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Treasure Chest: Can Alumina Maintain Dividends?

Treasure Chest | Jul 11 2019

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

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Brokers are mindful of the sustainability of Alumina Ltd's returns as global supply moves towards surplus. In contrast, Morgan Stanley is confident yields can be maintained.

-Expansion plans are accretive to valuation and should have limited impact on yield
-Uncertainty over the re-start of Alunorte has reduced visibility for 2020
-Is Alumina Ltd more structurally aligned with the industrials ex-banks?


By Eva Brocklehurst

The growth potential for Alumina Ltd ((AWC)) is strong in the medium term and high alumina prices have led to an elevated dividend yield in recent times. Yet can this yield be sustained into the future?

Several aspects of the stock suggest a clear structure and sustainable yield to Morgan Stanley, while other brokers are not so confident. Morgan Stanley assesses Alumina Ltd provides around 25% upside potential and this, coupled with a 7% yield, is significantly higher than mining peers and the industrials ex-banks.

Macquarie, downgrading the stock to Underperform from Neutral, now envisages downside risk to consensus earnings and dividend expectations. The broker reduces its alumina price forecasts – to US$300/t for the long-term and US$340/t for the June quarter – albeit concedes the dividend yield should provide some downside protection.

However, Morgan Stanley asserts expansion plans are accretive to valuation and this should have a limited impact on yield. Furthermore, the broker's forecast also incorporate below-consensus 2020 and 2021 alumina price forecasts at US$335/t and US$340/t, respectively.

These are both above spot prices of US$321/t, signalling upside risk, and the broker believes this is sustainable, driven by a low reinvestment rate. Using bear-case commodity prices, Morgan Stanley calculates, the lowest that the yield can fall is to 5.6% in 2022, still above mining peers. Morgan Stanley has reinstated coverage with an Overweight rating.


UBS envisages potential upside risk to both the alumina price and the company's share price should the re-start of Brazil's Alunorte refinery, the largest outside China, be delayed. A re-start, and additional supply from the rest of the world, is expected to offset reduced Chinese supply of alumina.

Alumina Ltd (which owns 40% of the AWAC JV) maintains a view that the small alumina deficit experienced in 2018 will move into balance in 2019. UBS recalls this balanced market view conflicts with that of Alcoa, the other 60% of AWAC, which is anticipating there will be a surplus of 200,000t-1mt in 2019. UBS expects a market surplus of 800,000t in 2019, rising to 1.9mt in 2021.

At 2020 alumina price forecasts of US$380/t, Citi calculates Alumina Ltd trades on a dividend yield of 11%. Alunorte's uncertain move to full production has reduced visibility on 2020 alumina prices and the broker suspects the pace of China's refinery re-starts will be key.

Citi has reduced its alumina price forecasts by -6% for 2019, to US$366/t, and upgraded 2020 by 2% recently. Yet the stock has risen 12% since early May and now trades in line with the broker's target. Hence, the rating was downgraded to Neutral in June.

More An Industrial?

AWAC operates refineries with very long lives. Morgan Stanley believes this makes the stock structurally closer to industrials but with reinvestment rates that are -50% lower than those of its mining peers. This feature is under appreciated by the market, and gives the impression the yield is more volatile than what the broker's analysis implies.

AWAC maintains a cash position and the company's gearing is negligible. This also lowers the yield risk through the commodity cycle. The production expansions that were recently flagged are positive, while closure costs can be managed.

Morgan Stanley finds that, even in a most aggressive scenario where there is a 10% simultaneous expansion at both Wagerup and Pinjarra, yield could be maintained at 5.4% through the investment phase.

Morgan Stanley also stress-tested the yield for closure costs related to the Portland smelter and Point Comfort refinery and finds the impact is also of the limited nature as well as being short term.

FNArena's database shows two Buy ratings, three Hold and one Sell. The consensus target is $2.55, signalling 9.4% upside to the last share price.

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