of total debt to capital to be more than 68% by the end of 2012, and that it will increase in 2013.