Alcoa’s Split: Can the Upstream Company Stand on Its Own?



Alcoa’s upstream company

The upstream company had revenues of $13.2 billion in the 12-month period ending June 30, 2015. Out of this revenue, the Alumina segment accounted for 28% while the remaining revenues came from the Primary Metals Segment.

Rio Tinto (RIO) is another leading upstream aluminum producer. It currently forms 1.8% of the SPDR S&P Global Natural Resources ETF (GNR).

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Adjusted EBITDA

The upstream company had an adjusted EBITDA (earnings before, interest, taxes, depreciation, and amortization) of $2.8 billion in the pro forma year ending June 30, 2015, as you can see in the graph above. The upstream company had decent EBITDA margins of over 21% in the pro forma year. Please note that the company’s all-in realized aluminum price was $2,400 per metric ton over this period.

However, the all-in aluminum price—which includes the LME (London Metals Exchange) aluminum price and the regional premiums—has corrected sharply over the last few months. The upstream company’s pro forma earnings until June 30 don’t really reflect the real impact of lower all-in aluminum prices. The earnings in the six months ending December 31, 2015, could come in much lower than the preceding six-month period.

Financial structure

According to Alcoa (AA), the upstream company would be “committed to disciplined capital allocation and prudent return of capital to shareholders.” Also, the upstream company would strive for a “strong non-investment grade” credit rating from the major credit rating agencies.

A non-investment grade credit rating shouldn’t come as a surprise to investors, based on the fact that several leading companies in the pure-play commodity space have non–investment-grade ratings.

In the next part of this series, we’ll explore how the value-add company should look like after the split.


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