Kalkine Resources Report

ALUMINA LIMITED

Sep 30, 2015

| Read Time :10 Mins

AWC:ASX

Investment Type

Small-Cap

Risk Level

Action

Rec. Price ($)

Company Overview - Alumina Limited is an Australia-based mining company. Alumina Limited's sole business undertaking is in the global bauxite, alumina and aluminum industry, which it conducts primarily through bauxite mining and alumina refining. All of those business activities are conducted through its 40% investments in Alcoa World Alumina and Chemicals (AWAC). AWAC has an international network of alumina refineries in the United States, Brazil, Suriname, Jamaica, Spain and Australia. AWAC owns or partly owns, bauxite mines operating in five countries that meet the production needs of the AWAC refineries. AWAC produces chemical grade alumina from three refineries: Kwinana (Australia), Point Comfort (USA) and San Ciprian (Spain). AWAC's shipping operations use owned and chartered vessels to transport dry and liquid bulk cargoes, including bauxite, alumina, caustic soda, fuel oil, petroleum, coke and limestone.

Mixed first half of 2015 performance: Alumina Limited (ASX: AWC) reported a net profit after tax of US$122 million in the first half of fiscal 2015, against the net loss of US$47 million in the corresponding period of last year. Meanwhile, AWC incurred US$53 million for restructuring the AWAC’s asset portfolio during the period as compared to US$74 million in pcp. Alumina improved a fully franked interim dividend of US 4.5 cents per share. As per the AWAC highlights, E BITDA improved by US$611 million to US$730 million, while EBITDA without significant items rose by US$455 million to US$801 million. Alumina EBITDA margin improved by $60 per tonne, while cash cost of alumina production reduced by $30 per tonne. AWAC’s average realized price of alumina surged by $21 per tonne. AWAC cash from operations enlarged by $239 million to $321 million during the period, which is later to a $300 million prepayment for the Western Australian gas supply agreement. The proportion of third party smelter grade alumina shipments that were priced on spot or alumina indexed basis improved to 71% during the period.

Alumina first half of 2015 performance highlights (Source: Company reports)

Balance sheet highlights: Alumina improved its cash and cash equivalents to US$30 million during the first half of 2015, as compared to US$24.9 million in the prior corresponding period. AWC decreased its borrowings to US$95.8 million in 1H15, from US$111.5 million in 1H14. Alumina cash inflow from operating activities to US$17 million during the period against net outflow of US$12.7 million in pcp. Net cash inflow from investing activities rose to US$43.4 million in 1H15, from US$19.6 million in 1H14. Meanwhile, AWAC’s improved free cash flow by $54 million. AWAC receipts increased by $17 million while contributions to AWAC reduced by $32 million. Corporate and finance costs decreased by $5 million. AWAC Maturity profile of borrowings prolonged with better pricing, while the gearing decreased to 2.8%. Cash from operations surged by $239.1 million during the period and also contains the $300 million prepayment for natural gas supply from 2020.

Alumina Daily Chart (Source - Thomson Reuters)

AWAC’s portfolio restructuring highlights: AWAC’s portfolio restructuring witnessed many changes during the first half of 2015 period. Alcoa reorganized its businesses in January and developed a separate mining unit, even though it falls under alumina reporting, and this would be under AWAC mining operations and interests. Mining business unit creation would identify the rising commercial value of bauxite, the wide resources that are available to AWAC and the mining capabilities and infrastructure capacity of AWAC. Alcoa also undertook a twelve month review of 2.8 million tonnes in refining capacity which includes AWAC refineries for potential restriction and permanent closure or divestiture and accordingly AWAC cut 0.443 million tonnes per year of capacity at the Suralco (Suriname) refinery. On the other hand, Alcoa of Australia which is an AWAC entity, won a twelve year gas supply agreement to power its alumina refineries in Western Australia, which would start from July 2020. This deal reiterates the fact of the low cost position of AWAC’s Australian alumina refining business. With this deal, over 75% of the amount of gas which now secured by Alcoa of Australia Limited would be replacing the present gas supply agreements which expire at the end of the decade. Meanwhile, Alcoa of Australia Limited shut the Anglesea coal mine and power station and incurred over $37.4 million total restructuring charges related to its closure. But Ma’aden refinery started operating using bauxite from its own mine from last year December and estimates o produce 1.0 million tonnes (AWAC’s share is 251,000 tonnes) of alumina in 2015. The mine also targets to be among the lowest cash production cost per tonne refineries in AWAC’s portfolio.

AWAC EBITDA performance (Source: Company reports)

Alumina addressable Market opportunity: The group estimates that the global aluminum demand might rise at a CAGR of 4.3% during the 2014 to 2024, driven by the electricity transmission in China ad transport in China and RoW. Xinjiang and other China regions added Smelting capacity of 1.4m tpa and 1.3m tpa respectively. Chinese primary aluminum and semis exports (including fakes) delivered solid performance during first half of 2015. However, there is still uncertainty in capacity balance due to non-clarity on China additions. Refining capacity balance depends on the expansions in Indonesia and Shanxi province, where bauxite may become an issue. Even CM Group and CRU are forecasting a slower Shanxi additions. On the other hand, Global capacity utilization improved due to better industry profitability but over 5.4m tpa merchant capacity was cut in Shandong. But, Alumina cost curve also fell 13% driven by rising US dollar, Energy prices, decrease in caustic prices and bauxite exports from Malaysia. Although Indonesian ban remains, rising exports in Malaysia would offset this pressure which could export in the range of 15 to 20 million tonnes this year. On an overall note, better demand and great capacity utilization might balance the market next year and AWAC would continue to get margin support driven by the shift to API and inferior costs as the costs would be incurred at BRL and AUD currencies. On the other hand, the ongoing supply restrictions on Pacific bauxite might lead to replace supply with more distant or costly bauxite by higher cost merchant refineries in the long term.

API shift to underpin margins (Source: Company reports)

Guidance: Alumina estimates an ongoing growth in metal demand which would lead to a better alumina demand. However, the group estimates the Short term alumina prices pressure would continue given the tough commodity market leading to lower aluminum prices and short term alumina oversupply. However, Alumina intends to maintain its margins through API pricing shift, enhancing productivity and falling Australian and Brazilian currencies. The group also improved its dividends during the first half, reporting an interim, fully franked dividend of 4.5 US cents per share, as compared to final dividend of 1.6 US cents per share in fiscal year of 2014. AWAC was able to deliver better EBITDA margins despite Western Australian gas prepayment. AWAC is well positioned to fund its growth efforts, and estimates to incur a capex of $175 million in the second half of 2015. As per the Net restructuring (after-tax) charges, Point Henry closure might incur upto $5 million while Anglesea closure might incur $20 million during the second half.

AWAC cash costs and currency exposure (Source: Company reports)

Stock Outlook: The shares of Alumina Limited (ASX: AWC) plunged over 33.7% during this year to date owing to highly volatile commodity prices during the period. In fact the stock corrected over 20% in the last three months and over 11.1% in just last four weeks alone. However Alumina mines are placed among the lowest cash cost of production in the world. Growing demand from Malaysia might offer some respite to the firm in the short term while the overall global demand is estimated to recover in the long term. Moreover, Moody's Investors Service quite recently altered Alcoa of Australia Limited's (AoA) outlook from stable to developing and even asserted AoA's Baa2 issuer rating. We believe investors need to consider adding Alumina in their portfolio, given its strong valuations and long term pressure. Moreover, the group has an attractive dividend yield of 7.1%. Based on the foregoing, we give a “BUY” recommendation on the stock at the current price of $1.125

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