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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Thank you very much for holding, and welcome to the Alumina Limited 2008 half-year results. Your lines will be muted during the presentation. However, you will have an opportunity to ask questions immediately afterwards, and I will provide instructions on how to do so at that time.
I would now like to hand the call over to Mr. John Bevan. Thank you, and please go ahead.
JOHN BEVAN, CEO, ALUMINA LIMITED: Good afternoon, everybody, and welcome. My name is John Bevan. I'm the new CEO of Alumina Limited. I will cover the highlights for the first half. Then I will hand over to Ken Dean, our CFO, to cover the financials.
The highlights of the first half are, firstly, our underlying earnings of AUD152 million for the first six months are in line with the last six months of 2007. The net profit after tax is lower at AUD44 million. The difference between underlying earnings is caused by two noncash, nonoperating losses, which Ken will discuss in his section.
Overall, we see this as a strong performance in a challenging business environment. Since the beginning of the year, aluminium prices are up 28%, and this has led to higher revenues and higher prices. The impact of this, however, has been offset by a significantly stronger Australian dollar and higher energy prices. Through this, our operations have continued to perform well, with production levels having increased by 4% despite the Varanus Island gas outage in Western Australia.
In the first half, we've also made good progress on our funding arrangements, completing an extension of all our 2008 maturing core debt and successfully marketing a convertible bond issue in May. Following an increase in capital expenditure for the Brazil project, the Company is developing new funding options for execution in the second half of 2008. The Board has approved a AUD0.12 per share interim dividend for the half.
Now, turning to our presentation today, I draw your attention to our disclaimer on forward-looking statements, including in this presentation.
Ken, over to you to take us through the financial results.
KEN DEAN, CFO, ALUMINA LIMITED: Thanks, John, and good afternoon, ladies and gentlemen. John has already mentioned the first half-year net underlying earnings of AUD152 million. Earlier this year, we commented that business conditions in 2008 meant that Alumina Limited's earnings would largely reflect the performance in the second half of last year, and that's very much what's happened. Revenues have reflected higher alumina and aluminium pricing in the strong global commodity market, but higher energy costs and a much higher Australian dollar in 2008 to date have kept net margins close to the level in the second half of 2007 and about 35% lower than the first half of 2007.
Included in underlying earnings of AUD152 million is a nonrecurring tax benefit of AUD32 million arising from the accounting for foreign exchange gains on our US dollar borrowings. Excluding that item, underlying earnings in the first half of 2008 pretty much mirror the second half of 2007.
Reported income has, however, been reduced by those noncash, nonoperating items that John mentioned, and we don't take those into account in our calculation of underlying earnings. I will talk a little bit more about that in just a moment.
First of all, the summary -- return on equity on an underlying earnings basis was 18%, down from 23% in the first half of 2007 and up from 16% in the immediately preceding half year. Underlying earnings were AUD0.24 per share for the half year.
Alumina Limited's directors have today declared an interim fully franked dividend of AUD0.12 per share, to be paid on October 14 to shareholders on the register on September 23. We advised in January, at the time we launched the new dividend reinvestment plan, that arrangements have been put in place to fully underwrite the issue of shares under the DRP related to this distribution. This dividend is in line with the directors' intention to maintain annual dividends at least at AUD0.24 per share, subject to business conditions.
As I've done in the past, we are reporting both net profit after tax, calculated according to International Financial Reporting Standards, as well as underlying earnings, which exclude the impact of noncash accounting entries which don't reflect the Company's business performance.
Those entries for the first half of this year have reduced income by AUD108 million, and that reflects two items -- first of all, the revaluation of embedded derivatives based on the current substantially higher LME aluminium price [that arose] at the beginning of the year, and the assumption, on the basis of the current forward curve, that prices will remain high for the remainder of our gas and electricity supply contracts; and then secondly, the actuarial assessment of the impact of lower global equity markets on the obligations, net of investment returns, of certain AWAC employee benefit plans. As we've done in the past, this additional disclosure about our earnings is provided to help everyone understand the Company's financial results.
LME aluminium prices for the first half of the year have been higher than they were during 2007. This graph shows that very clearly. The first-half average price of $1.31 per pound or about $2900 per tonne is 4% higher than the first half of 2007 and 13% higher than the average in the second half of 2007. The benefit of that higher US dollar aluminium price, however, has been eroded by the 14% change in the average US dollar/Australian dollar exchange rate to $0.92 average for the first half of 2008.
As John mentioned, during this half year we've refinanced all the Company's maturing 2008 core debt and added additional debt facilities. In doing so, we have reduced our 2008 funding costs below the level that we previously advised in our January guidance. 2008 funding costs are now expected to be approximately the same as they were in 2007, even though we will have a higher total drawn debt throughout this year.
That's been achieved by refinancing the portion of debt previously drawn in Australian dollars into US dollars, and through the issue in May of $350 million of convertible bonds with a fixed 2% interest coupon.
As we advised in January, the Company's dividend distribution in March was accompanied by the introduction of our new dividend reinvestment plan, and the issue of shares under that DRP was fully underwritten. That resulted in the issue of 22.9 million new shares, and arrangements are in place, as I said, for the dividend to be paid in the second half of the year to be similarly underwritten.
We indicated last week in our market announcement on the revised cost of AWAC's current growth project that we are now developing the additional financing to complete our commitment to fund these projects through to their completion in the middle of 2009.
Just to repeat again, [we felt] that the conditions in the first half of 2008 were similar to those in the second half of 2007. This graph shows the major drivers of the change in underlying earnings between those two consecutive half-year periods. Average realized alumina and aluminium prices were higher, driven by the 13% increase in average aluminium price. AWAC's additional alumina production of 300,000 tonnes in the first half of this year added a further AUD6 million to Alumina Limited's earnings.
And in the first half, we also booked a tax credit related to foreign exchange gains on our US dollar borrowings, which we account for as an effective hedge against our US dollar assets. This 32 million movement shown here reflects both from 2007 and the first half of...
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