Alumina Limited

Presentation at CRU 24^th World Aluminium Conference: Alumina Limited (ASX: AWC) is a mid-cap resource company with the market capitalisation of ~A$6.65Bn as on May 14, 2019.  The company gave a presentation at CRU 24^th World Aluminium Conference on 26^th April 2019 stating about its operational performance. The company pointed out that AWAC average alumina cash cost of production is $226/t in 2018 which is the lowest quartile global cash cost curve.

Expectation of Rise in China’s Imports: The company presented that there is an expectation of increased demand from China for bauxite with a CAGR growth of 17% till FY 2023. There are expectations of more import of bauxite because of:

• The declining quality of China’s bauxite deposits,
• Continuing environmental and safety audits,     
• China’s alumina production increases.

                                   
China Import (Source: Company Reports)

New Chief Financial Officer: The company, by an ASX release, announced the appointment of Mr. Grant Dempsey for the designation of Chief Financial Officer, effective from 1^st July 2019. Mr. Grant has a rich experience in advising and financing large resources companies and some of the leading owners and investors in long-life infrastructure assets.

A Quick look on Financial Performance: In Alcoa Alumina segment, the total adjusted EBITDA was A$372 Mn in Q1FY19 as compared to Q4FY18 figure of A$683 Mn. In Alcoa Bauxite segment, it saw A$126 Mn in Q1FY19 against A$110Mn in Q4FY18. Adjusted EBITDA margins of Alcoa Alumina and Alcoa Bauxite segments stood at 28.3% and 41.9%, respectively in Q1FY19. While in Q4 FY 2018, the EBITDA margin of Alcoa Alumina and Alcoa Bauxite segments were 40.2% and 33.8%, respectively.

The company pointed on the alumina performance and stated that lower alumina market prices and lower volume due to fewer production days were the main reasons which impacted the performance of the group. With respect to Bauxite, the steady performance boosted slightly by the better equity earnings.

With respect to AWAC business, it pointed out that AWAC Refining Business’ production stood at 3.1 Mt in both Q1FY19 and Q4FY18 and AWAC mining business showed marginal growth and stood at 11.2 mbdt in Q1FY19, a rise from 11.1 mbdt in Q4FY18.

The company also commented on refining and mining and stated that refining excludes equity shares of Ma’aden and mining includes wholly owned minus plus equity share of CBG and MRN.

What to Expect From AWC: Alumina index pricing demonstrates alumina market fundamentals. There are expectations that supply/demand for alumina would be broadly balanced in 2019. AWC Alumina Holding Limited is hoping that Chinese alumina supply side and environmental reforms, domestic bauxite depletions likely to reach flatter and higher Chinese alumina cost curve. With respect to third-party bauxite market, the continuing growth in bauxite exports from Guinea and Australia to China is forecasted. Also, reasonable volumes are expected from South-east Asia while other supply sources might fluctuate.

Stock Recommendation: The company has ~2.88 billion shares outstanding with the market cap of ~$6.65 billion, an annualized dividend yield of 13.55% and a beta of 0.72x (5-Years, Monthly basis). As per ASX, the company’s stock is trading slightly towards the 52-week lower levels with reasonable PE multiple of 7.38x. On the YTD basis, the stock has delivered the return of 4.05%. During FY18, the company reported a Net margin of 39,712.5% which is well above the industry median of 14.0%. The company also reported ROE of 29.1% again above the industry median of 12.2% generating more returns for the shareholders. Hence, considering aforesaid facts and current trading level, we give a “Hold” recommendation on the stock at the current price of A$2.330 per share (up 0.866% on 14 May 2019).   

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