AWAC returns to help Alumina pay final dividend

Melbourne’s Alumina is expected to continue to pay dividends despite the crash in prices for its namesake intermediate aluminium product. The impact of the crash in alumina prices hit home yesterday with the release of Alcoa’s fourth (December) quarter results in the US, with Alcoa the manager of the 60-40 global alumina alliance (AWAC) with Alumina.

The Alcoa result of $US65 million ($93m) was better than expectations but was down from $US432m in the previous corresponding period, due mainly to savage alumina and aluminium metal price falls.

Citi noted that Alcoa’s alumina earnings before interest, tax, depreciation and amortisation margin in the fourth quarter was $US57 a tonne, down from $US95 a tonne in the third quarter and $US100 a tonne in the first half of 20125.

Third-party alumina prices have dived from $US340 a tonne in the first half of 2015 to $US323 a tonne in the third quarter, and to $US267 a tonne in the fourth quarter. “With spot prices now at about $US200 a tonne, the EBITDA margin has evaporated despite further reductions in costs,’’ Citi said.

Even so, the broker expects Alumina will still be in a position to pay a final dividend of US4c a share. Helping the cause is Alumina’s net debt of only $US101m at December 31, and it has a healthy franking account.

Alumina’s ability to pay dividends is driven by dividend flows from AWAC. Alumina chief executive Peter Wasow said yesterday Alumina had received $35.2m in dividends from AWAC in the fourth quarter, offset by $2.4m in capital contributions back to AWAC.

While the alumina results reported earlier by Alcoa are not a direct reflection of how AWAC is travelling, Mr Wasow put some context around the challenges facing the business. He said, “Lower alumina and aluminium prices and unfavourable currency movements have negatively impacted margins during the fourth quarter of 2015,’’ he said. Higher production at the Australian refineries, continued productivity improvements, energy savings and cost control partially offset these declines.”

Mr Wasow noted that AWAC continued to “adjust its portfolio to improve its cost position and ensure continued competitiveness in the prevailing market conditions’’.

Alcoa recently announced that AWAC’s big Point Comfort alumina refinery in Texas would be taken completely offline, indicating that AWAC’s West Australian refineries were lower down the cost curve. Citi said that after the Point Comfort curtailment, AWAC would have taken almost 3 million tonnes of capacity out of the market.

Alumina shares closed 2.5c lower at 98.5c. It was a $2 stock a year ago.