Alcoa Inc. (NYSE:AA), one of the world’s largest aluminum producers, has secured a $2.1 million R&D contract from the U.S. Navy to develop advanced welding technology designed to reduce the cost of shipbuilding. Additionally, there are reports that three potential suitors have shown interest in its aluminum smelter in Italy. The company has been reeling under pressure from a slowdown in aluminum demand, falling aluminum prices and rising cost. Alcoa’s products are used across industries including mining, refining, smelting and recycling. It competes with companies like ArcelorMittal (NYSE:MT) and US Steel (NYSE:X). Our price estimate for Alcoa stands at $12, implying a premium of close to 20% to the current market price.
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Secures R&D contract from the U.S. Navy
Last week, Alcoa announced that it has been awarded a $2.1 million contract from the U.S. Navy. The company will develop advanced welding techniques for marine structures, enabling the Navy to reduce the cost of aluminum-intensive ships. Alcoa is expecting the Navy to save as much as $200 million in costs in current shipbuilding plans. Helping the military with advanced materials, designs and manufacturing techniques may establish Alcoa as a key player in the defense industry. The company has received about $8 million in new R&D contracts from the U.S. military in last 12 months. [1]
Potential investors express interest in Italy smelter
Recently Reuters reported that three potential suitors have expressed interest, although in early stages, in Alcoa’s Portovesme aluminum smelter in Italy. The smelter produces about 150,000 metric tons of aluminum annually. In January, Alcoa decided to shut the smelter as part of its plan to cut capacity citing unfavorable energy cost, rising raw material costs and declining aluminum prices. The takeover of the plant will be a breather for the company as it struggles to negotiate a deal with unions and local authorities amid heavy opposition. [2]
Hike in prices to provide some relief
The company hiked the prices of certain coil and flat sheet products by 5% thanks to soaring demand in the aerospace industry. Flat Rolled Products division makes up almost 18% of our valuation price for Alcoa’s stock. ((Alcoa raises coil, flat product prices by 5 pct, Reuters, March 2 2012))
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Notes:- Alcoa Wins Navy Contract to Apply Advanced Manufacturing Techniques to Shipbuilding, Alcoa Press Release, March 7 2012 [↩]
- Alcoa courted by three suitors for Italian plant, Reuters, March 8 2012 [↩]
