S&P downgrades Noranda debt

Drop in aluminum prices chief cause for lower profit outlook

Analysts at Standard & Poor’s have downgraded their rating of Noranda Aluminum Holding’s debt, saying the lower price of aluminum in world markets will prevent the company from hitting profit targets this year and next.

In their recent note, Megan Johnston and Gayle Bowerman say their assumptions for Noranda’s earnings before interest, taxes, depreciation and amortization move about $60 million for every 10-cent change in the price of aluminum. The metal started the year off costing almost $1 per pound but, until recently, spent four months below 90 cents. For Johnston and Bowerman, that means that, in both 2012 and 2013, Noranda should post EBITDA of $100 million to $130 million. Earlier this year, they had expected that range to be $150 million to $200 million.

“We believe it is unlikely that the company will achieve our previous EBITDA projections in 2012 and 2013 because aluminum prices are lower than we previously expected,” the analysts wrote. “In our view, aluminum prices have been under pressure due to market concerns about Chinese demand growth and economic uncertainty in the eurozone, as well as a relatively stronger U.S. dollar as compared with 2011.”

The two researchers had placed the Franklin-based company on ‘negative’ watch at the end of August and say they now rate its debt at ‘B,’ down from B+ and several notches below investment grade. A big reason for that is the company’s leverage — total debts are more than three times its equity and about six times its EBITDA — although that situation should improve as aluminum prices do.

“We believe that supply and demand should gradually come into better balance either through increased demand as economic recovers, or — in the absence of economic improvement — through additional curtailments of smelting capacity globally, which should shore up pricing,” Johnson and Bowerman wrote.

Equity analysts tracking Noranda also have been trimming their estimates in recent weeks. They now see the company earning 23 cents per share this year, down from 27 cents at the end of July. For 2013, their consensus is for Noranda to come down from 84 cents in mid-summer to 77 cents.

Shares of Noranda (Ticker: NOR) were down about 2 percent to about $6.35 in Tuesday afternoon trading. Year to date, they’re down about 20 percent.