Industry trade

Alcoa has a plan for zero emissions. Buy the stock while it’s a bargain.

The outlook for aluminum is brightening, as is the outlook for Alcoa, probably the best pure play on the versatile, lightweight – and cheap – metal.

Alcoa

the stock (ticker: AA) looks like a bargain, trading at a level that does not reflect its issuer’s favorable operating costs, improved balance sheet, increased shareholder returns and one of the carbon footprints the weakest in the industry. And investors are ignoring a potentially game-changing technology Alcoa is developing that could eliminate carbon emissions from the aluminum smelting process.

Jefferies analyst Chris LaFemina called Alcoa’s Elysis smelter project a joint venture with Anglo-Australian

Rio Tinto

(RIO), a potential “game changer” that would position Alcoa as a “truly green aluminum producer”. Alcoa is using the process on a small scale and aims to prove it commercially in the coming years.

Alcoa shares, at around $56, are down 43% from the $98 hit in March before aluminum prices fell nearly 40% to around $2,400 a metric ton, or $1.09 per pound. The stock is trading for just over seven times the expected 2022 earnings of $7.68 per share and has a similar estimated price-to-earnings ratio for 2023.

“Alcoa is cheap,” says Timna Tanners, analyst at Wolfe Research. “It has an advantageous cost position and doesn’t get much credit for its green initiatives.” It has an outperform rating and a price target of $62.

Recent Price $56.92
Market value (bil) $10.2
Change since the beginning of the year -4.5%
2022E EPS $7.68
2022E P/E 7.4
2023E EPS $7.41
2023E P/E 7.7
Net debt (mil) $299
Dividend yield 0.7%

E=estimate

Sources: Bloomberg; business reports

Although based in Pittsburgh, Alcoa has the vast majority of its operations outside the United States. It mines bauxite, an aluminum ore, mainly in Australia. It uses it to make alumina, an intermediate product, then refines the alumina into aluminum at smelters around the world, including a 120-year-old facility in Massena, NY Alcoa has spun off its aluminum products business in

arconic

(ARNC) in 2016 and is now focused on alumina and aluminum manufacturing.

Aluminum is still made using the same electricity-intensive process that Alcoa founder Charles Hall developed in the late 19th century. Alcoa benefits because about 80% of its electricity comes from renewable sources, most of it relatively cheap and carbon-free hydroelectricity. Its production emissions – about five tonnes of carbon per metric tonne of aluminum – are a third of the industry average of 15 tonnes, as many rivals rely on coal-generated power. This is increasingly important as many Alcoa customers, including

Apple

(AAPL), focus on carbon footprints. Alcoa’s overall costs are in the bottom half of the industry.

Aluminum is widely used. It’s in cars, airplanes, packaging, wiring, and wind and solar power components. Used in place of heavier metals and plastic, it improves vehicle mileage and is recyclable. It can offer the strength of steel with one-third the weight.

Ford engine
it is

(F) The best-selling F-150 pickup has an aluminum body.

“Aluminum is vital to the ongoing transition to building the electric vehicles and renewable energy infrastructure the world will need to transition to a low-carbon future,” CEO Roy Harvey said during the conference. Alcoa earnings conference call in July. Citing forecasts from an industry trade group, he said demand could increase by 80% by 2050, compared to 2018.

China plays an oversized role in the aluminum market, accounting for more than half of global demand and production.

In an Apple podcast this year, Eric Mandelblatt, who runs Soroban Capital Partners, an investment firm that owns Alcoa shares, said China had “destroyed” the aluminum market by dramatically expanding power smelters over the past year. of the past 20 years, to take advantage of its large coal reserves.

Aluminum prices have averaged below $2,000 per metric ton for the past decade and are no higher than they were in 1989. The bull case is that China is becoming more concerned environment and is committed to capping its smelting capacity at 45 million metric tons. annually, compared to approximately 40 million currently. The worldwide production capacity is 69 million. Alcoa manufactures about two million tons per year.

“Nobody is picking up the slack,” Mandelblatt said on the podcast, referring to the construction of new foundries. This could tighten the balance between supply and demand over the next decade. High electricity prices in Europe and elsewhere have already slowed capacity by one to two million metric tons of aluminum. Alcoa CEO Harvey said on the July conference call that 10-20% of global capacity is unprofitable.

When Mandelblatt, who declined to comment barrons, spoke in February, aluminum was at $3,200 a ton — it peaked this year at $3,900 — which would earn Alcoa $12 to $13 per share per year. At $5,000 a ton, which he called a dream scenario, Alcoa’s EPS could climb to nearly $30.

He also saw the possibility, within the next decade, of Western countries levying a carbon tax of perhaps $100 a ton on “dirty” aluminum made by China and other countries. This would benefit Alcoa, especially if its new fusion technology proves itself.

Alcoa has used its strong earnings recently to strengthen its balance sheet. It has only $299 million in net debt, against a market value of $10 billion, and total obligations, including pensions and retiree health care, of $1.2 billion, against $3.4 billion at the end of 2020.

Alcoa pays a quarterly dividend of 10 cents and repurchased $350 million of stock, or about 3% of its outstanding shares, in the first half of 2022.

“We have significantly strengthened the balance sheet and made great strides in improving our portfolio,” said William Oplinger, Alcoa’s chief financial officer. Barrons in an email. “As a pure, cost-driven aluminum company, we are well positioned to capitalize on the growing demand for aluminum.”

There are caveats, including a weak Chinese real estate market that is reducing demand for aluminum. But with its low carbon footprint, strong balance sheet and potential cutting-edge technology, Alcoa has both the metal and the guts to be a long-term winner.

Write to Andrew Bary at [email protected]