Alcoa extends supply agreement with Adbri

Adbri (ASX: ABC) was up 8.6% going to lunch today following revelations the construction materials and lime producer’s subsidiary, Cockburn Cement (CCL) had reached an agreement with Alcoa on an extension for the supply of quicklime by one year to January 31, 2023.

Adbri advised investors today that "as part of the variation to the existing agreement, CCL has agreed to supply a minimum and maximum volume of quicklime to Alcoa".

The minimum revenue contribution is expected to be about $25m and the maximum about $35m during the term of this extension.

Independent directors outnumbered

Today’s announcement follows recent boardroom dynamics which last October saw CEO Nick Miller elevated into the boardroom in a move that temporarily shifted the dynamics to a point where independent directors are outnumbered.

As well as making Miller a director of the company, the company is granting him performance rights worth $1.524m which fully vest in 2024 should he meet certain performance hurdles.

However, chairman Raymond Barro advised that a new independent director is being recruited to restore what he regards as “majority independent composition.”

Underpinning the company’s corporate governance complexities is the 43% ownership by Barro Group.

Barro/Adbri JV

While the family-owned Barro Group is a rival to Adbri, last November both companies entered a 50/50 joint venture to acquire a Victorian quarries business, Metro Quarry Group (MQG).

MQG operates two quarries at Lang Lang and Nyora in Victoria servicing the Melbourne market underpinned by 50 million tonnes of natural concrete sand reserves.

Commenting on the JV, Miller, noted.

“The acquisition of Metro Quarry Group extends our vertically integrated footprint, provides a compelling opportunity to secure the critical supply of natural sand for our downstream businesses and delivers potential to unlock significant cost efficiencies by integrating the two quarries into a joint venture with the Barro Group.”

Supply-chain issues to improve

Adbri is currently trading at a 15% upside to the $3.485 target price highlighted by companies covering the stock (covered by FN Arena).

Macquarie, the last broker to update its Adbri outlook (16/11/21) notes strong demand and expects supply-chain costs in covid-disrupted WA and Birkenhead production disruptions to be transitory.

The broker retained an Outperform, with the target rising to $4.05 from $3.80.

Consensus on Adbri is Hold.

Based on Morningstar’s fair value of $3.10, the stock looks undervalued.

Adbri share price performance over one year versus the ASX 200