Alcoa’s alumina segment generates best profitability since 2007

Alcoa is the largest global bauxite and alumina producer, with a strong first quartile cost position in both businesses. Alcoa reports the earnings of its bauxite mining and alumina refining business under its Alumina segment. The segment supplies alumina to Alcoa’s Primary Metals segment as well as sells to third-party customers.

Together, Alcoa and Ball Corporation (BLL) form ~4.4% of the Materials Select Sector SPDR ETF (XLB).

Record earnings:

• The Alumina segment’s third-party shipments in 3Q15 stood at 2,798 thousand tons, which represents a 3.1% year-over-year (or YoY) increase.
• Alcoa has been gradually moving away from aluminium-based pricing. Now it prices ~75% of its alumina based on the API (alumina price index) or spot pricing. This makes the Alumina segment’s fundamentals independent of aluminium prices.
• Third-party selling price in 3Q15 was up ~1% from the corresponding quarter last year, as you can see in the graph above.
• Alcoa’s alumina selling prices have risen on a YoY basis but have fallen compared to 2Q15. In 3Q15, lower API prices had a negative impact of $67 million on the Alumina segment’s earnings compared to 2Q15.
• In 3Q15, the Alumina segment generated ATOI (after-tax operating income) of $212 million, which was up more than 240% year-over-year. In the first nine months of the current year, the Alumina segment has generated the highest year-to-date profitability since 2007.

Outlook:

In 4Q15, Alcoa expects production to fall 120,000 metric tons due to curtailment of its Suriname refinery. It also expects the ATOI to increase by $10 million in 4Q15, excluding the impact of pricing and currency.