S&P places Alumina Ltd. 'BBB' rating on watch negative

Current trading conditions in the aluminum industry are challenging, driven by soft aluminum prices, the strong Australian dollar, and increasing input costs.

If these conditions persist, we expect Alumina Ltd.'s credit metrics to weaken to levels below our expectation for the 'BBB' rating.

We therefore have placed our 'BBB' corporate credit and issue ratings on Alumina on CreditWatch with negative implications.

We expect to resolve the CreditWatch following our review of Alumina's financial performance in light of the current challenging industry conditions.

Rating Action

On March 28, 2012,Standard & Poor's Ratings Services placed its 'BBB' long-term corporate credit and debt ratings on Australian mining company Alumina Ltd. on CreditWatch with negative implications. Rationale The CreditWatch placement reflects our concerns that current challenging trading conditions could weaken Alumina's financial metrics to levels below our expectation for the 'BBB' rating. If currently soft aluminum and alumina prices, higher input costs, and the strength of the Australian dollar were to persist, it will pressure Alumina's key cash flow metrics in 2012.

During the first quarter of calendar 2012 aluminum prices have averaged about US$0.99 per pound, compared to an average of US$1.09 per pound in 2011. In addition, the Australian dollar remains at above parity against the U.S. dollar. We also expect oil and caustic prices to remain at relatively high levels in 2012.

Alumina's credit quality critically depends on a stable dividend stream paid by Alcoa World Alumina and Chemicals (AWAC). The company relies heavily on the cash flows from AWAC to meet its debt obligations and dividend payments. Although AWAC has a track record of maintaining a high dividend payout ratio, its dividend payment is sensitive to movements in exchange rates, aluminum and alumina prices, and lumpy capital commitments. We expect the unfavorable trading conditions to reduce AWAC's earnings in 2012 to less than that in 2011. Furthermore, Alumina relies on Alcoa Inc. (BBB-/Stable/A-3; 60% shareholder and operator of AWAC) to respond to adverse trading conditions, due to Alumina's status as a 40% minority shareholder in AWAC.

Liquidity

We consider Alumina's liquidity position as adequate. Relevant aspects of our assessment of the company's liquidity profile are as follows:

-- We expect that sources of liquidity in the next 12 months will exceed uses by 1.2x.

-- The company maturities for the next two years will be manageable, with only US$53.6 million debt maturing in 2012 and US$160 million in 2013.

-- As at Dec. 31, 2011, Alumina had US$19 million cash and a US$295 million committed undrawn bank facility.

CreditWatch

We expect to resolve the CreditWatch after a review of Alumina's financial metrics in light of the current challenging conditions in the aluminum industry. We will also consider AWAC's operational and financial flexibility in preserving cash flows for dividend payments to its joint-venture partners in our review.E124