Alumina (AWC) Analysis

Submitted by Craig Strzelecki on 10 July, 2007 - 10:59

Alumina (AWC) has a maintained Outperform recommendation and A$8.28 price target per share from Australian market analyst Macquarie Research Equities. Alcoa, AWC's majority partner in the AWAC JV, reported its 2Q07 results after the closing bell in the US. Potential minor downside to earnings. Although it is always difficult to read any direct implications for AWC from the Alcoa result, flat after tax operating income and minority interests combined with a strong A$:US$ exchange rate imply a tough 1H07 for AWC. As expected, alumina production was down 3% half on half as AWAC cut back output from the low margin Point Comfort refinery. But the peak question for the analtysts sits in the revenue line. The three-month aluminium price for 1H07 was up 6.5% HoH and combined with the 3% fall in production, would imply a ~3% increase in revenue. However, Alcoa has reported flat revenue half on half. The analysts believe this is mainly due to the timing and mix of sales, which temporarily impacts the alumina:aluminium price linkage. The minority interest line adds some light. The Alcoa minority interest line has historically acted as a good indicator to the AWC reported profit. In 1H07, the Alcoa minority interests increased to US$225m from US$205m in 2H06. However, this ~10% rise is tempered by a 6% increase in the A$:US$ conversion rate as well as increased AWC interest charges. As such, they believe the minority interest line could be pointing to flat HoH profits for AWC, rather than any increase. Difficult to believe the market will see this as material. To the analysts, when looking for the AWC implications, the market may be slightly disappointed with the numbers coming out of Alcoa. With only possible minor downgrades, they will not be making any major changes to their AWC valuation, which is the main focus for AWC in today's M&A fuelled aluminium market. AWC continues to trade at a discount to the analyst’s NPV of A$8.28ps, which increases towards A$9.00 oer share when rolling forward to 2008. How much to replace AWC today? Using US$35/t for bauxite capacity and US$4,000/t for aluminium smelting capacity, the current share price of Alumina (AWC) implies a valuation around US$1,100/t for the AWC refining capacity. This compares to the analysts' estimate of US$1,000/t capital cost to build Western World alumina refining capacity today. For them, AWC is not trading at any significant premium and offers cash generating capacity today from refineries operating at the low end of the global cost curve, without the construction risks. Still a long-term value proposition. Although the Alcoa 2Q07 result may disappoint some, they see nothing to change their view on value for AWC.

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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