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Will Rio Tinto’s Quality Aluminum Assets Be Enough?

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Aluminum prices

The aluminum division contributed to 23% of Rio Tinto’s (RIO) 1H15 underlying EBITDA (or earnings before interest, tax, depreciation, and amortization). That’s why it’s important to understand this division’s profitability, depending on its realized prices and unit costs.

While aluminum prices started the year strongly with regional premiums at record levels, they trailed off during the rest of the year. London Metal Exchange (or LME) prices also slid slightly through the year and about 40% of smelters across the industry returning to a loss-making position by the middle of 2015. This led many aluminum players—such as Alcoa (AA), Century Aluminum (CENX), and Constellium NV (CSTM)—to shelve their high-cost smelting capacities.

Alcoa, which is the leading aluminum producer in the United States (IVV), forms 4.47% of the SPDR S&P Metals and Mining ETF (XME).

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Average prices slid through the year

  • The average price for the LME (or London Metals Exchange) increased by 2% year-over-year. While there was a significant uplift in the physical delivery market premiums in early 2015, during the second quarter of 2015, the premiums trailed off.
  • RIO’s average realized prices came in 2% higher YoY in 1H15 at $2,292 per ton. This includes the premium for value-added products (or VAP). VAP represented 59% of primary metal in 1H15.
  • Favorable exchange rate movements in Canada and Australia also helped underlying earnings in the aluminum division to the extent of $279 million.
  • Bauxite prices also remained attractive, owing to import demand from China. Management commented that in terms of cost and proximity to the market, RIO is well placed.

Costs are declining

  • Rio’s modernized Kitimat smelter should not only increase output but also reduce production costs and emissions.
  • With the expanded production of its Kitimat smelter, RIO’s 80% aluminum smelters are in the first quartile of the cost curve.
  • For 1H15, RIO saved $145 million through reduced raw material costs, increased productivity and lower labor costs.

For more on aluminum, visit Market Realist’s Aluminum page.

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