Alumina (ASX:AWC)

Michael Ferraro
Market Cap (AUD): 6.16B
Sector: Materials
Last Trade (AUD): 2.21 +0.07 (+3.27%)
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1. About

Alumina Limited is a leading Australian resource company with a specific focus on alumina, the feedstock for aluminium smelting. The Company owns 40% of the world’s largest alumina business, Alcoa World Alumina and Chemicals (AWAC) the recognised industry leader. Company’s partner is AWAC is Alcoa, who owns the remaining 60% and manages the day-to-day operations. Alcoa is also the world’s largest alumina producer. This partnership provides investors with a direct investment in the alumina industry.

Alumina Limited is one of Australia’s top 100 companies, delivering strong returns, consistent performance, and ongoing growth. AWAC employs over 5,000 people to mine and refine bauxite, who produce alumina, market the alumina to the world’s aluminium smelters and process a percentage of this alumina to produce aluminium metal. AWAC has a global network of mines, refineries in Australia, the United States, Guinea, Suriname (closed January 2017), Brazil and Spain and also an interest in a smelter in Victoria Australia. AWAC is also has a 25.1% interest in a bauxite mine and alumina refinery joint venture with Ma'aden in Saudi Arabia.

2. Business model


The Company operates as a single division:[1]



Revenue (US$’M)

% of total Revenue

% of Profit (before Tax)

Profit drivers[2]

Alumina Limited




  • In 2017, AWAC recorded a NPAT of $901.3 M compared to an NPAT of $49.0 M in 2016. AWAC’s results were impacted by alumina price fundamentals. Also, the sea borne bauxite market saw third party bauxite sales increase to 6.6 M bone dry tonnes (BDT). AWAC’s EBITDA, excluding significant items, rose to $1,685.3 M compared to $757.2 M in 2016
  • Cash from operations spurred by the higher alumina sales price increased to $1,102.4 M up from negative $26.2 M. The 2017 average realised alumina price was $335 per tonne, a yoy improvement of $93 per tonne (38%)

3. Strategy


Alumina’s key strategy is, through Alcoa World Alumina and Chemicals (AWAC):[3]

  • to invest in and own and operate long-life, low-cost bauxite and alumina assets, preferably large and able to be expanded and
  • for AWAC’s alumina to be priced off alumina’s fundamentals, in terms of supply and demand and construction and operating costs of alumina


AWAC is a leading global bauxite and alumina business.

4. Markets


The Company operates in markets including:[4]


Industry (Australia)

Industry Revenue (2018)

Growth Rate  (annual 13-18)

Aluminium Smelting

$5 billion


Bauxite Mining

$2 billion


5. Competition


Major competitors include:[5]


  • BHP Billiton Limited (ASX:BHP)
  • Rio Tinto Limited (ASX:RIO)
  • Rusal, AO

6. History



Joint exploration (with two other Australian companies) of bauxite deposits and secured other resources



Formed the integrated aluminium company, Alcoa of Australia (AofA), with WMC Limited holding 20% interest. Alcoa was invited to join the project with a 51% interest to provide the technology, aluminium industry expertise, and finance. AofA - construction began at Kwinana and Point Henry



AofA - first ingot poured at Point Henry, using US-sourced alumina



AofA - first export shipment of Kwinana alumina to Japan



AofA - Pinjarra alumina refinery commissioned



AofA - Wagerup alumina refinery commissioned



50 millionth tonne of alumina shipped. Production began at Portland Smelter



AWAC formed. WMC’s interest in AWAC was 40% (39.25% of AofA). 100 millionth tonne of alumina shipped. Production began at Portland Smelter



AWAC acquired Inespal’s refinery in Spain



AofA - expansion at Wagerup completed. Annual operating capacity was increased from 1.75 million tonnes to 2.2 million tonnes



Demerger of WMC Limited resulted in formation of Alumina Limited



Alumina acquired QBE's 0.75% interest in Alcoa of Australia



AWAC - Jamaica alumina refinery 250,000 tonne expansion completed. Sale of AWAC Specialty Chemicals business



