Aluminium demand keeps focus on players despite price retreat

THE spot aluminium price has retreated 11 per cent this year, but US giant Alcoa is surprisingly upbeat about demand.

Alumina (AWC) $1.54

Rio Tinto (RIO) $66.55

Kicking off the US second-quarter reporting season, Alcoa reported a better-than-expected $US136 million ($155m) profit, compared with a previous $US454m loss. Alcoa expects global aluminium demand to rise 10 per cent this calendar year, led by China. While aluminium remains in heavy surplus, Alcoa expects low-margin Chinese operators to curtail production, so there's a paradox here. An interested observer yesterday was Alumina, Alcoa's passive 40 per cent partner in the Alcoa Worldwide Alumina & Chemicals (AWAC) joint venture.

The aluminium-heavy Rio Tinto also stands to benefit from any uptick in demand, although its short-term earnings are driven by iron-ore pricing.

Alumina offered its own update of AWAC's main growth projects: the Alumar refinery expansion and Juruti bauxite mine, both in Brazil. After a good start, Alumar struck commissioning problems and power outages, but is now ramping up to intended capacity of 8000-9000 tonnes a day. Juruti is churning out at design capacity of 2.6 million tonnes.

Overall AWAC's current year production is expected to be 15.6 million tonnes of alumina, only 200,000 tonnes off targeted capacity. Alumina shares have drifted from the $1.90 levels of mid-April and we rate them a buy.

As for Rio, which reports second-quarter production today, aluminium still only accounts for 2 per cent of earnings despite the monstrous Alcan purchase in 2007. We had Rio as a hold at $71.73 in late June but will wait to see what it serves up today. Another beneficiary of improving aluminium sentiment is CSR, which will increasingly rely on earnings from its 25 per cent share of the NSW Tomago smelter once it becomes sugar free.

Billabong International (BBG) $8.95

THE jury's out on whether the global surfwear purveyor will forge ahead with its $90m acquisition of Canadian retailer West 49 if US rival Zumiez follows through with its threat and lobs a superior rival offer. If it does, Billabong will have to improve on its $C1.30 ($1.44) a share offer, with broker Citi suggesting Billabong could lob $C1.60 and still make the deal earnings accretive.

While Canada is not exactly synonymous with a sun-kissed surfer lifestyle, the purchase is all about expanding downstream from wholesaling to retailing. But not everyone is thrilled with the idea: aside from a few flagship stores, Billabong lacks retail experience. Deutsche argues Billabong already has offered over the odds for West 49, leaving little wriggle room. The firm suggests Zumiez, a big Billabong customer, doesn't really want West 49 but couldn't sit back and watch its supplier get bigger in retailing.

In the meantime, Billabong has consoled itself by acquiring Californian youthware brand RVCA for a reported $30m-$40m. Billabong's acquired stuff now accounts for 45 per cent of its annual sales of $1.5 billion. Billabong shares are much loved, but in our view they look expensive. Following this year's retraction from January $12.30 peak they look better value and we'll treat them as a long-term buy. Three-quarters of Billabong's revenue derives from the US and Europe, so it should surf an uptick in these battered economies.

Mosaic Oil (MOS) 13.5c

MOSAIC'S directors must have felt like they've had a nuclear missile pointing at their sensitive bits since AGL Energy lobbed a 15c-a-share, $130m non-binding offer on June 30. Somewhat imperiously, AGL gave the board until July 14 (yep, today) to unanimously support the takeover offer or scheme of arrangement. What's more, AGL declared its "offer" as "final as to price".

Mosaic yesterday reiterated last week's line that discussions had been initiated with AGL which "may or may not lead to an agreed transaction".

Mosaic is a pioneer of well fracture stimulation techniques in the Surat Basin, but AGL's interest lies with its depleted Silver Springs field in the Bowen Basin, which it wants to use for gas storage as part of an agreement with the BG-owned Queensland Gas.

AGL points out its offer is a 92 per cent premium on Mosaic's pre-bid share price. But according to one unhappy Mosaic holder, the company should be worth at least $200m (24c a share).

Speculative buy.

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