Alcoa Kwinana closure: Alumina surges on analyst ratings, price upgrades

A brighter future is in store for Alcoa and partner Alumina after WA’s Kwinana refinery shuts, analysts say. A similar fate awaits its 1000 impacted workers, vow local property groups.

The decision by Alcoa and its ASX-listed partner Alumina to stop production at the 60-year-old Kwinana refinery in WA by September could see its free positive free cash flow and dividends return as early as next year.

A number of analysts upgraded their earnings expectations, ratings and target prices on Alumina following the announcement by the group and its operating partner Alcoa on Tuesday.

Alumina Limited owns 40 per cent of Kwinana and other Alcoa assets across Australia, Brazil and Spain through their joint venture, Alcoa World Alumina and Chemicals. Their Pinjarra and Wagerup alumina refineries in WA will continue to operate. The closure will cut 750 of the 800 Alcoa positions at Kwinana and another 200 contractor roles.

AWAC is among of the top low-cost global suppliers of alumina, the main feedstock for aluminium – one of the most critical metals essential to everyday life and a decarbonised future. Alumina is extracted from bauxite.

Goldman Sachs equity analyst Paul Young said Alumina Limited is now looking attractive on a 12-month view after AWAC’s challenging 12 months of declining margins, dividend cuts, approval hurdles, WA production challenges due to lower bauxite grades and higher costs, including at the San Ciprian refinery in Spain, which may also close.

“We believe that AWC has been oversold and the stock is undervalued on numerous metrics and that margins will start expanding in mid-24, and we upgrade the stock to a buy …”

Its target price on Alumina was upgraded to $1.43.

Shares in Alumina closed 17.4 per cent higher at $1.15 on Wednesday. Alcoa closed 0.7 per cent higher at $US31.94 on the New York Stock Exchange the prior night.

Mr Young expected AWAC to receive key approvals by mid-2025 for the higher-grade North Myara and Holyoake bauxite mines that supply its Pinjarra refinery. AWAC’s bauxite mining lease in WA was recently extended for an additional 21 year term, however, every year it must obtain approval for a five-year rolling mine plan for both the Willowdale and Huntly mines.

Late last year, the WA government announced new conditions around Alcoa’s ongoing bauxite operations in the state’s southwest, which had come under scrutiny over their potential impact on drinking water supplies and environmentally sensitive jarrah forests.

Goldman Sach’s review of other loss-making refineries – making up about 5-10 per cent of the world supply chain – and the global cost curve suggests that the alumina price is not considering any possible supply side disruptions, underpinning a 20 per cent-plus recovery to more than $US370/tonne in 2024.

Alumina Limited CEO Mike Ferraro said the group fully supports Alcoa’s decision to shutter Kwinana. Picture: Stuart McEvoy

The broker expects curtailment of other alumina refineries across Guinea, Iran, India, Brazil, Jamaica, Vietnam and Russia, equating to about 8 million tonnes of production as China refineries remain profitable at the China spot price of $US380/tonne.

“Closing Kwinana and San Ciprian will not only lower AWAC into the bottom decile of the global cost curve (operating the Pinjarra, Wagerup and Alumar refineries), but should boost the alumina price,” Mr Young said.

Alumina Limited’s earnings will rise by 25 per cent and 24 per cent in 2024 and 2025, respectively, it said. A forecast margin expansion to more than $US120/tonne in the second half of 2024 and a return to positive free cash flow next year could also see dividends again in September 2025, Mr Young said in his note.

Citi analyst Paul McTaggart and his team retained their buy rating on Alumina at a target price of $1.10.

“While the loss of so many jobs in WA is regrettable, a 1.5mtpa reduction in AWAC alumina output should largely balance the ex-China market with China historically a net importer of western world alumina,” Citi’s note said.

The decision by Alcoa comes amid a “a flurry of supply disruptions in both bauxite and alumina”, it noted. “The Chinese bauxite market faced a double whammy due to domestic mining restrictions in key production regions and concerns about bauxite shipment disruptions from Guinea, which fuelled a surge in alumina prices from $US330/tonne to $US360/tonne.

Citi has a long-term alumina price estimate of $US350/tonne.

Mr Taggart also highlighted mining giant South32 as a “clear beneficiary” of AWAC’s call.

“For S32, at 4 million tonnes per annum (mtpa) of alumina from Worsley and 1.4mtpa from Alumar, an extra say $20/tonne price benefit would boost revenue by $US108m per annum.”

It has a price target of $3.70 on South32, which is trading higher near $3.39 at 12.18pm AEDT.

Macquarie analysts kept their neutral rating on Alumina, but raised the target price by 6 per cent to 85c after updating earnings per share forecasts.

In 2024 and 2025, they expect EPS will decrease 1-5 per cent before increasing 3-5 per cent in 2026 and 2027.

“Movements in alumina prices present the most significant upside and downside risk to our earnings forecasts and valuation,” Macquarie’s note said.

Commodity prices and demand-supply ructions have wreaked havoc over miners’ long-term plans, especially in mining hub, WA.

WA workers are reeling from a spate of bad news just on Tuesday – another 140 jobs also going in the closure of Panoramic Resources’ flagship Savannah nickel mine due to market conditions.

The Property Council WA and Housing Industry Association tried to assuage some of the concerns, saying their members are “ready to welcome these workers with open arms”.

In a joint statement, both groups urged workers to consider careers in the property and construction sectors.

“More than 6000 Perth jobs are currently being advertised across the industries, which can offer secure careers with a strong pipeline of work,” the statement said.

Property Council of Australia WA interim executive director Emily Young said the skills and experience these workers have are “highly sought after by the property and construction industries, which can offer diverse, exciting careers and a strong pipeline of work”.

Free TAFE courses are on offer and impacted workers are urged to visit the Build a Life in WA and Construction Training Fund websites.

Housing Industry Association executive director-WA Michael McGowan said “1000 extra workers could help the state build 1000 extra houses each year.”