Alumina Ltd posted first-half underlying earnings of US$149 million and declared an interim dividend of US4.2 cents per share, both broadly in line with Ord Minnett’s forecasts although the dividend was higher than market estimates. Net debt of US$90m was pre-reported, and equates to gearing of 3%.
Importantly, first-half cash costs were confirmed at US$202 per tonne, in line with our forecast. Full-year production guidance of 12.6 million tonnes (Mt) was unchanged.
Capital expenditure guidance of US$230 million for the full year was unchanged, implying a catch-up in the second half given a low first-half spending of US$58 million. A crusher move in Western Australia will see capital expenditure remain relatively elevated over the coming years.
Guidance for 12.6Mt of alumina production in CY17 was unchanged, while third-party bauxite exports will be about 7Mt. In the long term, the target is to ramp up third-party bauxite to 16Mt per annum, although the company is yet to clarify associated capital expenditure.
We acknowledge AWC has had a good run and is now testing our valuation support levels. That said, it is one of the few exposures globally to benefit from Chinese aluminium and alumina sector reforms, and on this basis we believe it will trade at a premium over the medium term.
We don’t view the valuation metrics as stretched, but believe the stock offers exposure to the China reform theme while still paying a solid dividend yield, with low gearing and high operating earnings per tonne. We maintain our Accumulate recommendation and have raised our target price to $2.50 from $2.20.