OREANDA-NEWS. Fitch Ratings has affirmed Aluminum Corporation of China Limited's (Chalco) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB+' with Stable Outlook. The Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'F2'.

Fitch has also affirmed Chalco's foreign-currency senior unsecured rating at 'BBB+' and the rating on its senior perpetual capital securities issued by Chalco Hong Kong Investment Company Limited at 'BBB'.

The ratings are supported by Chalco's strong linkages to its parent Aluminum Corporation of China (Chinalco) and the China sovereign (A+/Stable). This was evident when Chalco received government support to construct additional captive power plants and secure direct-purchase agreements with power providers, which significantly lowered production costs.

KEY RATING DRIVERS

Ratings Linked to Sovereign: Chalco is rated three notches below China's rating based on Fitch's top-down approach in line with its Parent and Subsidiary Linkage rating criteria. This reflects Chalco's and Chinalco's (the group) strategic importance to the government in developing the Chinese base metal industry and in securing overseas resources.

Strategic Importance to the State: Base metals like aluminium are important to China's development of its aerospace and defence industries. Chinalco - a major producer in copper and other rare metals - and Chalco form the largest metal group owned by the State-Owned Assets supervision and Administration Commission of the State Council (SASAC).

Continued Reduction in Cost Structure: Chalco has been improving its cost structure for its core aluminium business over the past couple of years through a combination of efforts including reducing overall energy consumption and raising self-sufficiency in bauxite base to supplement its alumina refining operation. Alumina is a key ingredient in aluminium production.

Chalco has increased its bauxite self-sufficiency ratio to 56% in 2015 from less than 50% in 2013, and expects to increase the ratio to 68% by 2016 as new mining projects are put into production. As a result, aluminium and alumina production costs in 1H15 have fallen by 6.6% and 9.0% yoy, respectively.

Improving Leverage, Sufficient Liquidity: Fitch expects Chalco's FFO net leverage to fall to below 15x in 2015 (38x in 2014) even though capex is likely to rise to CNY12bn from CNY8.5bn in 2014. Leverage will improve as profitability recovers following a sharp fall in 2014 on lower aluminium prices. Chalco also maintains significant unused banking facilities at favourable rates from a number of state-owned policy and commercial banks.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
-Capex to reach CNY12bn in 2015, followed by CNY10bn per year for2016 and 2017
-Aluminium prices to remain stable between 2015 and 2017
-EBITDA margin in mid-single digits between 2015 and 2017

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Positive rating action on the sovereign provided linkages between Chalco and the state remain intact

Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Negative rating action on the sovereign
- Chalco's strategic importance to the state is seen to have diminished, including but not limited to Chalco losing its dominant position in the domestic alumina and aluminium market. Weakening linkages may also be manifested in a reduction in its banking facilities; new regulations that affect banks' lending to state-owned enterprises (SOEs); or a new large debt-funded acquisition/project by the group that further increases leverage. The latter is likely to result in a multiple-notch downgrade of Chalco's rating to non-investment grade, particularly when the top-down approach is no longer appropriate.