Australia | Jan 24 2007
By Greg Peel
It was not a great 2006 for Australia’s primary aluminium producer Alumina Ltd (AWC). The aluminium price was weak most of the year, and it did not rebound post May in the same way copper and nickel did. Rampant expansion of Chinese alumina production had a lot to do with it.
The result is a stock price that is not only trading below net present value, but also below replacement cost, as UBS’ resource analysts calculate. UBS values Alumina at $6.83, and the shares closed yesterday at $6.47.
Now global aluminium (or is that aluminum) giant Alcan has announced that the expansion of its Gove alumina refinery in Australia’s Northern Territory is going to cost 77% more than first thought back in 2004 – US$2.3bn, to be precise, up from US$1.3bn. “Additional tie-ins” and “weather related delays” have been blamed by management, UBS reports. The expansion is intended to increase Gove’s capacity by 1.7Mtpa.
In hindsight, notes UBS, it would have been cheaper for Alcan to buy rather than build in this prevailing high-cost market.
To that end, UBS has extrapolated a value for Alumina Ltd as a fall-out from the Gove cost. The incremental cost has blown out from US$750/t of capacity to US$1350/t. Alumina’s current stock price implies an incremental value of US$800/t, says UBS.
Put another way, if Alumina’s refineries were valued at the Gove cost measure then Alumina would be worth $10.00 per share.
The aluminium price will always be Alumina’s short term price driver, notes UBS, but everything points to Alumina being a value investment, all things being equal. UBS rates Alumina a Buy with a 12-month target of $7.30.
The average target in the FNArena database is $7.62, despite a split of opinions. With a B/H/S ratio of 5/4/1, it takes ABN ($8.91) and JP Morgan ($8.80) to bump that target up.