Last year, Alcoa (AA) posted adjusted EBITDA of $3.1 billion, which was higher than what it posted in 2017. The company’s 2018 earnings were primarily boosted by the spike in alumina prices. Alcoa reported average realized alumina prices of $455 per metric ton in fiscal 2018. The company’s average realized alumina prices increased by $115 per metric ton between 2017 and 2018.
While alumina prices have come off their 2018 highs, the alumina to aluminum ratio is still quite high by historical standards. The partial curtailment of Alunorte alumina refinery in Brazil has driven alumina prices higher. However, we could see the refinery resume operations at full capacity. According to Reuters, “Norsk Hydro has agreed with Brazil’s federal prosecutor to have a third-party technical assessment that, if positive, could lead to it resuming full production at the half-shut Alunorte alumina refinery.”
Negative for integrated producers
Any fall in alumina prices would be negative for Alcoa and other integrated aluminum producers like Rio Tinto (RIO). However, Century Aluminum (CENX), which posted a loss last year mainly due to higher alumina prices, would stand to gain if alumina prices fall.
From a valuation standpoint, Alcoa is trading at an EV-to-EBITDA of 3.5x its 2019 expected EBITDA and 3.0x its 2020 consensus EBITDA. While the valuation multiples look reasonable for an entry point, they are based on consensus EBITDA of $2.3 billion in 2019, which seems to be on the higher side. If we see any further downside in alumina prices, it would be another risk for Alcoa and other integrated aluminum producers.
Furthermore, metals and mining stocks like Alcoa could be out of favor with markets unless China addresses its economic slowdown. At this price point, Alcoa’s downside could be limited, but big gains could elude investors given the current macro picture.