Mining Profits...Investing In Industrial Metals

Alcoa Inc., the world's biggest aluminum maker, said rising prices boosted third-quarter profit by 86 percent. Earnings were lower than analysts estimated as unplanned shutdowns hurt output, sending the shares plunging.

Net income rose to $537 million, or 61 cents a share, from $289 million, or 33 cents, a year earlier, New York-based Alcoa said today in an e-mailed statement. The average estimate of 16 analysts surveyed by Thomson Financial was 77 cents. Sales rose 19 percent to $7.63 billion.

The shares fell $1.69, or 6 percent, $26.60 at 7:24 p.m. in New York after Alcoa said aluminum production fell to 895,000 tons in the quarter from 904,000 tons a year earlier. Lower output eroded the benefit of a 33 percent rally in the price of metal from Alcoa's smelters. Chief Financial Officer Joseph C. Muscari said defective equipment was been repaired.

``The earnings were a disappointment,'' said Charles Bradford, an analyst at Soleil Securities in New York. ``The plant outages were significant and there was a whole series of little things impacting the result. They came in strong in the second quarter and maybe that set us up for being too optimistic.''

Operating profit from raw aluminum sales doubled to $346 million from $168 million, as Alcoa sold metal on average at $2,620 a metric ton, up from $1,963 a year earlier. Prices were less than the average of $2,530 on the London Metal Exchange. The profit for alumina, a white powder that's used to make aluminum, rose 74 percent to $271 million.

Flat-Rolled Products

The flat-rolled products unit reported a 41 percent drop in operating profit to $48 million because of seasonal shutdowns and mill outages. Alcoa also said it made a ``discretionary'' $200 million pension payment.

Alcoa is the first company in the Dow Jones Industrial Average to report third-quarter profit.

Maintenance at the company's Kitts Green facility, which supplies aerospace components that carry high profit margins, took about 10 days longer than expected and reduced income from continuing operations by $11 million, with other shutdowns cost the company another $13 million, Alcoa said.

Improved Outlook

``We are positive about underlying demand for the fourth quarter, with the exception of the automotive and housing markets,'' Muscari said on a conference call with analysts and investors.

Aluminum prices surged to the highest in at least 19 years in May as output failed to keep pace with increased demand from makers of containers and building materials. Rising prices helped boost Alcoa shares by 25 percent in the past year, reaching a two-year high of $36.96 on May 11.

Alcan Inc., the world's second-largest producer, forecast a global supply deficit of about 300,000 tons of primary aluminum in 2006. Consumption will increase 6.8 percent, compared with a 5.7 percent increase in output, the company said Aug. 5.

Aluminum reached a 19-year high of $3,310 a ton on the LME in May. Aluminum for delivery in three months fell $35 to $2,585 today.

``We have prices about twice the long-term historical average for aluminum, which is quite positive for producers of aluminum,'' said Jim Southwood, president of Commodity Metals Management Co. in Wexford, Pennsylvania. ``The risk is on the demand side, where these high prices could be adversely affecting demand.''

Rising costs to run smelters in North America has forced Alcoa Chief Executive Officer Alain Belda to shift production to countries such as Iceland, where energy costs are lower.

Russian Rival

OAO Russian Aluminium, which said yesterday it agreed to buy smaller producer OAO Sual Group, will eclipse Alcoa as the world's biggest aluminum company by output once the transaction is completed. The new business, which will be known as United Company Rusal, will produce about 4 million tons a year. Alcoa had output of 3.55 million tons last year.

Rusal will also produce 11 million tons a year of alumina, which is produced by processing bauxite and then refined into pure aluminum. Alcoa produces 14.6 million tons per year of Alumina.

The combined entity ``in the longer term could increase the competition for top-tier growth projects,'' BMO's Lazarovici said in a note to investors today. ``This could adversely impact the western world aluminum producers and accelerate the industry's consolidation.''

Four to five tons of bauxite yields about two tons of alumina and one ton of aluminum. Bauxite is a rock found mostly in tropical and sub-tropical regions. Alumina is refined from bauxite and converted to pure aluminum.