Alumina: Assumed Extended Diet of Lower Bauxite Grades Leads to Downgrades

No-moat Alumina AWC owns 40% of the world’s largest alumina refining enterprise, Alcoa World Alumina and Chemicals, or AWAC. We reduced our fair value estimate for Alumina by 9% to AUD 1.18 after pushing out the expected date for reinstatement of AWAC access to higher-grade bauxite reserves in Western Australia.

AWAC says it continues to make progress with relevant government agencies in support of the annual approval process for bauxite mining. It has submitted a revised mine management program for the period 2023-27, working toward approval for Myara North and the plan during the fourth quarter of 2023. But the company also says it now doesn’t expect improved grades versus recent lesser-grade material until 2027 at the earliest, with that coming via access to bauxite at new regions Myara North and Holyoake. We consequently increase alumina operating cost expectations to 2027.

AWAC enjoyed somewhat lower costs in the third quarter of 2023 mainly due to lower caustic prices and better operational performance. Alumina unit cash costs declined 8% to USD 303 per metric ton against USD 329 per metric ton in second quarter of 2023. As well, the firm expects further benefit from lower caustic soda costs in the fourth quarter in addition to productivity gains. But we’d view these as somewhat incremental in contrast to the benefits higher-grade bauxite affords. Unit costs averaged around USD 215 per metric ton for the three years to 2021, resting on high bauxite grades.

We reduce our 2023 Alumina EPS forecast to negative AUD 1.6 cents from positive AUD 0.8 cents, and our 2024 forecast to positive AUD 2.8 cents. That before gradual improvement to something resembling the historical levels nearer AUD 10.0 cents around 2027.

Alumina’s share price has halved since January 2023 and at around AUD 0.90 trades below our reduced fair value in 4-star territory. A positive ruling around access to better-grade bauxite is the most likely key catalyst for a share price rerate.