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Alcoa’s 2Q17: The Divergent Impact of Aluminum and Alumina

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Alcoa’s 2Q17 profit

Previously in this series, we’ve seen how commodity prices could impact Alcoa’s 2Q17 revenues. Along with revenues, investors should also keep track of profitability metrics. Notably, there are different metrics to measure a company’s profitability. While you can use gross profit for a start-up company, net profit is generally used for established companies. However, for mining companies (XME)(RIO) like Century Aluminum (CENX) and Norsk Hydro (NHYDY), we generally look at EBITDA (earnings before interest, tax, depreciation, and amortization).

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Consensus estimates

Alcoa (AA) is expected to post adjusted EBITDA of $491 million in 2Q17, compared to $533 million in the sequential quarter. Notably, we saw divergence in aluminum and alumina prices in 2Q17. While higher aluminum prices bode well for Alcoa’s profitability, they could be dented by lower alumina prices.

To be sure, Alcoa’s earnings are sensitive to both aluminum and alumina prices. It expects its annual EBITDA to rise by $226 million for every $100 per-metric-ton rise in aluminum prices. Similarly, Alcoa’s EBITDA is expected to fall by $226 million for every $100 per-metric-ton fall in aluminum prices.

Looking at alumina, Alcoa’s 2017 EBITDA is expected to rise or fall by $69 million for every $10-per-metric-ton increase or decrease in API (alumina price index).

Cost control initiatives

Along with commodity prices, Alcoa’s cost control initiatives could also impact the company’s profitability. Alcoa has been streamlining its operations in a bid to lower costs and drive profits. In our view, Alcoa could manage to beat consensus earnings estimates in 2Q17 on higher productivity in the quarter.

In the next part of this series, we’ll see how analysts are rating Alcoa ahead of its 2Q17 earnings.

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