Company Reports

No-moat Alumina Limited's first-quarter 2024 earnings bettered the prior quarter, but that's not saying much given the sub-optimal performance for some time now.

Alumina's sole asset is a 40% stake in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. 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. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf. An agreement in 2015 secured gas for the majority of Australian production until 2032.

Red ink was anticipated, but Alumina reported a worse-than-expected underlying 2023 net profit after tax loss of USD 92 million, against our loss estimate of USD 24 million. There were no dividends as expected.

Alumina's sole asset is a 40% stake in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. 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. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf. An agreement in 2015 secured gas for the majority of Australian production until 2032.

Alcoa World Alumina and Chemicals' joint venture partner Alcoa has launched a scrip takeover offer for Alumina. Consideration is 0.02854 Alcoa shares for each Alumina share, representing a 13.1% premium to Alumina’s immediately preceding share price of AUD 1.02, or a 19.5% premium based on the average 12-month exchange ratio.

Alumina's sole asset is a 40% stake in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. 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. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf. An agreement in 2015 secured gas for the majority of Australian production until 2032.

Our AUD 1.18 fair value estimate for no-moat Alumina stands. The owner of 40% of the world’s largest alumina refining enterprise, Alcoa World Alumina and Chemicals, reported an improvement in its fourth-quarter 2023 against the third quarter. However, this is coming off a low bar and our 2023 EPS forecast has improved only marginally to a still negative AUD 1.2 cents.

Alumina's sole asset is a 40% stake in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. 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. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf. An agreement in 2015 secured gas for the majority of Australian production until 2032.

Alcoa World Alumina and Chemicals, or AWAC, in which no-moat Alumina owns a 40% stake, has announced it will fully curtail production at its Kwinana alumina refinery, beginning in the second quarter of calendar 2024. Kwinana is an old, high-cost refinery that posted a pretax net loss of USD 130 million in calendar 2023, and management has previously raised the possibility of curtailment or closure. Kwinana’s annual nameplate capacity of 2.2 million metric tons would represent around a fifth of AWAC’s calendar 2022 global refining production; however, the refinery has operated at 80% capacity since January 2023.

No-moat Alumina 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.

Alumina Ltd's sole asset is a 40% stake in Alcoa World Alumina and Chemicals, or AWAC, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. 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. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf. An agreement in 2015 secured gas for the majority of Australian production until 2032.

No-moat Alumina recorded a 19% decline in NPAT to USD 74 million for the first half. As a forwarding office for Alcoa World Alumina and Chemicals, or AWAC, Alumina’s result is effectively tied to the former’s operational performance. The reduction in NPAT was largely driven by COVID-19 logistic challenges, higher fuel and raw material costs, and maintenance outages. These were partially offset by improved average realised prices for alumina and aluminium. In line with our expectations, alumina and bauxite production volumes remained relatively flat at 6.4 and 20.6 million tonnes, respectively. Alumina announced an interim dividend of USD 3.4 cents per share, on track to meet our full-year dividend forecast of USD 8.2 cps.

We still see general overvaluation among our listed mining coverage with the average price/fair value estimate sitting at a 9% premium, versus 10% in April. But some of the recent commodity price moves are yet to be factored into the share prices and we rate seven stocks as undervalued. Thermal coal miners New Hope and Whitehaven remain the cheapest of our coverage. Along with Glencore and South32, the firms trade in 4-star territory. Alumina Limited, Newcrest, and Teck Resources are also at modest fair value discounts.

We increase our fair value estimate for no-moat Alumina Limited by 36% to AUD 1.80 per share, chiefly due to higher margin expectations. Our 2021 EPS forecast is little changed at AUD 0.11, but our fiscal 2022 forecast more than doubles to AUD 0.24. The increases reflect a rise in both our near-term and midcycle alumina price forecasts. In the very near term, despite aluminium prices having risen materially, its chief input the alumina price remains comparatively weak. In the eight years to 2020, the alumina price traded at an average 17% ratio to the aluminium price. But for the first half of 2021, a spike in dry freight rates to China has seen the link degrade to around 12%. The alumina price has been at sub USD 300 per tonne levels despite aluminium prices soaring to over USD 2,200 per tonne (USD 1.00 per pound).

Alumina Ltd.'s sole asset is a 40% stake in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. AWAC primarily operates across the first two stages in the aluminum production chain: bauxite mining and alumina refining. AWAC's refineries are, on average, just inside the lowest quartile of the cost curve. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf venture until 2020 for 100% of output. An agreement in 2015 secured gas for the majority of Australian production until 2032.

No-moat Alumina delivered a 2020 result that reflects its competitive cost position amid declining alumina prices. NPAT of USD 146.6 million fell 31% versus the previous year, as a 5% improvement in unit cash costs to USD 199 per tonne was more than offset by alumina price weakness. This led to alumina EBITDA in the company’s operating joint venture Alcoa World Alumina and Chemicals, or AWAC, declining 45% to USD 69 per tonne. Encouragingly, the average realised alumina price of USD 268 per tonne in 2020 tracked our long-run forecast of USD 270 (in 2020 dollars), and we estimate AWAC generated alumina cash EBITDA margins of about 28%, better than our prior long-term projection of 25%. As such, we’ve raised our estimate for cash margins to 28%. However, we trim our fair value estimate to AUD 1.32 from AUD 1.45 due to appreciation in the Australian dollar since our last update (Alumina reports its financials in U.S. dollars).

We maintain our AUD 1.45 fair value estimate for shares in no-moat Alumina following the transition to a new analyst. Our Standard stewardship and very high fair value uncertainty ratings are similarly unchanged.

Alumina Ltd.'s sole asset is a 40% stake in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. AWAC primarily operates across the first two stages in the aluminum production chain: bauxite mining and alumina refining. AWAC's refineries are, on average, just inside the lowest quartile of the cost curve. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf venture until 2020 for 100% of output. An agreement in 2015 secured gas for the majority of Australian production until 2032.

Alumina Limited issued encouraging first-half results, as margins held up better than we anticipated amid soft demand and lower prices for alumina and aluminum. Having updated our valuation model, we've raised our fair value estimate to AUD 1.45 per share from AUD 1.30. Our no-moat rating is unchanged. Although shares are trading modestly above our updated fair value, shares remain fairly valued in 3-star territory after taking into account our very high uncertainty rating.

Alumina Ltd.'s sole asset is a 40% stake in Alcoa World Alumina and Chemicals, the world's largest alumina producer. Alcoa owns 60% and is the manager of the joint venture. AWAC primarily operates across the first two stages in the aluminum production chain: bauxite mining and alumina refining. AWAC's refineries are, on average, just inside the lowest quartile of the cost curve. Australian refineries constitute slightly more than 50% of the company’s alumina capacity and have gas contracts with the North-West Shelf venture until 2020 for 100% of output. An agreement in 2015 secured gas for the majority of Australian production until 2032.