Alumina: Interim result 2012

With commodity prices falling and input costs rising, Alumina’s first half result threatened to be terrible. Management put on a brave face, highlighting strong underlying demand, productivity improvements and industry wide shutdowns. But there was no hiding it; this was an awful result in terrible conditions.

After posting a US$68m profit this time last year, net profit fell precipitously to a US$15m loss, translating to negative earnings per share of US$0.006. With no sign of prices recovering, management sensibly opted not to declare a dividend. Net debt rose regardless, from US$472m to US$602m.

There was nothing complicated about this profit decline; falling prices across the industry cut into revenues while rising costs took a toll. AWAC, in which Alumina has a 40% equity stake, paid just US$176m in dividends compared to US$425m last year. If current conditions persist, dividends from AWAC could fall further. As Alumina must still pay for interest and capital expenditures, a capital raising is not out of the question.

Commodity price falls impact strongly on profit margins. Last year AWAC earned margins of over 18% but, as prices have fallen, EBITDA margins have slumped to less than 6%.

In what was otherwise a horrid result, there were two highlights. First, the strategy of moving away from aluminium-linked pricing to alumina pricing is paying off. The new regime is generating higher prices than before, which has shielded margins from further decay. AWAC’s production costs are also lower than big competitors like Rio Tinto, Norsk Hydro and Chalco. If prices stay weak, production cuts should start at higher cost operations, offering a reprieve to other companies in this struggling industry.

Alumina’s share price has climbed 13% since Alumina: For the bold and the patient on 18 Jul 12 (Speculative Buy - $0.64) but difficult conditions are likely to persist. Patience is needed in this deeply cyclical situation but, as industry conditions improve, so should profitability. SPECULATIVE BUY.