Ord Minnett has revamped its refining-cost assumptions for the Alcoa World Alumina and Chemicals (AWAC) joint venture – Alumina Ltd’s 40% stake in AWAC is its key asset, with the other 60% of AWAC being owned by Alcoa – based on a different interpretation of Alcoa Inc’s segment reporting.
Our previous calculation method excluded the impact of alumina swaps, which is not disclosed. Importantly, volume from swaps – we estimate 300,000 tonnes – does not generate operating earnings. By excluding these volumes from total shipments, adjusted sales reduce from 3.54 million tonnes (Mt) to 3.25Mt, aligning more closely with production.
This results in higher alumina operating earnings – excluding third-party bauxite contributions – of US$96/t versus our previous estimate of US$88/t, equating to the same operating earnings but on lower volume. Subtracting this from our US$300/t free-on-board alumina price estimate implies cash costs only rose US$2/t to US$204/t QoQ. In turn, our CY17 earnings estimate has increased by US$19 million on the back of this change.
We maintain our Accumulate recommendation and target price of $2.20, given the company’s strong balance sheet and dividend yield, along with its exposure to China’s aluminium sector reforms.