# [[Alcoa]] Pre-read our deep dive into [[Aluminium]] for more context. ## Company Overview Symbol: $AA Website: [Alcoa](https://www.alcoa.com/global/en/home/) Alcoa ($AA) are the world's largest producers of [[Bauxite]], [[Alumina]] and [[Aluminium]]. They have benefitted greatly from rising aluminum prices as a result of increasing demand for the [[metal]] & undersupply. ## Business Breakdown ##### [[Bauxite]] - One of the world's larget providers of Bauxite ore - Owns 7 Bauxite mines, operates 4 of them - Access to large deposits and mining rights for over 20 years - [[Land Rehabilitation]] matters from a sustainability lense ##### [[Alumina]] - World's largest producer of Alumina outside of China and the world's largest third party supplier of alumina Where the Alumina production goes: - 1/3rd Alcoa's Alumining smelters - 2/3rd other customers for aluminium productions What the total amount of Alumina produced globally is used for : - 90% goes into making [[Aluminium]] metal - 10% goes in industrial chemical operations in NA, Europe and Asia - [[Refining Assets]] technology matters for cleaner, more efficient production ##### [[Aluminium]] - [Smelting](https://www.alcoa.com/global/en/what-we-do/aluminum/smelting) - Low cost, fully integrated production - [Cast Products](https://www.alcoa.com/global/en/what-we-do/aluminum/cast-products) - Special Foundry Alloys - eg. non-heat treat alloys and SupraCast for compact engines - Full suite of value-add cast products (billet, slab, foundry ingot, alloyed and EC-grade rod, powder, high-purity and P1020) - [Energy](https://www.alcoa.com/global/en/what-we-do/aluminum/energy) - Energy assets w/ production capacity of 1.5 GW, partnersip positions, power management strategy ### MOAT / Competitive Differentiators ##### Sustana family of low C02 cast products Offers industry-leading environmental performance with a mine-to-casthouse advantage ^[https://www.alcoa.com/sustainability/en/sustana] - **EcoSource - Smelter Grade Alumina** - produced with no more than 0.6 metric tons of CO2e per metric ton of alumina, which is half the industry average of 1.2 metric tons of CO2e. - **EcoLum - Low Carbon Primary Alumina** - produced with less than 4.0 metric tons of CO2e for every metric ton of metal produced, including both direct and indirect emissions for bauxite mining, alumina refining, smelting and casting. This performance is approximately 3.5x better than the industry average. - **EcoDura - Aluminium with Recycled Content** - produced with at least 50% recycled metal, conserves significant amounts of energy and reduces the environmental impacts associated with producing virgin aluminum. ##### Sustainability Advantage - High Quality of [[Refining Assets]] - 8 refineries in 5 countries - Australia, Brazil, Spain, Saudi Arabia and US - Good [[ Sustainable Refining]] Practises - Driving the sustainable management for bauxite residue, a byproduct of the alumina refining process. Looking [[Turn Alumina By Products to Value]] - Using innovative residue filtration technology instead of solar drying bauxite residue. Process produces a dry residue cake by filtering mud slurry. ^[https://www.youtube.com/watch?v=QbmuYngSMZE&ab_channel=Alcoa] - Reduces water use & stoage area requirements. Goal to reduce land requirements per metric tonne of alumina produced by 15% by 2030 (cost efficiency potential - [[Land Rehabilitation]] leaders post restoring the land once the operations are complete - Returned to 100% species richness in Australia's Jarrah Forrest - Applying an innovative reforestation approach called [[Nucleation]], that cuts recovery time by 50%. - **Increasing the Amount of Clean Energy used for production**: - 55% of power production capacity comes from clean, renewable hydroelectric operations - More than 70% of Alcoa’s aluminum smelting portfolio runs on renewable sources - **Increasing the production of Secondary Aluminium through acclerating Recycling ** - At their Poços de Caldas location, Alcoa increased the amount of recycled scrap used in billet production by 200% since 2015. This has reduced the plant’s GHG emissions by approximately 30%. - Producing primary aluminum from recycled content **consumes about 5%** of the energy required to make virgin aluminum and **avoids up to 95%** of the energy-related emissions. ##### Innovation Advantage - **[Carbon Free Smelting Venture](https://www.youtube.com/watch?v=7y8jE5V70Lc&t=3s&ab_channel=Alcoa)with Rio Tinto called [[ELYSIS]]** - Main Benefits: - Smelting Technology that uses proprietary electrode materials to emit oxygen and eliniminates GHG. - The carbon anodes are usually replaced every 25 days, ELYSIS anodes have 30x the lifetime - Reduces operating costs by 15% - Increases production by 15% - Can be installed in new facilities and the retrofit existing ones. - Most significant innovation in the Aluminium industry in more than a century --> Planned for sales in 2024. - Apple, Gov of Canada & Quebec are investors. - Created another [joint venture](https://www.alcoa.com/saudi-arabia/en) w/ Saudi Arabian Mining Company (Ma’aden) in 2009 to form