Alumina To Become Key Saudi Supplier

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



By Andrew Nelson

US aluminium leader Alcoa Inc and Saudi Arabian mining company Ma’aden have agreed to develop a fully integrated aluminium industry in the Kingdom of Saudi Arabia. AWAC, Alcoa’s 60/40 joint venture with Alumina ((AWC)), will be the supplier of alumina to the project’s smelter.

The smelter will be developed in the first phase of the project and is expected to come on line in 2013. A bauxite mine and alumina refinery will subsequently be developed in the second phase of the project, with the AWAC JV expecting first production in late 2014.

Alumina expects its equity contribution to the mine and refinery will add up to around US$120m, with contributions to be made progressively between 2010 and 2014. While nothing is written in stone yet, Alumina said that a variety of debt funding options will be considered for the project.

After incorporating US$120m of additional spend into its model, GSJB Were says the outlay will only result in minor reductions to its earnings forecasts from FY10-FY12. This is due to the higher interest charges that will be incurred.

However, The broker hasn’t as yet factored the costs or revenue that will arise from the project into its model given the company hasn’t provided any guidance. That said, earnings wont be affected until after 2014.

All up, the broker thinks this newly formed relationship between Alcoa and Ma’aden is a big positive for the AWAC JV and thus Alumina. While the bauxite mine and alumina refinery won’t come on line until 2014, the fact that Alumina is diversifying its earnings through different projects is a positive, says the broker.

Based on the broker’s current production estimates and aluminium prices, it thinks that Alumina will generate enough free cash flow over the next two years to fund its portion of the capex.

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