The Alcoa takeover offer for Alumina prices it at the low end
The Alcoa scrip bid for Alumina is well below some analysts’ price for the target company, which has posted a steep full year loss.
Alcoa’s takeover price for joint venture partner Alumina has been described as “a long time coming and ... a little bit of a let-down’’, however analysts do not see a competing bid arising.
Alumina on Tuesday reported a full year net loss of $US150m, in what the company said was a “difficult year” characterised by lower production volumes, higher production costs and lower alumina prices.
The company, which on Monday revealed its joint venture partner Alcoa had launched a $3.4bn scrip-based takeover bid for it, will not pay a full year dividend for the second year in a row.
Some analysts said NYSE-listed Alcoa’s offer price of 0.02854 shares for each Alumina share was well below their valuations for the Australian company.
Goldman Sachs analyst Paul Young, speaking on an investor call with Alumina management on Tuesday, said “it’s been a long time coming and does seem a little bit of a let-down’’.
“I think some are probably looking for a bigger premium,’’ Mr Young said.
In a research note released on Monday Goldman Sachs said its 12-month price target for Alumina was $1.39 per share, against the implied value of $1.15 for the bid.
Alumina owns 40 per cent of the Alcoa World Alumina and Chemicals (AWAC) joint venture with Alcoa, which was formed in 2002.
“The proposal comes following a challenging past 12 months for the AWAC alumina joint venture with uncertainties around Western Australian bauxite approval timelines, lower bauxite grades impacting WA alumina production, elevated unit costs in Spain, and weak seaborne alumina prices, resulting in declining margins,’’ Goldman Sachs said.
The broker said the company could restructure into a “lower cost, more profitable alumina business’’ with the closure of the loss-making Kwinana and San Ciprian refineries, and forecast it would return to paying dividends in late 2025.
Morgan Stanley analysts said while the bid price was in line with consensus estimates of Alumina’s value, it was below their base case valuation of $1.40 per share.
“We note however, that there are unlikely to be other interested parties given the commodity being niche and also the underlying business (AWAC) shareholding being a minority of which Alcoa already owns the majority,’’ the broker said.
“The independent report is still a hurdle to cross, but we think the stars are aligned for the process to progress to completion with Alumina recommending the deal.’’
Alumina managing director Mike Ferraro said on Tuesday there had been “a range of negotiations and discussions with Alcoa over the years and it’s been really hard to settle on relative value depending on where the share prices were at the time. It’s like trying to pin the tail on the donkey.
“This time it’s basically aligned. I think that there could be some feedback that we’re at the low point of the cycle and our share price is relatively low, we should be doing better.
“But the reality is the relativities are aligned not only in the short term, but also in the long term.’’
Mr Ferraro said he and the Alumina board had been of the view for some time that being part of a larger, fully integrated supply chain was important.
“Bringing the two assets together into one and giving our shareholders exposure to the aluminium segment that we don’t have, I think is really important for the longevity of this venture going forward.
“We have taken into account long term, net present value and other valuation metrics.
“We’ve looked at historical contribution, potential forward contributions, done a lot of assessment, but really the key message here ... it’s not just about the short term, it’s the upside in the long term for our shareholders.’’
Alcoa would apply to establish a secondary listing on the ASX to allow Alumina shareholders to trade their Alcoa stock on the ASX should the deal go ahead.
Alumina’s full year loss, reported on Tuesday, was down from a net profit of $US104m the previous year.
The company said the alumina price was about 5 per cent lower in 2023 compared with the previous year.
“While these results are disappointing, AWAC has recently achieved a number of important milestones,’’ the company told the ASX.
“Confirmation of the mine plan approvals in WA restores confidence in near-term operations while AWAC progresses approvals for the next mining areas at Myara North and Holyoake.
“AWAC has also announced two significant actions to improve financial performance. Firstly, the decision was made to curtail AWAC’s oldest WA refinery at Kwinana from the second quarter of 2024.
“This will allow the business to focus on its two tier one refineries in Western Australia at Pinjarra and Wagerup. Secondly, the decision was made to initiate further action at the partially curtailed San Ciprian refinery in Spain.
“Together with the ongoing focus on profitability improvement across all aspects of the portfolio, these initiatives provide AWAC with a strong foundation to create a significantly higher quality refinery portfolio.’’
Alumina has granted Alcoa 20 days exclusivity for its takeover proposal.
China’s CITIC holds a 9.6 per cent stake in Alumina, and said on Tuesday it was “considering and assessing the proposal’’.
Alumina’s largest holder, Allan Gray Australia, has already backed the deal, entering into an agreement that gives Alcoa the right to acquire up to 19.9 per cent of Alumina.
Alumina shares were 7.6 per cent lower at $1 at midday on Tuesday.
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