the **world's largest, lowest cost fully integrated aluminium facility** ### Growth Potential - China's production slowing. - China's push to limit carbon emissions have limited the local coal powered aluminum producers including big players (Hongqiao). - Alcoa has positioned itself as a sustainable low-carbon aluminum producer. (78% production from renewable energy) and is testing the use of renewable energy in the refining process - EVs are utilizing more aluminum since it is lightweight and can create more energy efficient products. - Increased freight costs have given Alcoa an edge over competitors since it has production operations all around the world (5 continents) ### Value Indicators - *Revenue Growth:* Alcoa is forecasted to reach **$10.6 billion in revenues** for the full year, representing a **14.5% increase** over 2020 - *Amount of Greenfield Development:* ^[Greenfield areas are normally undeveloped areas highly recommended for new construction.] has been low and this could be seens as an indicator of technological innovation to increase system wide capacity equivalent to a new refinery over the past decade - *Financially Attractive* - Current P/E ratio is at 7.83 vs Industry avg 15.38 - EBIT growth estimated at 33.70% vs Industry avg 13.91% #### Quantitative Analysis - EV/Sales (FWD) ratio of 0.74 (Better than competitors by 59%) - [[Price/Book (TTM)]] 1.63 (Better than competitors by 32%, slightly undervalued as less than 3) - Free Cash Flow Per Share Growth Rate (FWD): 52% (almost 200% better than competitors) - Q2 2020 revenue was $2.8B (Beat estimates by $196M) - Gross Profit Margin 20% (Lower than competitors by 32%) - EBITDA margin 2020 12.89% - EBITDA YoY Growth at 59% (Better than competitors by 350%) - EBITDA 2022 estimated growth at 18% (Better than competitors by 57%) - Debt to Assets at ~66% #### Risks - Increase in energy prices - Production of aluminum uses a large amount of electricity which can have a minor effect on aluminum prices - Externality that is not controllable - Alcoa is trying to de-risk this with their own energy assets - Aluminium Commodity Futures Price Sensitivity - Burden of future long term liabilities: Currently the company has privatised their US and Canada employee pension plans and post-employment benefits, paying off a large sum. This could be an issue going forward from a cash flow perspective - Geopolitical Forces - China's push to drive up imports of aluminium scraps for secondary supply given the production and emission caps - US's push w/ protectionist policies - More insider selling than buying over the last 3 months profiting off of the increased share price --> Indicator of higher prices. [Secform4](https://www.secform4.com/insider-trading/1675149.htm) #### Scenarios ###### Bear - Alcoa's share price is dependant on the price of aluminum and demand. Given the current market rally we can expect a small dip in the next few months once the prices and demand stabilize. ###### Base - All players (ex-China) increase production capabilities and benefit from the Chinese government crackdown. ###### Bull - Aluminum process will continue to rise given the current demand and Alcoa is well positioned to meet supply requirements. #### Competitors ##### Aluminium Corp of China & China Power Investment Corp - Domestic competition remains high with roguhly 100 domestic aluminum-manufacturing companies that are focused on trying to gain market share as China is attempting to consolidate its aluminum industry. - High Supply has left smaller companies focusing on volume in an attempt to survive in the industry and undercut larger firms such as Aluminium Corp of China and China Power Investment Corp ##### Norks Hydro ASA - Company expects a revenue growth of a mere 1% in 2022 in comparison to a 5% industry average - Currently the closest competitor to Alcoa given the geopolitical situation ##### UC Rusal - Company is under constant threath of US sanctions which will benefit Alcoa and other competitors. - 80% of shares held by insiders which poses a risk. Other competitors: Constelium (France), Rio Tinto (Australia), Xinfa (China), South 32 (Australia) #### [[Linchpins]] - [[Industrial Process Innovation]] - [[EV Adoption & Acceleration]] - [[Chip Innovation x Scaling]] - [[Sustainabilty of Industrial Production]] - [[Electricity Price Decline]] #### [[Idea Thesis]] - [[Turn Alumina By Products to Value]] - [[Innovate the Aluminium Industrial Processes]] ##### People - [Vincent Christ - CEO at ELYSIS](https://www.linkedin.com/in/vincent-christ-9066491/?originalSubdomain=ca) - [Timothy D Reyes - CCO at Alcoa](https://www.linkedin.com/in/timothydreyes/) - [Agnello Borim - VP at Maaden](https://www.linkedin.com/in/agnello-borim-301b3383/) ##### Sources 1. [Seeking Alpha](https://seekingalpha.com/symbol/AA) 2. [Alumina Business](https://www.youtube.com/watch?v=4G4ytqUOrsM&t=228s&ab_channel=Alcoa) 3. [Alcoa - Sustainability enhancing product value](https://www.alcoa.com/sustainability/en/enhancing-product-value) Tags: #value1pager #kp #cp Links: [[Value One Pagers]] | [[Aluminium]] | [[Commodities]]