Alumina Ltd Dividend Under Threat

The near-term operating environment for Alumina is difficult, as overcapacity is driving down prices, aluminium inventories are at near record levels and capacity closures haven't yet been enough to tighten up the market.

In JP Morgan's view this tough near-term outlook for Alumina Ltd should not necessitate an equity rising, as undrawn debt facilities are likely to be enough to ride things out in coming months even if market conditions worsen further before improving.

While this is a positive, the issue in JP Morgan's view is weak near-term cash flows that are likely to mean an increase in group debt levels. The broker's estimates suggest dividends received from AWAC won't be enough to cover interest, corporate costs, capital calls and remaining dividend payments.

This leads JP Morgan to suggest Alumina's net debt will rise from US$472 million at the end of 2011 to around US$562 million by the end of this year. This will leave Alumina with around US$170 million in undrawn debt facilities at the end of 2012. Group debt should improve in 2013 thanks to higher alumina prices.

With debt levels expected to increase this year, JP Morgan sees scope for Alumina to look at cutting dividends. The final dividend for 2011 equated to US$73 million, so in the view of JP Morgan the likelihood is no interim or final dividend will be declared in 2012.

Forecasts have been adjusted to reflect these expectations and changes to aluminium and foreign exchange assumptions. JP Morgan is now forecasting underlying net profit in US dollar terms of $5 million this year and $85 million in 2013, which compares to previous estimates of minus $1 million and $168 million respectively.

In earnings per share (EPS) terms this equates to results of US0.2c this year and US3.5c in FY13, which compares to consensus EPS forecasts according to the FNArena database of minus US0.1c this year and US5.6c in 2013.

The key for JP Morgan is while Alumina Ltd is unlikely to require an equity raising this year, there continues to be the risk the company remains unprofitable or capital call requirements increase in coming months. Any slowdown in macro economic growth that pressures aluminium prices could generate such an outcome.

This risk leads JP Morgan to suggest while shares in Alumina Ltd look cheap relative to valuation, this is based on long-run earnings margins for the company returning to normal levels. Current market conditions suggest this may occur later rather than sooner given the excess supply in the aluminium market.