AWAC - Suriname alumina refinery 250,000 tonne expansion completed



AWAC received Government approval to expand the Wagerup alumina refinery in Western Australia to a max. 4.7 million mtpy



Early works program at the Clarendon (Jamaica) alumina refinery completed adding 146,000 mtpy of production



Co-operation agreement signed between AWAC and Vietnam on the development of bauxite mining and alumina refining



AWAC acquired BHP's 45% interest in the Suriname Aluminium Company (Suralco) to own 100% of the 2.2 million mtpy alumina refinery and mining interests. AWAC entered into 25% interest in an alumina refinery (initial capacity 1.8 million mtpy) and bauxite mine (initial capacity 4.0 million mtpy) joint venture project with Ma'aden in the Kingdom at Saudi Arabia



2.1 million mtpy expansion of the Alumar alumina refinery in Brazil (AWAC 54% interest) and the 2.6 million mtpy bauxite mine at Juruti in Brazil completed



Jamalco alumina refinery in Jamaica sold

Point Henry smelter at Geelong closed



Anglesea Power Station (formerly used as an energy source for the Point Henry smelter) closed

San Ciprian refinery in Spain converted from fuel oil as the prinicipal energy source to natural gas



Amendments made to the AWAC joint venture agreements that ensure Alumina Limited's shareholders benefit from the improved performance of AWAC

Ma'aden joint venture alumina refinery commercial production commenced

Bauxite third party supply contracts signed

Kwinana alumina refinery implements press filtration to reduce residue volume output and conserve water usage



Suralco refinery in Suriname closed

7. Team


Board of Directors[7]


Mr. Michael P Ferraro – Managing Director

Mr. G John Pizzey – Chair, Independent Non-Executive Director (will retire as Chairman and Non-Executive Director effective from 31 March 2018)[8]

Ms. Emma Stein – Independent Non-Executive Director

Mr. Chen Zeng – Non-Executive Director

Mr. W Peter Day – Independent Non-Executive Director (will succeed Mr. Pizzey as Chairman)[9]

Ms. Deborah O’Toole – Independent Non-Executive Directors

Mr. John Bevan – Independent Non-Executive Directors


Management Team


Mr. Michael P Ferraro – Chief Executive Officer

Mr. Chris Thiris – Chief Financial Officer

Stephen Foster – General Counsel & Company Secretary

Andrew Wood – Group Executive Strategy & Development

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8. Financials


2018 Half Year Results Presentation


Financial Year 2016/17 (ended 31 December):[10]



Revenue (US$’M)

% Change

Profit (before Tax) (US$’M)

% Change

Alumina Limited










9. Risk


Major risks include:[11]


Principal Risks

Movements in the market prices of bauxite, alumina, and aluminium – AWAC’s, and hence Alumina Limited’s, performance is predominantly affected by the market price of alumina, and to some extent the market prices of bauxite and aluminium. Market prices are affected by numerous factors outside of Alumina Limited’s control. These include the overall performance of world economies, the related cyclicality of industries that are significant consumers of aluminium and movement in production disproportionate to demand (whether as a result of changes to production levels at existing facilities or the development of new facilities). A fall in the market prices of bauxite, alumina, and aluminium can adversely affect Alumina Limited’s financial performance. AWAC seeks to identify ways in which to lower costs of production and thus achieving a low position on the cost curve. Achieving a low position on the cost curve allows AWAC to remain competitive in the event of unfavorable market movements. AWAC and Alumina Limited generally do not undertake hedging to manage this risk.


Fluctuations in exchange rates – while a significant proportion of AWAC’s costs are incurred in Australian dollars, its sales are denominated in US dollars. Accordingly, AWAC and Alumina’s Limited’s future profitability can be adversely affected by a strengthening of the Australian dollar against the US dollar and a strengthening against the US dollar of other currencies in which operating or capital costs are incurred by AWAC outside Australia, including the Brazilian Real. Also, given that China is a significant part of the world alumina and aluminium markets, fluctuations in the Chinese Renminbi against the US dollar could have some impact on other parts of the industry. AWAC and Alumina Limited generally do not undertake hedging activities to manage this risk.


