Goldman Sachs has added Australia’s Alumina (AWC.AU) to its conviction list, rating the shares a Buy with potential upside of 17%.
The investment bank points to the alumina and bauxite miner’s joint venture with Alcoa (AA), which it expects to be a source of increased distributions for Alumina in the coming years.
Alumina is effectively a holding company for its 40% stake in the Alcoa World Alumina and Chemicals joint venture, which is the world’s second-biggest alumina business. That means its cash flow and earnings are left at the mercy of the JV’s capital requirements. As these capital requirements go down in future, Alumina should start getting more cash returns from the business.
Here’s more detail from Goldman analyst Craig Sainsbury:
Over the past decade, AWC has contributed US$2.5bn to fund their stake in the Alcoa World Alumina and Chemicals JV. After the contributions are accounted for, AWC has generated a net distribution of just US$210mn from their investment. However, now that growth capex & closure costs requirements have passed, we believe that AWC is set for a period of receiving elevated distributions from the JV. With current alumina prices and cash costs (c.US$300/t & US$215/t respectively) we believe AWC could receive c.US$300mpa in distributions from the JV from 2H17 onwards.
Goldman has a new, higher target price of AUD2.3 on Alumina’s stock, which it says reflects increased earnings and improved cash flow due to lower contributions to the JV, and higher alumina prices. The investment bank also expects Alumina’s dividend to reach almost 7% in its 2018 financial year.
AWC Price at posting:
$2.01 Sentiment: Buy Disclosure: Held
