Alcoa’s Smelter Upgrades Investment Could Reduce Costs

November 9th, 2011 by Rebecca McClay
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Alcoa Inc. (NYSE:AA) announced Monday that it would forge ahead with the second phase of a $2.1 billion investment in new smelters in Quebec, Canada, which may help the company pare down operating costs in the long term. The company confirmed that it would expand and modernize three aluminum production facilities to reduce costs as well as greenhouse emissions. The five-year project will cut costs at three smelters by 13 percent, ramping up the average productivity of about 1 million tons of aluminum per year by another 120,000 tons per year. [1] Pittsburgh-based Alcoa, the largest aluminum producer in North America, competes with other aluminum giants like Rio Tinto (NYSE:RIO) and BHP Billiton (NYSE:BHP).

See Full Trefis Analysis for Alcoa Here

Improving Capacity in Anticipation of Market Recovery

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Alcoa made the decision to move forward with the projects in Baie-Comeau, Deschambault and Becancour after it secured a 25-year commitment from its government for preferential electricity rates. The aluminum market is still weak as investors continue to worry about a possible European recession, so Alcoa’s capacity upgrades to the smelters should make it well-positioned to benefit from a market turnaround, which is expected in the next several years. Aluminum prices have fallen about 10 percent this year, but demand may soon rise again as the metal is becoming more predominant in electronics and increasingly used by aerospace and automotive companies. [2]

Management’s Long-Term Aluminum Outlook Remains Bullish

Alcoa recently reported somewhat disappointing third-quarter earnings, with net income of $172 million up 182 percent from the year prior but down 47 percent from the second quarter. Sales increased 21 percent to $6.4 billion. The company has forecast 12 percent growth in the aluminum market for 2011 and expects aluminum demand to double by 2020. [3]

The Trefis price estimate of $20 for Alcoa’s stock is significantly higher than the market price.

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Notes:
  1. Alcoa to Beef up three Quebec Plants, Globe and Mail, Nov 2011 [↩]
  2. Alcoa and Century Aluminum Benefit From Greater Exposure, MarketWatch, Nov 2011 [↩]
  3. Alcoa Kicks Off Earnings Season With A Thud, Forbes, Nov 2011 [↩]