AWC

Australian Resources Weekly provided by Australian market analyst UBS.

Impact of Apache explosion

Apache gas pipeline explosion event:

Alumina Limited (AWC) has a share price target of $6.70 from Australian stockmarket analyst Macquarie Research Equities.

Alumina Limited (AWC) announces US$300m convertible bond

Event: AWC announces US$300m convertible bond:

Alumina (AWC) has a Neutral 2 recommendation and a stock price target of $8.20 from Australian equities market analyst UBS. Rio Tinto today announced an all cash bid of US$101ps for Alcan, valuing Alcan at US$38.1bn. The implied multiple for this transaction based on consensus earnings is 16.3x (07e) and 16.7x (08e) earnings, pre-synergies (according to Rio) of US$600m after tax. Press articles over recent weeks have talked about a bid for Alcan by Rio Tinto and for Alcoa by BHP Billiton. With one leg of the double now underway, it is likely in their view that the market will focus on the probability of a bid for Alcoa and AWC by BHP Billiton., or perhaps a bid for AWC by Alcoa given it may be unsuccessful in its bid for Alcan. However, they believe the only logical owner for AWC is its joint-venture partner in AWAC, thus it may not attract as high a multiple. Based on consensus earnings of 49cps in 2008e and the Rio-Alcan multiple of 16.7x, we derive a value for AWC of $8.20ps. They have raised their price target to this as they expect the market may support the AWC price in the short term as a result of M&A in the sector and a renewed focus on alumina/aluminium. Their NPV is $6.74 based on a US90c/lb LT aluminium price. With the aluminium cost curve moving up, there may be upside to LT price, but we prefer BHP & RIO to AWC for their more attractive relative valuations.

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 (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 (AWC) has a Neutral 2 stock trading recommendation and a price target of $7.50 per share from analyst UBS. Alcoa reported Q1/07 EPS of US$0.79, slightly above consensus forecasts of US$0.76, and up from US$0.66 in the Q4/06. Management attributed the good performance to "productivity improvements in cost of goods and overheads" and a "focus on higher value-added solutions such as aerospace products, and productivity programs". Alcoa's Minority Interest line came in at US$115m (A$146m) which is generally a good proxy for AWC's NPAT. The analyst was previously projecting H1/07 NPAT of A$361m for AWC which would imply that Q2 earnings would have to be A$215m or 47% higher to reach our forecast. As a result, we have brought our 07 earnings down 7% to reflect lower production in Pinjarra, FX, and costs related to the Guinean strike. The stockmarket analyst expects that Alumina Limited's current off-market buyback program could support the stock in the near term, particularly through the pricing and scale-back periods. Additionally, aluminium prices have year to date held up at >US$1.25/lb which implies that consensus forecasts may be too low at cUS$1.10/lb. However, earnings valuations for AWC relative to BHP, RIO, Alcoa and Alcan remain high.

Alumina (AWC) have a retained Outperform recommendation from stock analyst Macquarie Research Equities (MRE). Shares in Alumina (AWC) survived yesterday's sell-off relatively unscathed after the company announced a $250m off-market share buyback following approval from the Australian Taxation Office (ATO). The analyst believes AWC presents a "clear value proposition", with yesterday’s announcement only adding to this view. At the time of the result, MRE's provisional analysis indicated the potential for a A$250–350m return given the limitations dictated by the ongoing capital expenditure program and prospective balance sheet capacity. As such, while this initiative is welcomed, the stock analyst believes it has been well flagged by the company and should therefore come as little surprise to the market. That aside, MRE note that the capital component of the buyback of A$0.36ps (or around 5.0% of the current price) is particularly attractive for those investors who enjoy a low marginal tax rate. At the time of the 2006 financial result, management outlined the innovative nature of the revised AWAC funding arrangement and the buyback announcement is clear evidence of its benefits. In summary, the funding development gives investors (and the board) a greater degree of confidence that the company can continue to meet its capital requirements and ensures that Alcoa of Australia will continue to distribute dividends (with the valuable franking credits attached), even in the event that the AWAC partners approve the capital intensive Wagerup project. That's why the board has now committed to an annual franked dividend of A$0.24ps and why the board can consider such initiatives as the aforementioned buyback. At an assumed buyback price of A$7.00ps, the A$250m buyback will cancel 41.5m shares, or around 3.5% of AWC issued capital. On that basis, and assuming an interest charge of 5.5%, after tax earnings will be reduced by about A$9.0m. On the flip-side, the cancellation of ~41.5m shares is similarly expected to reduce the annual dividend commitment by ~A$10m. Therefore, AWC has effectively generated EPS accretion of around 1–2% with only minimal (or even no) future cash impact to the company and its shareholders. Furthermore, it is particularly important to note that in this instance, the analyst can certainly commend management for committing to purchase its own shares at a discount to their estimation of NPV.