Aloca Corporation, in which Alumina (ASX: AWC) owns a 40% stake, announced plans to fully curtail production at its Kwinana Alumina Refinery last week. The decision was prompted by the refinery's higher costs, aging infrastructure and broader efforts to enhance the Group's operating efficiency.

The curtailment is projected to lower Group refining costs in the mid-to-long term as the remaining WA refineries, Pinjarra and Wagerup, are lower-cost and higher-margin facilities.

Shares in Alumina rallied 7.7% on the news and another 17.4% the next day – Thanks to a sizeable upgrade from Goldman Sachs. The analysts upgraded the stock to a Buy from Neutral and hiked the target price to $1.43 from $1.10 due to valuation reasons.

Stocks with the Biggest Broker Upgrades

'Target price' is an aggregate of Refinitiv broker target prices. % Dif compares target prices between 5 January and 12 January 2024

Does the Closure Affect Alumina's Valuation?

Morningstar describes Kwinana as an "old, high-cost refinery that posted a pretax net loss of US$130 million in 2023", and its curtailment would represent around a fifth of AWAC's 2022 global refining production.

"We don’t expect the closure of Kwinana to materially affect our $1.18 fair value estimate for Alumina," the analysts said.

More broadly speaking, brokers expect AWC earnings to fall in 2024-25 amid one-off curtailment costs but rise again in 2026-27 as production shifts to the more cost-effective refineries.

The closure also brings attention to the global alumina market, with the closure potentially being supportive for further upside in alumina prices. Brokers expect this to be beneficial for AWC as well as South 32 (ASX: S32).

Alumina prices were reported at 3,154 yuan a tonne on 3 January 2024, up for a seventh consecutive day amid tight bauxite supply, environmental protection policies and firm demand, according to the Shanghai Metals Market.