Citi downgrades Alumina to “Sell” in another blow for aluminium heavyweight

Citi Bank has downgraded Alcoa-linked ASX stock Alumina (ASX:AWC) to a “Sell” from “Neutral” as higher production costs saw US$20m wiped off 2H 2022 earnings for the company, according to Citi’s calculations. 

The bank is forecasting a 5.7% loss in Alumina’s total shareholder returns prompting it to downgrade the price target for AWC from $1.59 to $1.50. 

Alumina owns a 40% stake in Alcoa and it is generally considered a proxy for investment in the latter Aluminium producing heavyweight. 

4Q results drive downgrade

Citigrouo is ultimately unimpressed with Alumina’s fourth quarterly report published on Thursday. 

It’s a bad month for Alumina. Earlier this month, Macquarie also downgraded its earnings forecasts for the company due to WA gas availability issues.

Total earnings was US$51m in Q4 compared to US$84m in Q3, a -48% decrease.

Citi has notched down profit estimates for Alumina by -10%.

In turn, the target price for the company has been downgraded from $1.59 to $1.50 (that’s where Citi gets its number that shareholder returns will decline -5.7%). 

But why? A look at the factors 

Citi sees multiple things working against Alumina in its latest note on the company. 

These include: 

• Higher production costs impacted 2H 2022 earnings by US$20m 

• Prices for aluminium products down -8% to US$334/t (spot alumina currently higher than what the company is being paid at US$360/t) 

• Third-party shipments decreased -2% due to issues at San Ciprian refinery 

• Activity at the Western Australian Kwinana and Pinjarra refineries remains subdued as WA gas market availability remains an open concern 

• “Alcoa accounts showed a net loss attributable to AWC in [2H 2022] of US$48m” 

• AWC’s net debt rose to US$106m. 

Outlook concerns 

There are also forward-looking issues Citi raised on Friday. 

• WA government is taking longer to approve new mines, according to the bank 

• Lower bauxite quality at Australian refineries through CY22 likely to continue impacting shipments 

• Alcoa is reducing the bauxite grade at its Huntly mine starting in April to extend ore supply under existing approvals 

• Lower grades of bauxite mean more input costs (higher volumes of caustic, energy costs, and bauxite) 

• CIti expects to see quarterly earnings lower by $55m for the rest of the year 

AWC's one year chart