Alcoa Sambas to $16 with Embraer Deal for Jet Development

Things are looking up for ALCOA (NYSE:AA) with a Trefis price estimate over 60% ahead of the current stock price of about $9, the company may be on the brink of breaking out of the slump that began six months ago. At that time the stock was trading above $16 a share. Of course, Alcoa wasn’t alone. The industry as a whole, including Freeport McMoRan (NYSE:FCX) and Brazilian firm Vale (NYSE:VALE) also took it on the chin around that same time.

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In what may be indicative of improving market conditions, ALCOA has requested a 5-year extension to expand their Western Australia Wagerup refinery operations. The environmental approval has expired, and ALCOA thinks the time is right to re-focus their efforts. This comes on the heels of AA’s 2008 suspended expansion efforts for this same refinery; a bullish sign from ALCOA management.

New Agreement May Help ALCOA Push Toward Trefis Price of $16

ALCOA and Embraer S.A., the leading airline manufacturer in Brazil, recently announced an agreement whereby AA will provide aluminum alloys, design and fastener expertise as Embraer develops high performance fuselage and aircraft wings for their entire line of aircraft. Embraer is the leading manufacturer of smaller aircraft, up to 120 seats and a major Brazilian exporter.

Neither ALCOA nor Embraer management speculated on the impact of the joint venture, but it is yet another sign AA is heading in the right direction in spite of the global economic environment. This is particularly true as AA projects the aerospace industry will be one of the leading buyers of aluminum (along with the automotive industry) into 2012 and beyond.

Still Pressure, But Cautious Optimism is Warranted

As ALCOA investors know, the company will always be subject to pressure from energy prices; a huge expense item. However, cost cutting measures and the recent agreements are positive signs and should impact several key divisions. According to Trefis estimates, Engineered Products alone make up nearly 22% of the stock price, with Alumina only slightly behind at 20.6%. Both of these key divisions will be impacted by the recent Embraer partnership. And if management is right, the aerospace industry should continue to provide opportunities for growth.

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