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Chalco Jumps on Higher Aluminum Prices, Rio Talk

Shares of Aluminum Corp of China, or Chalco, rose more than 10 percent on Thursday on higher aluminum prices and market talk that its parent and Alcoa could raise their stakes in mining group Rio Tinto.

The stock hit an early high of HK$13.50 in Hong Kong before retreating slightly to HK$13.32, up 8.65 percent. It outperformed a near 4 percent gain on the index for Chinese companies listed in Hong Kong.

Market talk said its parent, Aluminum Corp of China (Chinalco), and Alcoa could raise their stakes to as much as 20 percent, a move that may help China's top alumina producer defend against high prices for raw materials.

The two companies bought a 12 percent stake in Rio Tinto's London-listed shares earlier this month.

"Rio Tinto said the chance of potential cooperation of Chinalco exists and the resumption of Chalco's smelter production at Guizhou also helped lift the stock," said Geoffrey Cheng, an analyst at Daiwa Institute of Research (HK). However, the Guizhou smelters could take a month to resume full operation, he added.

One percent of aluminum production in Chalco's Guizhou plants, which was suspended in late January due to a power shortage caused by snowstorms, had resumed, the company said on its Web site on Wednesday.

Power problems in South Africa sent aluminum prices up overnight also boosted Chalco shares, brokers said.

South Africa's power shortage leads to potential cutbacks or buybacks of power to aluminum smelters affecting a potential 1.2 million tons per annum of capacity, about 5 percent of global capacity, Cheng said.

South African state utility Eskom is considering a complete power supply buyback from all of the country's aluminum smelters plus one in Mozambique as part of a multi-strand approach to solving the country's power crisis.

Chalco shares have rebounded 35 percent from their recent trough in January but were still 50 percent off their peak of HK$26.35 in October due to a global sell-off and rapid growth in China's alumina and aluminum production.

Sun Hung Kai Financial said the aluminum price hike was likely to be short-term, given the global economic slowdown and continued growth in supply, especially in China.

"We think Chalco's fundamentals have weakened from its move downstream, which has diluted margins and ROE (return on equity)," said Eva Yip, an analyst at Sun Hung Kai.

There has been market speculation that Chinalco will inject the Rio Tinto stake into Chalco, but given the sheer size of the deal, which is 2.4 times Chalco's market cap, this seems unlikely in the short term, she added.