Alcoa Under the Scanner – Surviving in Poor Market Conditions

Alcoa Under the Scanner – Surviving in Poor Market Conditions
Alcoa Headquarters in Pittsburgh - via Flickr

Since Alcoa (NYSE: AA) launched as an independent company – (after spinning off its downstream segment in November 2016, now rebranded as Arconic,), the company has continued to fight tough market conditions to secure growth. The split was not a surprise to market watchers, as it came after the average LME cash price for 2016 hit the lowest level since 2003 (US$ 1605/tonne). But 2019 has registered some success for Alcoa, in the way the company has rationalised and increased production, while further lowering costs.

Alcoa posted a net loss of $402 million (US$ 2.17/share), which includes a $319 million one-off cost to divest from its 25.1% minority interest in the Ma’aden Rolling Company (MRC) in Saudi Arabia. The remaining US$ 81 million were earmarked for other special items (including a tax provision of US$ 22 million, US$ 8 million for the USW master agreement negotiation and other Becancour lockout related costs). With these move, Alcoa has been released from all future MRC obligations, including Alcoa’s support for MRC debt, and its share in any future MRC cash contributions. Excluding the impact and costs of special items, Q2 2019 adjusted net loss amounts to US$ 2 million, or $0.01 per share.

Alcoa continues to hold a a 25.1% stake in the joint ventures with Ma’aden on bauxite mining, alumina refining and aluminum smelting. Alcoa reached two new competitive labour agreements at smelters in Québec, where it agreed to six-year contracts at the Baie Comeau (May 31) and Bécancour (July 2) smelters in Canada. Ending an 18-month labour dispute, the Bécancour restart began on July 26. The full restart will be completed in the second quarter of 2020.

Finally, Alcoa reached a conditional agreement on July 5 to divest from the Avilés and La Coruña aluminium plants in Spain. Alcoa expects to record restructuring-related charges in the third quarter of 2019, estimated to range between US$ 100 million and US$ 140 million (pre- and after-tax), or $0.54 to $0.75 per share, depending on whether an acquisition or a collective dismissal occurs.

As of January 1, 2019, the Company changed its accounting method for valuing certain inventories from last-in, first-out (LIFO) to average cost. The effects of the change in accounting principle have been retrospectively applied to all prior periods presented.

In the second quarter, Alcoa reported adjusted EBITDA, excluding special items, of US$455 million, down slightly from the prior quarter, primarily due to lower pricing for both alumina and aluminium that was partially offset by higher energy sales and lower costs for raw materials. The second quarter revenue was US$ 2.71 billion, which is flat sequentially from the previous quarter. The cash balance at the end of June stood at US$ 834 million and total debt at US$ 1.8 billion, while net debt was US$ 1.0 billion, as of June 30, 2019.

In-depth data

Among its top three ex-China competitors (UC Rusal, Norsk Hydro and Rio Tinto), Alcoa is the second largest bauxite miner (behind Rio Tinto), with a production cost in the first quartile, the largest alumina refiner, with the largest long position and a first quartile cost production, and the third largest aluminium producer (behind UC Rusal and Rio Tinto).

Shipments of bauxite in H1 2019 stood at 23.2 million dry metric tonnes. Shipments of alumina were 6.7 million tonnes, while primary aluminium shipments reached 1.4 million tonnes. Around 12% of bauxite shipments and 69% of alumina shipments in H1 2019 went to 3rd party sales, as well as 100% of aluminium shipments. Worth mentioning with this is that the company’s primary aluminium production in Q2 amounted to 533,000 tonnes (down from 537,000 tonnes in Q1), while the remaining amount (1.4 million tonnes) refers to shipments of flat rolled products.

Total annual bauxite shipments in 2019 are expected to range between 47.0 and 48.0 million dry metric tonnes. Total alumina shipments are projected between 13.6 and 13.7 million tonnes with anticipated operational improvements and higher year-on-year production. Aluminium shipments are expected to be between 2.8 and 2.9 million tonnes.

Alcoa’s realized alumina sales price in Q2 2019 amounted to US$ 376/t compared to US$ 467/t in Q2 2018. The realized primary aluminium price in Q2 2019 was US$ 2167 /t vs. US$ 2623/t last year.

In the Bauxite segment Alcoa, expects adjusted EBITDA improvement between US$ 5 and 10 million in Q3 2019, on higher production and lower major maintenance costs, compared to Q2 2019. The same is expected in the alumina segment, where lower caustic soda costs are expected to provide US$ 30-35 million sequential benefit Q/Q.

In the Aluminium segment, lower alumina prices are estimated to produce a sequential benefit of US$ 35-40 million in Q3. Lower hydro prices in Brazil will be partially offset by better rolling results, netting an adjusted EBITDA down by approximately US$ 10 million. Finally, the removal of Section 232 tariffs on Canadian origin aluminium sold in U.S., lower raw material costs and other performance improvements are expected to provide a sequential benefit of US$ 15 million in Q3 2019.

Alcoa reported US$ 13.4 billion in revenue in FY 2018, with more than half of its revenues (54%) coming from the Aluminium segment. The Alumina segment accounted for 39% of revenues, with bauxite coming in last with 7%. In 2019, Alcoa projected revenues of US$ 10.9 billion and US$ 11.1 billion in 2020.

Alcoa’s goal is to maintain US$ 1 billion of cash on the balance sheet (it had US$ 0.834 billion on June 30). The plan for 2019 is about US$ 300 million of sustaining capital, with US$ 120 million of return seeking capital for 2019 (revised in June from US$ 150 million).

William Oplinger, Alcoa’s executive vice president and chief financial officer, said at a conference in May, that the company expects approximate benefits of US$ 100 million a year due to Section 232 tariffs on aluminium imports. This mainly comes from significantly higher Midwest premiums, which have created a “pricing umbrella” for U.S. primary aluminium producers. However, the recent removal of imports tariffs for aluminium produced in Canada resulted in falling Midwest premiums, which will likely send Alcoa’s benefits lower.

Recently Alcoa announced that the Aluminium Stewardship Initiative (ASI) has certified three Alcoa-operated locations, one in each of the Company’s three business units. The ASI certifications are valid for three years and include the Juruti bauxite mine in Brazil, the Alumar alumina refinery near São Luís, Brazil, and the aluminum smelter in San Ciprián, Spain.

Comparing to “old Alcoa”

It is interesting to make a quick comparison between the old Alcoa (which includes Arconic) and today’s streamlined Alcoa. As a reminder, Arconic includes the Aerospace, Automotive, Can-stock and Engineering divisions (building and construction and industrial gas turbines).

Though no precise comparison can be established due to different accounting methods, looking at the two companies’ revenues from sales and EBITDA can provide a good image of their respective sizes.

If we take as a reference Q2 2015, and compare to Q2 2019, considering similar market conditions and LME aluminium prices, and if we take into account that:

  • Average LME aluminium cash prices were similar: US$ 1769 /t average in Q2 2015 vs. 1793/t in Q2 2019.
  • Average realised aluminium price in Q2 2015 was US$ 2180 /t vs. US$ 2167/t in Q2 2019.

The following table provides some initial conclusions:

Source: Alcoa, compiled by Goran Djukanovic (1) –  Adjusted and consolidated net profit (loss) attributable to Alcoa (2) -The Aluminium segment’s third-party aluminium shipments are composed of both primary aluminium and flat-rolled aluminium.


Source: Alcoa, Fastmarkets, Goran Djukanovic est.