Alumina on shelf - for how long?

Belda held the dual role of chairman and chief executive of the US aluminium giant from 2001. Earlier this year he passed on the CEO baton but held on to the chairmanship, for the time being at least.

Belda has since joined the IBM board, which, along with his directorship in Citigroup, gives company watchers the impression that his planning for retirement from Alcoa is well under way.

Why should this market care that Belda is about to ride off into the sunset? There are good historical reasons why it should, particularly when it comes to Southbank-based Alumina.

Alumina is the 40% partner in the Alcoa-managed AWAC global alumina alliance. It is a collection of the world's best or near-best bauxite/alumina assets, with a couple of aluminium smelters in Victoria thrown in for good measure.

Alcoa has long wanted to have full control of AWAC. We know this because Belda made a takeover approach in 2001 for the group that held the AWAC interest at the time. It was also the group that had been Alcoa's trusted partner since the 1960s, WMC.

Encouraged by WMC to bid, Belda first offered to pay $9.75 a share for all of WMC. And in October of 2001 it was increased to $10.20 a share. Belda thought that he had a deal and flew back to the US. But WMC chief Hugh Morgan had other ideas.

Morgan decided there would be more value to be had by "demerging" WMC into two vehicles - one holding the AWAC interest (Alumina) and the other holding WMC's Olympic Dam copper/uranium mine and its nickel interests (WMC Resources, acquired by BHP Billiton in 2005).

Morgan wanted to introduce some competitive tension into any takeover of WMC. Because of Alcoa's control of AWAC and AWAC's restrictive joint-venture rights, competitive tension in a WMC takeover was not possible.

Morgan's theory was that, with the demerger into Alumina and WMC Resources, Alcoa would still need to bid at an endorsed level for Alumina while the BHPs and Xstratas of the world could compete for WMC Resources, as they did in 2005.

Funny thing is that Alumina is still sitting out there. That is despite it being Alcoa's only chance at securing big-bang growth in alumina without it running foul of global antitrust regulators.

That Alcoa has not come calling is all to do with Belda. He is said to have been livid with the behaviour of the Australians back in 2001 and vowed that he would not be back for a second look. But once he moves on, it could well be a case of game on.

That makes the recent trashing of Alumina's share price all the more interesting. On Friday it was again looking friendless at $4.53 a share for a market capitalisation of $5.2 billion.

That's an interesting figure. If you wanted to replicate Alumina's share of AWAC's 2007 production - 5.72 million tonnes of alumina and 155,000 tonnes of aluminium - it would cost you about $6.6 billion.

So after its share price beating, Alumina is trading at less than replacement value by some $1.4 billion. It is a point that would not be lost on Alcoa, particularly after it was done over by Rio Tinto in last year's battle for Canada's Alcan.

Whether or not Alumina is left on the shelf by Alcoa remains to be seen. What is more certain is that Alumina is finding plenty of support among brokers at its current price, down more than 30% since May.

There are short-term concerns about the impact of the Varanus Island gas explosion on supplies to AWAC's West Australian alumina operations, and cost pressures for labour and other key inputs have continued. Other investors might have fretted over Climate Change Minister Penny Wong's plan for an emissions trading scheme and its long-run impact on the aluminium sector. They need not have worried, although it is clear no new aluminium smelters will be built in Australia. Best to send our alumina to China for them to smelt it into higher-value aluminium, minus carbon penalties.

The more certain impacts of the Varanus Island incident and other cost pressures are reflected in expectations that Alumina's calendar 2008 profit will be well short of the 2007 profit of $436 million. Expectations for 2008 range from $135 million (UBS) to $273 million (Goldman Sachs JBWere).

Because of varying commodity and exchange rate assumptions, it all gets a bit woolly when it comes to 2009 and 2010. For what it's worth, the expectations for 2009 range from $157 million (ABN Amro) to $594 million (UBS) while for 2010 it is a range from $131 million (ABN Amro) to $1.07 billion (UBS).

What investors are supposed to make of that lot is anybody's guess. The only agreement seems to be that the 2007 profit of $436 million - announced seven months ago - was in fact $436 million. That's not true. All expect Alumina to be maintaining annual dividend of a 24 a share (5.2% prospective yield) out until 2010.

There is also good consensus that aluminium could be one of the better-performing metals in the next year or two, even with the expectations of lower global economic growth.

That's because of the forced cutbacks in production in South Africa and China due to power shortages. A laggard in the five-year bull run in mineral commodities between 2003 and 2008, aluminium has been relatively strong in recent weeks while the rest of the pack have got decidedly weaker.

After marching to $US1.40 a pound, aluminium is back at a one-month low of $US1.35 a pound. That's up from the 2007 average of $1.21 a pound. But the US exchange rate has wiped out the price benefit.