Alcoa's Lower Quality Bauxite Impact Extended To 2027: Analyst Hints At Closure Of Kwinana Refinery

BMO Capital Markets analyst Katja Jancic reiterated the Market Perform rating on Alcoa Corporation AA, lowering the price target to $28 from $30.

Alcoa reported quarterly adjusted losses of $(1.14) per share, which missed the analyst consensus estimate of losses of $(1.13), compared to losses of $(0.33) per share from the same period last year. 

Looking ahead, although Alcoa expects its revised Mine Management Program (MMP) to be approved in 4Q'23, the concessions made will result in Alcoa continuing to mine lower-quality bauxite until 2027, assuming it receives permits for the new mining regions, the analyst notes.

Further, uncertainty/risk remains regarding the potential EPA involvement, with the decision expected before year-end, Jancic adds.

Regarding the 4Q'23 outlook, Alcoa flagged ~$15 million in net favorable q/q EBITDA impact, driven primarily by lower raw material costs, partially offset by higher energy costs/negative mix. 

Alcoa indicated it submitted a revised MMP, which includes multiple concessions. However, the analyst says that the concessions made will translate to Alcoa continuing to mine lower-quality bauxite until 2027 (delayed from mid-2024) when it expects to enter new mining regions (Myara North and Holyoake), pending permit approvals.

To offset some of the negative impact (currently ~$45 million/quarter), a restructuring program was initiated at the Kwinana refinery, which is expected to result in ~$10 million in annual cost savings, with Alcoa indicating it is looking at all options to further reduce costs, including potentially shutting down the refinery. 

Overall, given the cautious aluminum and alumina markets outlook, and with limited company-specific positive drivers in the near term, AA shares are nearly fully valued, notes the analyst.

Based on the above, the analyst widened the EPS loss forecast to $(2.25), compared with the prior view of $(1.72) loss per share.

Price Action: AA shares are trading lower by 8.11% to $24.37 on the last check Thursday.