No Respite In Sight For Alumina

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This story features ALUMINA LIMITED.
For more info SHARE ANALYSIS: AWC

By Chris Shaw

As commodity prices continue to slide the earnings outlook for resource companies continues to worsen and none more so than aluminium play Alumina ((AWC)), for which brokers continue to lower their forecasts and price targets. It has reached the point where some analysts see scope for the company to make a loss next year.

Factoring in changes to both its currency and commodity price forecasts, Credit Suisse has dropped its earnings per share (EPS) estimates by 21% in FY09 and by 29% in FY10, to 19.4c and 22.5c respectively. The broker makes the point it has very little confidence in its new forecasts as commodity prices remain extremely volatile and it is impossible to predict what production cuts may emerge in the market given the current weak price environment.

UBS has been even harsher in its assesssment as on its revised commodity price forecasts it sees the company delivering a loss of $76 million in 2009, before returning to a modest level of profitability in 2010. Its new numbers equal outcomes of -5c and 4c in EPS terms over the next two years, while the broker sees no scope for a dividend in 2009 against a consensus dividend forecast according to the FNArena database of 17.1c.

JP Morgan has a similarly pessimistic view, suggesting if there is no improvement in metal prices and the Aussie/US dollar exchange rate, and oil prices don’t turn more favourable, the company would report losses and its net present value would turn negative.

Merrill Lynch has made smaller cuts to its numbers than others in the market but as the broker points out having already cut its estimates significantly on previous occasions it is now 52% below consensus in 2009 and 48% below in 2010, which highlights how much scope there is for further adjustments to estimates in the marketplace.

With such a poor outlook it would be reasonable to expect Sell ratings to predominate in the market but the FNArena database shows only JP Morgan has an Underweight recommendation on the company, compared to eight Hold ratings. The argue put forward by most of those with Hold recommendations is there remains some value at current levels, but this won’t be recognised until there is some improvement in the level of aluminium prices. 

There are some other positives, Credit Suisse seeing the move to suspend the Wagerup expansion as a good one for the company in the current environment and Citi pointing out the announced cut in production at Point Comfort is also a sensible move as it is uneconomic at current metal prices.

Shares price targets have come down sharply as earnings have been revised lower, with the database showing an average target now of $2.42, down from $2.89 a week ago. JP Morgan is the lowest at $1.33, while Merrill Lynch and GSJB Were continue to set their price targets at levels above $3.00.

Alumina shares today are substantially weaker and as at 2.45pm the stock was down 14% or 24c at $1.465, which compares to a trading range over the past 12 months of $1.455 to $6.91.

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