On Monday, November 23, Alcoa (AA) shares rose more than 4% after Elliott Management announced its stake in the company. On November 23, investor Paul Singer and Elliott Management announced its stake of 6.4% in Alcoa.
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On September 28, Alcoa announced its plan to split into two publicly traded entities. According to management, Alcoa’s aluminum legacy operations and automotive businesses weren’t compatible anymore. Dividing the businesses into two entities would boost its value. After Alcoa’s spin-off, one of the two entities will focus on activities related to the aluminum business—like the production of alumina and primary metals. The second entity will focus on the value-add components of Alcoa’s current businesses that involve the automotive and aerospace industries.
According to Elliott Management, Alcoa is dramatically undervalued. This is why it’s acquiring the stake in Alcoa. Commenting on the Alcoa’s split into two entities, Elliott Management said that it expects Alcoa’s move to create value for Alcoa’s equity. The falling aluminum prices have been keeping the pressure on Alcoa’s equity prices. By observing data from the past year, Alcoa’s equity prices and LME 3M Aluminum share a strong correlation of 0.93. Since the beginning of 2015, the LME Aluminum prices fell more than 22%. Alcoa lost more than 42%.
Alcoa wasn’t the only mining company that fell due to base metal prices in 2015. Freeport-McMoRan (FCX), Glencore (GLNCY), and Rio Tinto (RIO) also fell during the year. The base metal prices impacted these companies as well. The prices are trading at multiyear lows. The major base metal ETFs like the SPDR S&P Metals & Mining ETF (XME) and the Power-Shares DB Base Metals Fund (DBB) fell 49% and 28%, respectively, since the beginning of 2015 due to the fall in base metal prices.