Increases in AWAC’s production costs or a decrease in production – AWAC’s operations are subject to conditions beyond its control that may increase its costs or decrease its production, including increases in the cost of key inputs (including energy, raw materials, labour, caustic and freight), the non-availability of key inputs (including secure energy), weather and natural disasters, fires or explosions at facilities, unexpected maintenance or technical problems, key equipment failures, disruptions to or other problems with infrastructure and supply. In addition, industrial disruptions, work stoppages, refurbishments and accidents at operations may adversely affect profitability. Some cost inputs are subject to long-term contracts to increase the certainty of input pricing. AWAC’s operating and maintenance systems and business continuity planning seek to minimise the impact of non-availability of key inputs. AWAC’s portfolio restructuring and repositioning continues to ensure that operations as a whole remain competitive. AWAC also invests in capital expenditure projects that will reduce cash costs over the long term. Planned development and capital expenditure projects may not result in anticipated construction costs or production rates being achieved.


AWAC structure – Alumina Limited does not hold a majority interest in AWAC, and decisions made by majority vote may not be in the best interests of Alumina Limited. There is also a risk that Alumina Limited and Alcoa may have differing priorities. During 2016, the joint venture agreements were modified to ensure that certain key decisions require Alumina Limited’s consent by a super-majority vote.


Greenhouse gas emission regulation – energy, specifically electricity, is a significant input in a number of AWAC’s operations, making AWAC an emitter of greenhouse gases. The introduction of regulatory change by governments in response to greenhouse gas emissions may represent an increased cost to AWAC and may affect Alumina Limited’s profitability. AWAC and Alumina Limited monitor regulatory changes, and understand their effect on AWAC.


Political, legal and regulatory impacts – AWAC and Alumina Limited operate across a broad range of legal, regulatory or political systems. The profitability of those operations may be adversely impacted by changes in the regulatory regimes. AWAC and Alumina Limited’s financial results could be affected by new or increasingly stringent laws, regulatory requirements or interpretations, or outcomes of significant legal proceedings or investigations adverse to AWAC or Alumina Limited.

This may include a change in effective tax rates or becoming subject to unexpected or rising costs associated with business operations or provision of health or welfare benefits to employees, regulations or policies. AWAC is also subject to a variety of legal compliance risks. These risks include, among other things, potential claims relating to product liability, health, and safety, environmental matters.

Intellectual property rights, government contracts, taxes and compliance with the US and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. Failure to comply with the laws regulating AWAC’s businesses may result in sanctions, such as fines or orders requiring positive action by AWAC, which may involve capital expenditure or the removal of licenses and/or the curtailment of operations. This relates, particularly to environmental regulations. Alumina Limited and AWAC undertake a variety of compliance training and governance functions to mitigate these risks. Furthermore, AWAC maintains a spread of assets and customers across a portfolio of countries and regions to minimise disruption and concentration risk.


Closure/impairment of assets – Alumina Limited may be required to record impairment charges as a result of adverse developments in the recoverable values of its assets. To the extent that the carrying value of an asset is impaired, such impairment may negatively impact Alumina Limited’s profitability during the relevant period. Closure, curtailment or sale of AWAC’s operations may result in a change in the timing of required remediation activities and/or an impairment being incurred as a result of the carrying value of an asset exceeding its recoverable value, but may be necessary to ensure the ongoing competitiveness of AWAC operations.


Customer risks – AWAC’s relationships with key customers for the supply of alumina (including Alcoa) are important to AWAC’s financial performance. The loss of key customers or changes to sales agreements could adversely affect AWAC’s and Alumina Limited’s financial performance. AWAC mitigates customer risk by having a broad customer base across many countries and regions.


