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Why Alcoa’s 2018 Guidance Miffed Analysts

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Dec. 4 2020, Updated 10:52 a.m. ET

Alcoa’s 2018 guidance

Alcoa (AA) expects to generate adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) between $2.6 billion and $2.8 billion in fiscal 2018. The guidance has baked in average LME (London Metals Exchange) aluminum prices of $2,200 per metric ton and API (alumina price index) of $390 per metric ton. In arriving at this guidance, Alcoa has assumed almost flat alumina (AWC) and bauxite shipments as compared to 2017 with a slight decrease in its aluminum shipments (CENX). The company has also factored in a headwind of $400 million from higher raw material costs.

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However, some analysts were miffed about Alcoa’s 2018 guidance. The company generated adjusted EBITDA of $775 million in 4Q17 after $50 million in short-term financial impacts from the headwinds that we discussed in the previous article. Annualizing $825 million means full-year EBITDA of $3.3 billion. Let’s see what Alcoa’s management had to say about lower-than-expected 2018 guidance.

Management’s take

First, in 4Q17, Alcoa benefited from higher alumina prices (RIO). However, in its 2018 guidance, Alcoa’s API assumption is lower than its 4Q17 realized alumina prices. Alcoa also expects currency movement as a headwind this year to the tune of $100 million. Furthermore, Alcoa is facing a labor situation at its Becancour smelter in Quebec, Canada. Due to the labor action, Alcoa’s 2017 aluminum shipments are expected to be lower than last year. The financial impact of the labor impasse is also expected to negatively impact Alcoa’s 2018 earnings.

Meanwhile, Alcoa expects to return cash to shareholders in 2018. However, the company has not yet decided whether it will return value through share buybacks or dividends. The company plans to have $1 billion in capital allocation on its balance sheet. The company intends to split its excess cash flows between deleveraging and returning cash to shareholders.

You can visit our Metals and Mining page for ongoing updates on this industry.

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