Alumina Update

Submitted by Craig Strzelecki on 8 May, 2007 - 19:52

Alumina (AWC) has seen their shares jump over three percent in trade today after Alcoa last night announced a $33bn cash and scrip offer for Canadian aluminium rival Alcan. Surely this must be positive: In a vanilla sense, sharemarket analyst Macquarie Research equities can't help but think that the market will wake up this morning and consider bauxite, alumina and aluminium assets to be more valuable than they were yesterday given the 30% premium that Alcoa is proposing to pay for Alcan. Similarly, additional consolidation of the industry and the growth options that this deal will deliver to AWAC must be a good thing! In addition, recent history tells us that the first bid is never the last and there clearly remains the potential for this hostile bidding process to become competitive. In that environment, there would appear to be significant risk in carrying a short position. However, the market may consider AWC less of a corporate target in the near term. Following recent analysis, the analyst expects to move their base case Net Present Value (NPV) for AWC toward A$8.00 and therefore don't consider there to be a significant takeover premium built into the stock. As such, while it is reasonable to conclude that AWC itself is now less of a target in the near term, analyst's don't believe that should be an over-riding factor for the market. To illustrate that fact, they note AWC is currently trading below the replacement cost of western world capacity which flies in the face of any suggestion that a premium is attached to the stock. Simply, the AWAC formation agreement dictates that the partners in the JV must maintain all bauxite and alumina assets in the AWAC structure (an effective non-compete clause). Consequently Alcoa, should it be successful with the bid, will be forced to vend the Alcan alumina assets into AWAC. Initial discussion (and the conference call with Alcoa) suggests Alumina (AWC) will be supportive of that move and therefore keen to participate. In that scenario, the analyst's analysis suggests AWC will be required to fund its ~A$3.5bn right to the Alcan assets. Given the current balance sheet capacity of AWC, that suggests that a material equity raising towards the year end is not out of the question. That said, given the strong platform that such a deal is expected to provide to AWAC, the analyst's would hope that the market would digest such a requirement readily. The analyst's continue to focus on the underlying value of the large diversified miners and Alumina Ltd. In time, despite significant volatility and idle speculation, they do believe that the value approach always wins out. Consequently, they maintain a positive tact and suggest investors maintain an overweight position up to their likely valuation of A$8.00 per share.

Alumina Limited is listed on the Australian Stock Exchange (ASX) under stock code AWC. You can view their investor website here. AWC was listed on the ASX on 31 October, 1961. Donald Marshall Morley is the chairman for Alumina and John Marlay the CEO. The company as a joint venture interest in bauxite mining, alumina refining, alumina based chemicals and aluminium smelting via its 40 per cent interest in the series of operating entities of Alcoa World Alumina & Chemicals. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. You can use Instalment Warrants to trade AWC. Check your charts and good luck with your share trading!

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