Alumina (AWC), the listed Australian shareholder in Alcoa’s key alumina and bauxite business, AWAC, and selected aluminium smelters, is being further relegated by a move by Alcoa to split itself into two companies.
Alcoa announced overnight that it would split into two publicly traded companies, one containing its slow growing bauxite, alumina and aluminium operations and the other its higher-value aerospace and automotive titanium and aluminium metal businesses. The news saw Alcoa’s shares rise more than 5%, a pretty good performance given the global sell off in equities, especially on Wall Street.
Weak metal prices, down 25% in the last year; 42% slide in Alcoa’s share price in the past year, volatile earnings; missed estimates and no sign of any improvement in the outlook for the commodity side of the business has forced Alcoa into deciding to split the company.
The split means Alumina, which owns 40% of AWAC, (AWC is the largest bauxite and alumina producer in the world) will lose the growth drivers from the hiving off of those higher-margin and growth businesses when the split happens at the end of next year.
Alcoa’s traditional aluminium business has been hurt by a ballooning surplus of metal (from China), which has caused prices to fall to six year lows and has worsened the industry’s biggest crisis in years.
Despite numerous closures and cutbacks of bauxite, alumina and metal producing facilities in the past three years (including facilities in Australia), the aluminium market has worsened. Alcoa has closed or curtailed 170,000 tonnes of annual metal output this year as part of a review of 500,000 tonnes of smelting capacity announced in March. That program will continue while the split is developed and happens next year.
Alcoa has been trying to offset this by investing deeper in its higher-margin titanium and high-strength aluminium sales to the aerospace industry, as plane makers such as Boeing report a growing order book, and renewed global spending on automobiles.
Airplane manufacturers have turned to lightweight titanium from aluminium (and will account for 40% of the revenue in the business) and automakers to new, strong aluminium alloys instead of high-strength steel to improve performance and fuel efficiency.
The aluminium business had revenue of $US13.2 billion in the 12 months ended June 30 and earnings before interest, tax, depreciation and amortisation (EBITDA) of $US2.8 billion, with 64 facilities and around 17,000 workers.
The new company to be created by the split had revenue of $US14.5 billion, with EBITDA of $2.2 billion, 43,000 workers and 157 facilities.
Alcoa has signalled its direction in some recent purchases which have included aerospace and defence industry-focused titanium supplier, RTI International Metals Inc, for $US1.3 billion and privately-held TITAL, which makes titanium and aluminium structural castings for aircraft engines and airframes.
A benefit from the split is that it will separate the volatile earnings in the commodity-based side of the company from the more reliable and consistent earnings in the new metals business.
Falling aluminium prices led to Alcoa missing June quarter earnings estimates and, year to date, the company’s stock is down more than 42%. That slump is what the split is really about.
Some US analysts have suggested that a split would benefit the company’s aerospace and automotive business and could lead to a takeover of its traditional aluminium business.
The 25% slide in aluminium prices since last September has seen London Metal Exchange metal prices fall to six-year lows. Falling premiums for physical delivery have added to the problems for producers such as Alcoa because it cuts their already slim to non-existent margins.
Reuters reckons that the grim price outlook means that 10%, smelting capacity outside of China, or 3.5 million tonnes of production, is losing money. That also helps explain why the split has been announced, finally, after years or urgings from investors and bankers.
