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AWC’s profit improved marginally during the third quarter
Edited by : AL CIRCLE
2 min read
The USD 67 million alumina segment result for Alcoa, a proxy for Alumina Ltd, or AWC’s, profit, improved marginally on the second quarter’s USD 64 million profit, and was meaningfully better than the previous corresponding period’s loss. Compared with second-quarter 2013, the Australian dollar fell 8% to USD 0.92. That compares with an approximate 2% decline in realised alumina price. Around half AWC’s alumina is Australian sourced.
No change to our AUD 2.60 per share AWC fair value estimate or our 2013 and 2014 earnings forecasts of AUD 0.034 per share and AUD 0.077 per share respectively. While improvement appears in train, the earnings impact is for now tempered by ongoing aluminium/alumina price weakness. A solid platform is in place though, for when prices eventually turn around, as we expect. For the moment, at USD 0.82 per pound, aluminium prices are barely off four-year USD 0.78 lows.
Yet, strong underlying trends persist. The cost of alumina’s prime input bauxite has, on average, risen 35% in China during the last two years. Ongoing growth in China’s imports, as domestic bauxite depletion continues to impact supply, is likely to also induce higher alumina pricing, particularly as dismantling of the aluminium price link for alumina in favour of spot continues. Around 53% of AWC’s alumina will attract spot this year.
No change to our no-moat rating or very high fair value uncertainty for AWC. Despite obvious advantages, including a low cost position relative to peers, aluminium is not geologically scarce, and AWC’s focus on alumina makes it susceptible to concentrated and volatile market pricing. However, moat-type returns are not required for AWC to be a successful investment from these low levels.
No change to our AUD 2.60 per share AWC fair value estimate or our 2013 and 2014 earnings forecasts of AUD 0.034 per share and AUD 0.077 per share respectively. While improvement appears in train, the earnings impact is for now tempered by ongoing aluminium/alumina price weakness. A solid platform is in place though, for when prices eventually turn around, as we expect. For the moment, at USD 0.82 per pound, aluminium prices are barely off four-year USD 0.78 lows.
Yet, strong underlying trends persist. The cost of alumina’s prime input bauxite has, on average, risen 35% in China during the last two years. Ongoing growth in China’s imports, as domestic bauxite depletion continues to impact supply, is likely to also induce higher alumina pricing, particularly as dismantling of the aluminium price link for alumina in favour of spot continues. Around 53% of AWC’s alumina will attract spot this year.
No change to our no-moat rating or very high fair value uncertainty for AWC. Despite obvious advantages, including a low cost position relative to peers, aluminium is not geologically scarce, and AWC’s focus on alumina makes it susceptible to concentrated and volatile market pricing. However, moat-type returns are not required for AWC to be a successful investment from these low levels.
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