In general, we see any pricing of carbon, as being a decent tailwind for Alumina (AWC) given it’s a bottom quartile cost-curve producer, and even better when you include (shove into the curve) a carbon price, given lower emissions/cleaner product.
Below is a story from last month about the border adjustment mechanism designed, ultimately, to penalise high emission production.
Overall, the market has not loved AWC, with BHP, RIO, FMG performing much, much better. We have really struggled with this, given we think that iron ore is over-earning, and will settle to a $75/tn or lower level, and as such see downside risks to the iron ore producers.
Roughly 40% of the alumina supply curve is underwater, at the moment, given high energy prices, but long run we think that’s the best time to buy a commodity producer.
Eventually, competitors go under, and ex-ante you make supersized profits. If you buy when the company is already making supersized profits, ex-ante you get the mean reversion, and the PE of 4x turns out to be a PE of 16x.
Again, this isn’t a trade that’s worked so far, but, it is how we view it.
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