Alcoa Corporation

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Alcoa Corporation is a vertically integrated aluminum company, encompassing bauxite mining, alumina refining, aluminum production (including casting and rolling), and energy assets. It is a global leader in the aluminum industry.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Alcoa Corporation operates a global business in the aluminum industry. * Its operations are structured around three main segments: * Alumina: The production and sale of alumina, a white compound extracted from bauxite ore and the main component in the manufacturing of aluminum. * Aluminum: The production and sale of primary aluminum. * Aluminum Specialties: Manufacturing of value added parts through conversion and fabrication.

They also own and operate power generation facilities and sell electricity. * Their largest customers are typically large corporations in the metals and automotive industries. * Revenue is derived primarily from sales of aluminum and alumina products.

Industry Trends

Global Demand: The aluminum market is subject to fluctuations based on global economic conditions, such as manufacturing growth, supply chain disruptions, and trade relations between various countries.
Energy Prices: Aluminum production requires significant energy inputs, often representing a sizable portion of the cost structure. Volatility in energy prices, particularly natural gas and electricity, can significantly impact profitability.
Competition: The aluminum industry is highly competitive, and new entrants are increasingly entering the market. This is especially evident in regions with more favorable regulatory conditions and more abundant bauxite reserves.
Sustainability: Consumers are increasingly demanding more sustainably produced products, which is requiring companies to show progress on reducing carbon emissions throughout production.

Competitive Landscape

The aluminum industry is dominated by a number of major players, including Rio Tinto, and Alcoa.
Most aluminium producers are in commodity business and are essentially price takers, leading to intense price competition and low barriers to entry.
Chinese companies have become increasingly important competitors in aluminum production.
Few companies such as Alcoa and Rusal have their own supply chains from mining to fabrication
While many firms rely on scrap-based recycling, only few such as Alcoa and Rusal have operations spanning the entire value chain from mining to sale of a final aluminum product.

What Makes Alcoa Different?

Alcoa has a vertically integrated aluminum production, which is unusual in the industry, from mining bauxite to refining alumina and producing primary aluminum, all the way to converting and casting it into specific products. This control across the value chain gives them more control over costs.
Alcoa was historically the first, and therefore often had better access to infrastructure like power, water, and transportation networks, which is hard to replicate.
They have a long history of development in aluminum production, with an original focus on the development of new metallurgy techniques and new alloys, which could be used in manufacturing and have a lot of demand.
They are also increasingly focusing on sustainable aluminium production to increase its perceived premium.

Financials * Revenue Distribution: Alcoa’s operations are separated into 3 reporting segments. * Alumina: In 2023, this segment accounted for $2.75 billion (17%) of total revenue, with a margin of $18 million which is very low. This is their biggest revenue segment, and the company sees an opportunity in it. * Aluminum: In 2023, this segment contributed $7.32 billion (45%) of their revenue. And made a loss of -$45 million. This indicates this is not one of the most profitable areas. * Aluminum Product: In 2023, the segment contributed $6.12 billion (38%) to total revenue, with an EBITDA profit of 451M. The market seems to value this segment more than the other two. * The company also has interest and other non operating expenses, such as provisions, impairment, and restructuring charges which cost them around $880 million for the whole of 2023.

Profitability : The company reported a net loss in 2023 of $1.244 billion. As shown by its segment earnings report, the profitability is highly dependant on their aluminum products division. They plan to invest more in their bauxite and alumina production in the following years, which they hope will lift those segments.
Gross Margins: Historically, gross margin of the company is around 14-17%. There is a lot of volatility in its financials, since the prices of the commodity (aluminium) play a significant role in its returns.
Debt: The company has a debt of around $2.6 billion, which is not a lot relative to its market cap of around $7.35 billion.
Cash and Equivalents: Company has $1.3 billion in cash and equivalents and should remain liquid enough to take advantage of future opportunities.
Capital Expenditure: Company needs $1.7 billion in capital expenditures for 2024. Capital intensity in this business is very high.

Moat: 2 / 5

While Alcoa has some competitive advantages, such as the integrated supply chain, they don’t translate to a strong moat. The company primarily competes on price in a commodity business, where differentiation is very difficult to achieve, limiting their pricing power.
Although, they are the leaders in certain segments in the aluminum industry, competition from global markets is high, which makes it tough for Alcoa to consistently make huge profits.
Their technology patents and innovations do help, but most competitors are also capable of making relatively similar products.
Although the company has a large, well-integrated and high return asset base, there are other similar companies, like Rusal, which limit Alcoa’s moat.

Alcoa has a weak moat, making it vulnerable to swings in commodity prices. They may be able to compete with other players on the cost curve, and get some benefit from their long established supply chain, and some specific technological innovations. But they lack the pricing power needed to achieve high returns over the long term.

Understandability: 3 / 5

The business itself is easy enough to understand, it’s an aluminum company.
However, its business has so many segments across a global landscape, and the interrelation of these various segments is not easily grasped. The industry landscape also causes some complication because of its nature. Their complex financial statements also make it hard to ascertain information from.

Balance Sheet Health: 3 / 5

While their cash position is good at 1.3 Billion dollars, their total debt at around 2.6 Billion dollars is significant, which puts it at risk in the face of price downturns. They need to maintain their operating efficiency and ensure their cost controls, especially in high capital expenditure industries such as metal production.
Current liquidity is good, and they have been able to generate large cash flows in many years and should have the ability to maneuver in a difficult economic environment

Recent Concerns and Challenges * Volatile prices: Alcoa’s financials are very susceptible to fluctuation of prices, which made 2023 highly unprofitable. They face a risk of negative price movements which will severely affect their profitability. * China: Chinese aluminium producers have become increasingly competitive and can impact the company’s future sales * Geopolitical risks: The conflict in Ukraine has caused the price of Aluminium to fluctuate wildly, due to its effect on energy prices. The company also faces various other geopolitical risks because of its global structure and is likely to face significant adverse effects if trade wars or other similar situations arise.

Management’s view: The management believes in reducing the company’s debt, optimizing costs and increasing the aluminium business will increase the shareholders’ value, but will need time to see these strategies fully implemented.