We’ve been adding to our Alumina (AWC) exposure, within our direct equity portfolios, as the stock sells off.
AWC is trading broadly in line with alumina and aluminium prices, both of which spiked at the onset of the Russian invasion of Ukraine and subsequently fell as aluminium exports from Russia still made their way to market, avoiding sanctions, and alumina imports to Russia fell, adhering to sanctions.
This is an unfortunate combination for AWC.
Further, the energy price increases in Europe are causing cash costs of production to rise. It is likely that costs in the coming half will exceed $300.
That means a margin squeeze, and as such the AWC share price is under pressure.
However, the long-run fundamentals for both alumina and aluminium are excellent. Decarbonisation and the rise of renewables underpins attractive demand dynamics. Like many other metals, new supply and refining capacity outside China is fairly modest.
The time, in our minds, to buy commodities is not so much when prices are high and deficits are pronounced: that is precisely the kind of environment that invites a supply response over the longer run. Rather, we prefer to increase our exposure when surpluses abound and returns are low.
As long as the cash costs of production overall are favourable (and AWC sits at the bottom of the cost curve) and the balance sheet is strong (AWC has effectively no debt, see below), we can afford to wait out the troughs of the cycle, or in this case, the volatility of the cycle.
The embedded earnings expectations for AWC are modest but enough to produce a “market-like” rate of return under a range of decapitalisation scenarios (here, a 7% total return).
Similarly, the valuation metrics are undemanding. We are reasonably “well paid” to wait for better margins, as energy issues and the impacts of sanctions moderate over time.
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