ACE Investors

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By Team Ace Investors

COMPANY OVERVIEW

Alcoa Corporation CDI (“AAI” or the “Company”) is a global industry leader in the production of bauxite, alumina and aluminium, a position enhanced by a portfolio of value-added cast products and select energy assets. Since developing the aluminium industry more than 135 years ago, Alcoa has built a legacy of breakthrough innovations and best practices that have led to efficiency, safety, sustainability and stronger communities wherever it operates.

Source – Company’s Report

During the second quarter, the Company’s total third-party revenue of $2.9 billion increased 12% sequentially. In the Alumina segment, third-party revenue increased 5% on a 7% increase in average realized third-party price, partially offset by lower shipments. In the Aluminum segment, third-party revenue increased 16% on a 9% increase in average realized third-party price and increased shipments. Adjusted net income was $30 million, or $0.16 per share, excluding the impact from net special items of $10 million. Notable special items include a mark-to-market gain of $26 million related to energy contracts, which was more than offset by restructuring-related charges of $18 million and the tax and noncontrolling interest impact of these items.

INVESTMENT RATIONALE:

World Class Bauxite and Alumina Portfolio – Alcoa is one of the world’s largest bauxite miners with high-quality reserves and a first-quartile cost position. Through its sole ownership and equity interests, Alcoa has access to bauxite reserves at seven global mines in Australia, Brazil, Guinea and Saudi Arabia. Alcoa owns and operates two mines in Western Australia (Huntly and Willowdale) and two in Brazil (Juruti and Poços de Caldas). Alcoa operates the world’s largest third-party alumina business, and its portfolio of refining assets has the industry’s lowest average carbon intensity footprint. The Company’s portfolio of seven refineries holds a highly competitive, first-quartile cost curve position. In addition, the six global refining assets that we operate in Australia, Brazil and Spain are located near key markets in the Atlantic and Pacific.
Successful Completion of Acquisition of Alumina Limited – In August 2024, the Company completed the acquisition of Alumina Limited. This strategic move positions Alcoa to further strengthen its market leadership as a pure play, an upstream aluminium company. With Alcoa’s acquisition of Alumina, the Alcoa World Alumina and Chemicals (AWAC) joint venture is now fully owned and controlled by Alcoa. Alcoa previously held a 60 per cent ownership interest in AWAC. AWAC consists of several affiliated entities that own, operate or have an interest in bauxite mines and alumina refineries in Australia, Brazil, Spain, Saudi Arabia and Guinea. AWAC also has a 55 per cent interest in an aluminium smelter in Victoria, Australia.
During the second quarter of 2024, the Company resumed the controlled pace for the restart of the Alumar smelter and continued actions to improve the smelter’s overall performance, after the smelter experienced operational instability in the prior quarter. The site was operating at approximately 72 per cent of the site’s total annual capacity of 268 kmt (Alcoa share) as of June 30, 2024. In April 2024, the U.S. Treasury, in coordination with the United Kingdom, announced sanctions on Russian aluminium. In March 2024, Alcoa completed the restart of approximately 54,000 mtpy of capacity at its Warrick Operations site in Indiana that began in October 2023. Alcoa incurred restart expenses of $3 during the first quarter of 2024.
The Management believes that the Company’s cash on hand, projected cash flows, and liquidity options, combined with its strategic actions, will be adequate to fund its short-term (at least 12 months) and long-term operating and investing needs. The Company plans to opportunistically access liquidity sources to support its cash position and ongoing cash needs. Further, the Company has flexibility related to its use of cash; other than the Alumina Limited debt assumed as of August 1, 2024, the Company has no significant debt maturities until 2027. Alcoa ended the quarter with a cash balance of $1.4 billion.
Profitability Improvement Programs: In January 2024, the Company shared a series of actions to improve its profitability by $645 million by year-end 2025 in comparison to the base year 2023. Through the second quarter of 2024, the Company had implemented numerous run rate improvements and realized year-over-year raw materials savings which are projected to achieve $350 million of the target. The Company is on track to deliver the full target by the end of 2025.
2024 Outlook - Alcoa expects 2024 total Alumina segment production and shipments to remain unchanged from the prior projection, ranging between 9.8 and 10.0 million metric tons, and between 12.7 and 12.9 million metric tons, respectively. The difference between production and shipments reflects trading volumes and externally sourced alumina to fulfil customer contracts due to the curtailment of the Kwinana refinery. Alcoa expects 2024 total Aluminum segment production and shipments to remain unchanged from the prior projection, ranging between 2.2 and 2.3 million metric tons, and between 2.5 and 2.6 million metric tons, respectively.

ACE’s RECOMMENDATION:

The combined entity solidifies Alcoa's position as a leading global supplier of alumina, enhancing its competitive edge in key markets. The acquisition increases Alcoa’s economic exposure to its core, tier-1 bauxite and alumina business, and provides Alumina shareholders with exposure to Alcoa’s global aluminum business. By integrating Alumina's interests, Alcoa anticipates achieving synergies through simplified corporate governance, resulting in greater operational flexibility and strategic optionality. Alcoa operations in Western Australia are a key component of the Company’s portfolio, and this acquisition is expected to deepen that commitment.

The Company continues to optimize its portfolio of assets, with plans underway to move to a 1st quartile cost position and become the lowest CO2e emitter in the industry. With its global network of cast houses, the Company produces primary aluminium to precise customer specifications. Within the aluminium segment, it has energy assets with the operational flexibility to support metal production and capture revenue through participation in third-party markets.

We believe the long-term outlook for aluminium demand remains strong. With diversified demand across multiple sectors and a wide range of products that will require more aluminium, we expect an increased focus on materials that are sustainably produced. Alcoa has always been a sustainability leader, and it is well positioned for a market that is demanding responsibly sourced materials, helping its customers meet their sustainability targets. We recommend the stock as SPECULATIVE BUY at the closing price of $42.62.

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