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Treasure Chest: More Upside For Alumina?

Treasure Chest | Apr 19 2018

The share price of Alumina Ltd has shot up as the market factors in the potential impact of sanctions on Russian individuals and companies.

-Alumina price may head to record highs given disruptions to the supply chain
-Ultimately a momentum trade which signals price move may be temporary
-Sanctions most relevant to aluminium but the two commodities move in tandem

 

By Eva Brocklehurst

Alumina Ltd ((AWC)) is likely to be a beneficiary of sanctions being imposed on Russia, channelled through major aluminium/alumina producer Rusal.

The alumina price is up 63% already, Shaw and Partners notes, and could head towards record highs as buyers try to acquire the product given disruptions to the supply chain. The latest price for alumina is around US$580/t, up from US$470/t a week earlier.

Alumina Ltd is likely to move higher in tandem and the broker suggests a share price closer to $4 may be plausible, as when mining equities catch momentum the price/NPV can move to 1.5-2x.

Such a move would mean the target could rise from $3.30 to $4.40. Shaw and Partners, not one of the eight stockbrokers monitored daily on the FNArena database, raises its target to $3.40 accordingly and maintains a Buy rating.

The calculation centres on the fact that for every US$10/t hike in the alumina price, Alumina Ltd's earnings would be around US$80m higher on a 100% basis. Alumina Ltd owns 40% of the AWAC joint venture, so a 10% hike in the price would lift earnings from the JV by around US$120m, all things being equal.

The added bonus is that aluminium and alumina prices move within a 15-20% range of each other. Alumina Ltd's direct exposure to the aluminium price is minimal. Around 95% of alumina sales are now priced on the index with no direct relationship to aluminium. Still, there is a connection and a 10% rise in the aluminium price would lift it earnings by around US$7-10m.

However, the broker warns this is ultimately a momentum trade and, while it may have substance for several months or even quarters, what goes up will eventually come down.

Shaw and Partners also cites the Nalco chairman, who has indicated that the alumina price may reach US$650/t in the next 5-6 months. Nalco is a significant player in the Indian alumina/aluminium industry.

UBS notes, at present, the sanctions are relevant to aluminium, of which Russia produces 6% of global supply. The broker agrees Alumina Ltd has already begun pricing in the upside that is implied by the sanctions.

Running a sensitivity analysis across commodities that have prospective sanctions, including aluminium, alumina, nickel and copper at spot prices, the NPV of Alumina Ltd lifts 151%. Free cash flow yield lifts most dramatically, by 4.1% to 9.9%.

Alumina Ltd is pricing in a long-run operating earnings (EBITDA) margin of around US$170/t, UBS calculates, versus the historical average of US$100/t adjusted for portfolio changes.

The database shows two Buy ratings, two Hold and one Sell (UBS). The consensus target is $2.43, signalling -16.2% downside to the last share price. The dividend yield on FY18 and FY19 forecasts, on present FX values, is 6.6% and 5.3% respectively.

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