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What Value Proposition Could Alcoa’s Upstream Company Offer?

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Upstream company

Alcoa’s new upstream company will have some 17,000 employees across 64 locations. It should be the largest global bauxite and alumina producer, with strong first-quartile cost position in bauxite and alumina. The company will count Century Aluminum (CENX), Norsk Hydro (NHYDY), Aluminum Corporation of China, Rusal, and Noranda Aluminum among its competitors.

Currently, Alcoa (AA) forms 2.74% of the Materials Select Sector SPDR ETF (XLB).

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Smelting portfolio

The upstream company is expected to be the fourth-largest aluminum producer with a smelting capacity of 3.4 million tons. Please note that over the last few years, Alcoa has curtailed several smelters in a bid to improve its cost positioning. Its smelting capacity has come down by almost one-third since 2007.

However, as a result of these moves, Alcoa’s cost position has improved from the 51st percentile in 2010 to the 43rd percentile in 2014. The company expects to further bring down it’s positioning to the 38th percentile by the end of next year. Being a cost-competitive aluminum producer should be a key focus area for the upstream company.

Energy

The upstream company should have a power production capacity of ~1550 MW (megawatts). Out of this, the company currently uses ~30% for its captive needs while the remainder is sold into the power grid.

The upstream company would also have a portfolio of 17 casthouses. These would provide value-add products to customers. Alcoa expects its value-add products to form ~70% of its smelter shipments in 2015—up from 57% in 2010. The value-add products sell at a premium to other standard products like ingots.

In the next part, we’ll look at the upstream company’s pro forma financials.

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