Alcoa (NYSE:AA) has taken full control of Evermore Recycling, the world’s leading company in used beverage can (UBC) recycling. Evermore was initially established as a joint venture between Alcoa and Novelis, but it will now operate as a wholly-owned entity of Alcoa. It purchases more recycled cans than any other group anywhere in the world. In July, Alcoa agreed to gain complete control of Evermore, which will not be part of Alcoa’s Global Packaging group and will continue to operate out of Nashville in Tennessee. ((Alcoa Now Sole Owner of Evermore Recycling, The World Leader in Beverage Can Recycling, Alcoa Recycling Blog))

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What’s The Big Deal About Aluminum Recycling?

One good thing about the otherwise energy-intensive aluminum production business is that aluminum can be recycled infinitely. It is estimated that about two-thirds of the aluminum produced in 1888 is still in the market today. Alcoa believes that aluminium cans are the most easily recycled containers. They take less than two months to be converted into new cans so essentially a can picked up from a shelf and discarded will find its way back to the shelf in a little over 60 days. More importantly, the energy required to recycle a can is almost 95% of that required to manufacture a can from scratch.

To put things in perspective, here are a few examples. The energy saved from recycling a single can versus producing it from scratch can power a television for three hours. To give a macro perspective, the amount of energy saved just from recycling cans in 2011 was equal to the energy equivalent of over 17 million barrels of crude oil. This is the amount of oil needed to fuel more than 1 million vehicles on the road for a year. Also, the amount of energy saved by recycling cans in 2011 is what it takes to produce the 29 billion plastic water bottles Americans consume each year.^[1] ^[2]

In short, this explains why Alcoa finds recycling attractive. These above figures reveal how energy savings lower Alcoa’s costs and make recycling a profitable proposition for the company.

Alcoa’s Recycling Business

Evermore Recycling purchases UBCs directly from the upstream infrastructure, engaging with suppliers that meet quality and commercial requirements. Alcoa believes that the deal will make its position stronger in the scrap markets. It aims to raise the UBC recycling rate to 75%.^[3] Lower scrap rates benefit its recycling business and, by virtue of its dominant position in the recycling business, Alcoa is able to procure UBCs at favorable prices.

Last month, the company released its Q2 2012 results. It posted a loss of $2 million in the quarter compared with a profit of $322 million in the year-ago quarter. The bottom-line took hit due to lower aluminum prices. Alcoa primarily depends on the demand from automobile, aerospace, packaging and commercial transportation segments for its business. With most of these segments facing a tough time due to weak economic conditions in China and the U.S., the demand has been weak and so have aluminium prices. Hence, we believe that Alcoa’s recycling business provides it a modicum of stability and assured profits. Gaining complete control over Evermore will enable Alcoa to further consolidate its leading position in the recycling business and improve the bottom-line.

Our price estimate for Alcoa currently stands at $10, which is a premium of around 25% to the market price.

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