VALUATION HIGHLIGHTS

1. Aluminum constitutes 55% of the Trefis price estimate for Alcoa's stock.
2. Alumina constitutes 45% of the Trefis price estimate for Alcoa's stock.

WHAT HAS CHANGED?

1. Alcoa's Recent Earnings
   • Alcoa posted a mixed set of Q1 2024 results. Revenues fell by 2% year-over-year to $2.6 billion, in line with expectations, while net losses widened to $252 million, or $1.41 per share compared to $231 million in the year-ago quarter. Alumina production decreased 4% sequentially to 2.67 million metric tons on account of lower production from the company's Australian refineries.

2. Near-term economic headwinds
   • There are a couple of factors clouding the outlook for the aluminum industry. The U.S. Federal Reserve and other major central banks have been hiking interest rates at an aggressive pace to combat inflation. Following the Fed's big rate hikes over the past year, the effective federal funds rate stands at over 4.5% - the highest levels seen in over a decade. Higher interest rates are widely expected to result in a hard landing for the U.S. economy, leading to lower demand from key aluminum consumers such as the automotive and construction industry.

3. High Energy Prices Weigh On Aluminum Market
   • Producing aluminum is extremely energy intensive, with roughly 15 megawatt-hours of energy required to produce a ton of the metal. This number is much higher than most other industrial metals. With energy and electricity prices on the rise, following the Russian invasion of Ukraine, aluminum producers such as Alcoa are likely to see pressure on their margins.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of Alcoa's value that present opportunities for upside or downside to the current Trefis price estimate for Alcoa:

Aluminum Division

• Average Price of Aluminum: Aluminum prices have risen from $1,710 per ton in 2020 to about $2,800 in 2022, although it is likely to decline a bit in 2023, due to economic headwinds. We expect prices to rise to about $2650 by the end of our review period. However, if prices rise at a stronger-than-expected pace to about $3,200 by 2029 there could be an upside of almost 10% to our price estimate.


• Aluminum EBITDA Margin: EBITDA margins for the Aluminum division are expected to stabilize at 17% by the end of the forecast period, driven by expectations of improved pricing environment in the medium term and the company's efforts to boost the productivity of its operations. However, for a scenario where margins decline to about 13%, there could be a downside of almost 20%.

BUSINESS SUMMARY

Alcoa is the leader in the production of aluminum products such as primary aluminum, fabricated aluminum, and alumina. The company is involved in every aspect of the industry, including mining, refining, smelting, and recycling.

Aluminum products account for over 55% of Alcoa's revenues; accordingly, the company is heavily impacted by aluminum prices.

Alcoa operates in around 10 countries worldwide, including Australia, Brazil, the U.S., and European countries.

Bauxite is the primary ore used in alumina production, whereas alumina is the primary ore used in aluminum production. The company also sells bauxite and alumina to third parties.

SOURCES OF VALUE

Alumina division is most valuable for Alcoa

Despite the Aluminum segment contributing maximum revenue to Alcoa, the alumina division has become the most valuable division for the company. This was largely due to the higher margins in the segment, favorable price and product mix, and higher prices due to supply constraints.

The Alumina segment represents the company's worldwide refining system, which processes bauxite into alumina. About two-thirds of the alumina produced is sold under supply contracts to third parties worldwide, while the remainder is used internally by Alcoa's aluminum segment.