Alcoa Fears Australian Carbon Tax
Alcoa (NYSE:AA) reacted to the decision of the Australian government to implement a carbon tax in the country by announcing that its earnings figures would be hit. The world leader in the production and management of primary aluminum, fabricated aluminum and alumina commented that it understood the importance of having sustainable operations and that it has voluntarily made significant cuts to its carbon emissions over the years. [1] But it was not possible to reduce emissions to lower levels without incurring heavy capital expenditures on its part. Alcoa competes with other international metals and mining giants like Rusal, Rio Tinto (NYSE:RIO), BHP Billiton (NYSE:BHP) and Chalco (NYSE:ACH).
Our price estimate for Alcoa, at $18.55, is roughly 5% below the stock’s market price.
Understanding the Australian Carbon Tax
The Australian federal government, led by Prime Minister Julia Gillard, announced on 24th February 2011 that they have a framework in place to implement the Carbon Tax from 1st July, 2012. According to the announcement, “the price on carbon would be fixed for a period of three to five years before moving to a cap-and-trade system” [2]
While the exact price to be levied as carbon tax has not yet been disclosed, it is expected to be between $23 – $26 per ton of carbon emitted.
Alcoa’s Business in Australia
Alcoa has extensive operations in Australia. Alcoa’s alumina refining facilities at Kwinana, Pinjarra and Wagerup in Australia constitute almost half (8.9 million metric tons) of the 18.1 million metric tons total capacity for the company. Besides this, the company has mining, smelting and processing facilities spread across Australia.
What it Means for Alcoa
Alcoa claims to have cut greenhouse gas emissions from its Australian operations from the levels in 1990 by about 40%. And it believes it would be difficult to reduce emissions further due to the efforts undertaken to improve energy efficiency.
This would mean Alcoa would face the full brunt of the carbon tax law, and will end up paying more tax in Australia.
We currently forecast tax rates for Alcoa to be around the 35% mark. But if the tax rate ends up being around 37% from the year 2013, then this could represent roughly 5% downside to our $18.55 price estimate for Alcoa’s stock.
See our full analysis for Alcoa’s stock here
Notes:- Alcoa says carbon tax will hurt, Business Spectator, April 29 2011 [↩]
- Gillard unveils carbon price details, ABC News, Feb 24 2011 [↩]