The company’s Bauxite, Alumina, and Aluminium segments account for 2%, 26%, and 72% of total sales, respectively. Geographically, the U.S., Netherlands, Australia, Spain, Brazil, and Other regions account for 43%, 22%, 17%, 12%, 5%, and 1% of total sales, respectively. However, around 65% of the company’s long-lived assets, including plant and machinery, are located in Australia, Brazil, and Iceland.
With $920 million of cash from operations and $565 million of net proceeds from investment activities, the company repaid $800 million of long-term debt and distributed dividends for the first time since its inception in 2016. Per recent filings, the company expects the transportation, construction, and packaging industries to be key demand hubs for aluminum.
Thus, there is a strong likelihood of demand exceeding supply and assisting cash generation capabilities of Alcoa in the coming years.
Below are key drivers of Alcoa's value that present opportunities for upside or downside to the current Trefis price estimate for Alcoa:
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 represent around 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.
In spite of the Aluminum segment contributing maximum revenue to Alcoa, the alumina division has become the most valuable division for the company in 2018. This was mainly due to higher margins in the segment, favorable price and product mix, and higher prices due to supply constraints. However, we expect aluminum to come back as the most valued segment for the company in the near future.
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.
Aluminum has diverse applications in the industry. Thus the sales of aluminum are largely dependent on global economic growth. With the US-China trade war taking a toll on global trade and growth in 2019, followed by the pandemic in 2020, deteriorating economic conditions led to a decrease in the demand for aluminum and the prices of the metal. Developments in China and the U.S. are particularly important. However, with lockdowns being lifted and economic recovery looking strong, aluminum demand is set to rise, which would support strong pricing.
The U.S. government's tariffs on imported aluminum in the country are expected to boost domestic aluminum demand and remain a beneficial move for Alcoa as it is a prominent U.S. aluminum player.
The U.S. government had announced sanctions against the Russian giant, Rusal, barring them from international business. However, these sanctions were consequently eased with a possible hint of withdrawal, given that Rusal's majority owner, Deripaska, ceded control from the company. These major developments had led to excessive growth and consequent decline in aluminum commodity as well as aluminum stock prices, making the market extremely uncertain.
As per the provisions of a law passed by its Parliament, the Indonesian government halted the exports of bauxite ore from the country in January 2014. The country intends to boost its domestic mineral processing capacity at the cost of exporting unprocessed mineral exports. Bauxite is the key mineral ingredient for the production of alumina. Indonesia used to account for 10-15% of global bauxite supply and was a major exporter to China, the world’s largest aluminum producer. A constriction of supply due to the Indonesian export ban has supported bauxite prices. Although Indonesia relaxed this ban in 2017, it intends to reintroduce the ban at the end of 2022 - an event that can reduce global supply and raise prices.