Company Overview: Alumina Limited (ASX: AWC) is a metals and mining company with a 40% interest in the Alcoa World Alumina & Chemicals (AWAC), a leading global bauxite and alumina business. The current refining portfolio of AWAC is comprised mostly of tier-1 assets that allow it to generate strong returns throughout the commodity cycle. The company offers investors a relatively undiluted exposure to the alumina market with AWAC selling predominantly at the market-driven alumina price indices (API), reflecting global alumina market fundamentals.

AWC Details

Improving Top-line and Bottom-line: Alumina Limited (ASX: AWC) is a metals and mining company, focused on refining the intermediate alumina product in the aluminium supply chain. As at 7 October 2020, the company’s market capitalisation stood at ~$4.11 billion. The company’s strategy is to invest worldwide in bauxite mining, alumina refining and selected aluminium smelting operations through its 40% ownership of Alcoa World Alumina & Chemicals (AWAC) - a leading global bauxite and alumina business in Australia that owns and operates long-life, low-cost bauxite, and alumina assets. AWC’s growth strategy is to work closely with AWAC’s joint venture partner - Alcoa Corporation, to maximise AWAC's performance and ensure sustained growth. AWAC JV owns and operates globally leading bauxite mines and alumina refineries in Spain, Saudi Arabia, Australia, Brazil, and Guinea. Over the period of 2015 - 2019, the company’s revenue and net profit have increased at a CAGR of 123.61% and 24.77%, respectively.

5-Year Financial Performance (Source: Company Reports)

Amid the ongoing COVID-19 pandemic, AWAC assets are operating without interruption, with health and safety measures in place. Currently, the company’s utmost focus is on the safety of its employees. Looking ahead, the company is focussed on maintaining a decent balance sheet for a cyclical business that can meet shareholders’ requirements while meeting AWAC’s investment calls throughout the cycles. Considering the cash generation at AWAC, combined with AWC’s robust balance sheet, the company seems well placed to deal with the shocks and market disruptions caused by the COVID-19 pandemic.

FY19 Results Highlights: During the year ending 31 December 2019 or FY19, AWAC recorded a net profit after tax of US$565.1 million as compared to a net profit after tax of US$1,640.2 million in 2018. The decline in profit was mainly due to a softening market price for alumina. Over the year, AWAC was benefited from record annual alumina production of 12.6 million tonnes and a 7% improvement in the average cost of production to US$210 per tonne.

During FY19, AWC received US$420.9 million in net cash distributions from AWAC and reported a profit after tax of US$214 million. For the full year, the company paid a total dividend of 8.0 US cents per share.

H1FY20 Result Highlights: During the half-year ending 30 June 2020 or H1FY20, AWAC’s cash cost per tonne of alumina produced improved by 11% per tonne compared to the previous corresponding period (pcp). Due to COVID-19 pandemic and associated disruptions, AWAC witnessed significant health, economic, and logistical impacts on its assets during H1FY20. However, AWAC’s refineries performed decently over the period and recorded the highest daily production rate for a half year. The Bauxite production from AWAC operating mines increased by 2% to 20.3 million BDT in H1FY20, compared to pcp. The production from AWAC operated refineries was 6.4 million tonnes, up 3.2% on pcp. For the half-year period, AWAC reported lower NPAT of US$246 million, compared to US$552 million in H1FY19, mainly due to lower realised alumina prices, partially offset by improvements in the cash cost of alumina production and lower charges for significant items.

AWC also reported a lower NPAT of US$90.5 million, compared to US$210.9 million in pcp, mainly due to the decline in the net receipts from AWAC. During H1FY20, AWC’s general and administrative expenses were US$0.6 million, higher as compared with 1H 2019, reflecting Alumina Limited’s continued investment in capabilities and expertise required to manage the business in an increasingly complex market. For the half-year period, the company has paid a fully franked dividend of 2.8 US cents per share. As at 30 June 2020, the company had cash and cash equivalents of US$32.6 million and net debt of US$77.4 million.

H1FY20 Results (Source: Company Reports) 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 50.65% of the total shareholding.  Allan Gray Australia Pty and CITIC Resources Australia Pty. Ltd. hold maximum interest in the company at 9.95% and 9.61%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s ROE stood at 5.4%, higher than the industry median of 4.9%. For the same period, the company’s current ratio stood at 34.2x, significantly higher than the industry median of 1.85x. The company's debt to equity multiple stood at 0.07x in H1FY20, lower than the industry median of 0.21x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

COVID-19 Update: Despite the challenges presented by the COVID-19 pandemic, all AWAC assets continue to operate without interruption. In response to COVID-19 pandemic, AWAC undertook several prudent cash preservation actions, which includes reviewing non-critical maintenance activities, actively reducing operational costs and deferring certain sustaining and growth capital expenditure projects. These measures helped AWAC in maintaining decent operating performance during H1FY20.

Australia Ltd Taxation Assessments Update: Recently, the Australian Taxation Office (ATO) undertook a transfer pricing examination in respect of certain historical third-party alumina sales made by Alcoa of Australia Limited (AoA) over a 20-year period. Following the examination, the ATO has issued Notices of Assessment for additional income tax payable by AoA of around A$214 million and claims for compounded interest on the primary tax amount totaling approximately A$707 million.

Change of Director’s Interest: Recently, the company disclosed that one of its Director Shirley IN’T VELD who had a direct interest in the company had acquired 2563 ordinary shares under her election to participate in the Dividend Reinvestment Plan. She now holds 102,563 ordinary shares of the company.

Outlook: Although AWAC’s performance was impacted by the COVID-19 pandemic, the long-life and quality of its assets provide flexibility to maintain or adjust operations where needed which allows AWAC to re-emerge in good shape to quickly take advantage of improved conditions. AWAC’s operational performance continues to benefit from its cash conservation initiatives, stable production, focus on health and safety, and its low position on the cost curve.  The company currently expects the demand for aluminium to grow in the market through economic expansion and increasing intensity of use. With AWAC remaining at the lower end of the cost curve, it is well-positioned to compete effectively against Chinese and other alumina producers.  For FY20, AWAC expects its alumina production to be around 12.8 million tonnes and aluminium production to be around 160,000 tonnes. AWAC expects third-party bauxite sales to be around 6.5 million BD tonnes in FY20.  Considering AWC’s undiluted exposure to alumina in the supply chain, low debt and robust balance sheet, the company seems well-positioned for long-term growth.

AWAC FY20 Guidance (Source: Company Reports)

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last three months, the stock of AWAC has corrected by 14.76% and is trading close to its 52-weeks low, offering a decent opportunity for accumulation. The stock is trading at a PE multiple of 30.3x and has an annual dividend yield of 6.61%. On the technical analysis front, the stock has a support level of ~A$1.35 and a resistance of ~$1.68. We have valued the stock using a price to earnings multiple based illustrative relative valuation method and have arrived at a target price of lower double-digit upside (in % terms). For the purpose, we have taken peers like South32 Ltd (ASX: S32), BlueScope Steel Ltd (ASX: BSL) and Lynas Corporation Ltd (ASX: LYC), etc. Considering the resilient performance by AWAC in H1FY20, AWC’s robust balance sheet, long-term fundamentals of AWAC, current trading levels and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.410, down by 0.353% on 7 October 2020.

AWC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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