Alcoa owns 60% and is the manager of the joint venture. Alumina is effectively a forwarding office for AWAC profits. Its profits stem from its equity share in AWAC, less local head office and interest expenses. While AWAC enjoys a low operating cost position relative to its competitors, the cost curve is relatively flat, and competitive pressures exist via supply from China.
Alumina was the result of a demerger of WMC’s aluminium assets in 2003. AWAC has substantial global bauxite reserves and alumina refining operations, many of which are in the lowest quartile of the cost curve. AWAC primarily operates across the first two stages in the aluminium production chain: bauxite mining and alumina refining. AWAC’s refineries are, on average, just inside the lowest quartile of the cost curve. Alumina’s cost-efficient refining operations stem from proximity to bauxite mines and access to cheap power.
Alumina Price Finally Catches Up to Soaring Aluminium Price; No Change to AUD 1.80 FVE
Our fair value estimate for no-moat Alumina is unchanged at AUD 1.80 per share.
AWAC mined 11.1 million tonnes of bauxite and refined 3.1 million tonnes of alumina, both slightly lower than the June 2021 quarter. However, the gross margin on the alumina side rose 8% to USD 55 per tonne as realised pricing strengthened 4% to USD 292 per tonne. But this strengthening is only a prelude to what can be expected in the fourth quarter, with the average alumina price for the first two weeks of October at USD 410 per tonne. This is broadly as we’d expected given alumina has been wildly out of step with its usual synchronisation to the aluminium price. The latter is soaring at around AUD 1.40 per pound, nearly double the fiscal 2020 average.
Our mid cycle alumina price forecast is unchanged at USD 315 per tonne and considered to be a healthy price. The global alumina cost curve is a flat one. We think rising energy costs, increasingly capturing the cost of carbon, and favourable demand trends via light-weighting vehicles and via battery market growth, support a healthy mid cycle alumina price.
Financial Strength
At end 2020, AWAC had USD 361 million in net cash, marginally improved on 2019’s USD 340 million. At the end June 2021, Alumina had just a position of USD 5.7 million in net debt, also marginally improved. Historically, AWAC reinvested heavily in its operations at the expense of dividend growth. We expect the company to remain largely in maintenance mode, with no major projects planned over the foreseeable future. Therefore, AWAC should pay out most if not all of its operating cash flows in the form of a dividend to Alumina Ltd. and Alcoa. This will help to maintain Alumina Ltd.’s strong financial health. We expect AWAC to remain unleveraged and Alumina to remain modestly leveraged at worst.
Bulls Say
- Alumina is a beneficiary of continued global economic growth and increased demand for aluminium via electrification of transport.
- AWAC is a low-cost alumina producer. It has improved its position on the cost curve relative to peers through expansion of low-cost refineries and closure of high cost operations.
- The amended AWAC agreement ensures that Alumina will be able to maximise value for shareholders and makes it a more attractive acquisition target.
Company Profile
Alumina Ltd. is a forwarding office for Alcoa World Alumina and Chemicals’ distributions. Its profit is a 40% equity share of AWAC profit, less head office and interest expenses. Its cash flow consists of AWAC distributions. AWAC investments include substantial global bauxite reserves and alumina refining operations. Declining capital and operating costs and a lack of supply discipline from China are likely to result in competitive pressures, but Alumina’s position in the lowest quartile of the industry cost curve is defensive.
(Source: Morningstar)
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