Cash to Flow

Alcoa Inc, the majority partner in Alumina Ltd’s 40%-owned Alcoa World, Alumina and Chemicals (AWAC) joint venture, reported positive alumina division results for the December quarter and we note the following key points from the release:

 

  • Combined bauxite and alumina operating earnings (EBITDA) came in at US$668m, with implied EBITDA of US$196/t – stripping out third-party bauxite – versus our estimate of US$202/t.
  • Implied alumina cash costs were flat quarter-on-quarter at about US$215/t, which was a solid result given the inflationary backdrop.
  • We have incorporated a slightly higher alumina price outlook into our model, increasing our forecasts by 5% to US$373/t in CY18 and by 8% to US$320/t in CY19.

We maintain our Accumulate recommendation on Alumina Ltd and have raised our target price to $2.70 from $2.50.

 

  • Alumina margins – Alcoa reported combined bauxite and alumina EBITDA of US$668m, of which we estimate US$15m relates to third-party bauxite sales. Stripping this out, implied EBITDA of US$196/t was broadly in line with our US$202/t estimate. The reported achieved price of US$406/t looked a touch soft, suggesting sales may have been weighted towards the beginning of the period when prices were lower. Importantly, cash costs appeared to hold steady at around US$215/t, which we saw as a good outcome given inflationary pressures across the industry.
  • Dividend outlook – Alumina Ltd reported net debt of US$58m at the end of the period. We estimate a final dividend of $0.10/share based on the cash flow received up until the declaration of the dividend in February.

Alumina Ltd offers exposure to tier-1 alumina assets and buoyant commodity markets, with a strong balance sheet and significant cash flow from the AWAC joint venture. Given the lack of growth commitments, this should be returned to shareholders in the foreseeable future. The shares have had a good run, but we maintain our Accumulate recommendation based on the likelihood that markets remain tight and cash returns in improve year-on-year.

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