Alcoa's surprise profit is good news for Alumina holders

BELIEVE it or not, there's a silver (actually, aluminium) lining to Wall Street's 1.5 per cent nervy turn overnight and it comes from this year's second worst-performing main metal (behind only nickel).

Kicking off the US quarterly earnings season, Pittsburgh plodder Alcoa reported earnings of $US94 million ($91.4m) and earnings per share of 9 US cents, compared with $US309m previously. Alcoa is the first of the 30 stocks in the Dow Jones index to report its quarterly numbers, so expect a better performance tonight.

(Our market this morning confined itself to a 0.75 per cent loss but it's hard to know whether that's Alcoa-related).

Of course a 69 per cent profit slump is nothing to enthuse about - at least until you consider that the market was expecting Alcoa to post an EPS loss of 4 US cents a share.

Also Alcoa sank to a $US193m loss in the fourth quarter so black ink is better than red ink.

Rec Coverage 28 Day pass The news sent Alcoa shares up 5 per cent in late trading in the US and locally the joy rubbed off modestly this morning on Alumina (AWC, $1.185), the 40 per cent partner in the Alcoa World Alumina and Chemicals (AWAC) joint venture.

In a heartening sign for economic growth indicators, Alcoa has reaffirmed its calendar 2012 demand forecast of 7 per cent growth. This includes 13-14 per cent for the aerospace industry and - yes – 3 per cent to 7 per cent for the dinosaur auto industry.

“Challenges remain in this economy,” says CEO Klaus Kleinfeld (somewhat redundantly we suspect).

Alcoa has already said it will reduce alumina production (the upstream part affecting AWAC) by 4 per cent.

Aluminium prices continue to behave erratically. A year ago, spot aluminium traded at $US2600 a tonne, but by the end of calendar 2011 had sunk to $US2020/t. By the end of the March quarter 2012, the price had bounced to $US2126/t but after last night's 2 per cent rout on the LME it was back at January 1 levels.

Wisely, Alumina chief John Bevan was keeping a (aluminium) lid on it today.

“Challenging market conditions continued during the quarter with headwinds from lower aluminium and alumina prices and the stronger Australian dollar,'' he said. “These headwinds were partially offset by continued productivity gains, which was pleasing.”

AWAC handed over $US26m of franked divs for the quarter, compared with $US80m for the previous March quarter.

Give or take a few admin costs, this income is re-distributed to Alumina holders as dividends, less admin and financing costs.

Alcoa dispensed 6 US cents a share in divs last year, but given EPS was 5.2 US cents, the payout was topped up through borrowings.

Needless to say, this year's gruel will be thinner or even off the table altogether.

Alumina has been one of Criterion's hoodoo stocks, with last June's speculative buy call at $2.04 proving wildly optimistic.

But we maintain the call. As we said at the time, the stock is best valued on the intrinsic value of its global mining and refining assets, which can't be replicated.

On a sum-of-the-parts basis, the stock is worth much more and one day there'll be corporate action to tidy up the clumsy AWAC structure.