Debt refinancing – Alumina Limited’s ability to refinance its debt on favourable terms as it becomes due or to repay its debt, its ability to raise further finance on favourable terms, and its borrowing costs, will depend upon a number of factors, including AWAC’s operating performance, general economic conditions, political, capital and credit market conditions, external credit ratings and the reputation, performance and financial strength of Alumina Limited’s business. If a number of the risks outlined in this section eventuate (including the cyclicality of the alumina industry and adverse movements in the market prices of aluminium and alumina) and Alumina Limited’s operating performance, external credit rating or profitability is negatively impacted as a result of these risks, there is a risk that Alumina Limited may not be able to refinance expiring debt facilities or the costs of refinancing its debt may increase substantially.


Other risks include:

  • an alumina and/or aluminium market in supply surplus may lead to downward price pressure;
  • Chinese growth slowing and affecting aluminium consumption and hence aluminium and alumina demand;
  • Greater Chinese aluminium production at lower cost, combined with lower demand in China, may lead to a greater level of Chinese primary aluminium and semi-finished product exports, depressing the world prices of aluminium;
  • Alcoa and its subsidiaries have a variety of obligations to Alumina Limited and AWAC, the fulfilment of which depends on their financial position. Adverse changes to the financial position of Alcoa and its subsidiaries could result in such obligations not being met;
  • a greater outflow of aluminium stocks from warehouses’ inventories could impact the world alumina market;
  • a sustained increase in the supply of cheap bauxite from Asia to China, could lower Chinese alumina production costs;
  • a technology breakthrough could lower Chinese alumina production costs.
  • Emerging competitors entering the alumina market may cause overcapacity in the industry which may result in AWAC losing sales.


Market Risk

Foreign exchange risk

Foreign exchange risk for the Group arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Group’s functional currency. The fixed rate note is issued in Australian dollars. To mitigate the exposure to the AUD/USD exchange rate and Australian interest rates the Group entered into CCIRS for the full amount of the face value of the fixed rate note to swap the exposure back to US dollars. Except as described above, the Group generally does not hedge its foreign currency exposures except through the near-term purchase of currency to meet operating requirements.


Cash flow and fair value interest rate risk

The Group’s main interest rate risk arises from its borrowings. Borrowings by the Group at variable rates expose it to cash flow interest rate risk. Borrowings at fixed rates would expose the Group to fair value interest rate risk. When managing interest rate risk the Group seeks to reduce the overall cost of funds. Group policy is to generally borrow at floating rates subject to availability of attractive fixed rate deals. In 2017 and 2016, CCIRS for the whole face value of the fixed rate note was used to manage the exposure to Australian interest rates over the life of the note. A change in credit rating for Alumina Limited triggered a 1.75% step up in coupon from 5.5% to 7.25%, which was effective 20 November 2016. To cover the increased interest rate exposure one of the original CCIRS was amended and an additional CCIRS was entered into. A subsequent change in credit rating triggered a 0.50% step down in the coupon from 7.25% to 6.75%, effective 19 May 2017. Existing CCIRS were amended to manage the changed interest rate exposure.


Credit Risk

Credit risk arises from cash and cash equivalents, derivative financial instruments, and deposits with banks and financial institutions, as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A-‘ are accepted, and exposure limits are assigned based on actual independent rating under Board approved guidelines. Credit risk further arises in relation to cross guarantees given to wholly owned subsidiaries. Such guarantees are only provided in exceptional circumstances and are subject to Board approval. The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represent the Group’s maximum exposure to credit risk.


Liquidity Risk

Prudent liquidity risk management requires maintaining sufficient cash and credit facilities to ensure the Group’s commitments and plans can be met. This is managed by maintaining committed undrawn credit facilities to cover reasonably expected forward cash requirements. Management monitors rolling forecasts of the Group’s liquidity, including undrawn borrowing facilities and cash and cash equivalents on the basis of expected cash flows.