Alcoa Inc. - Stocks

Instrument description

Aluminum is one of the most important metal and recognized for its physical and chemical properties. Aluminum is the second most malleable metal, and is also quite ductile. Aluminum is best used as an alloy with combination with other metals such as copper, magnesium, manganese, and silicon. The essential use of aluminum is in the construction of airplanes. Aluminum is also used in electrical transmission lines and window frames.

Aluminum is found abundantly in the Earth’s crust, but it is mostly extracted with different minerals such as Bauxite and Cryolite, and these minerals are known as ‘Aluminum Silicates.’ One industrial company that is accepted as the pioneer and leader in the aluminum industry is ‘Alcoa Inc.,’ which is an American industrial company headquartered in Pittsburgh, Pennsylvania. Alcoa is an abbreviated form of the Aluminum Company of America (AA).

Alcoa started functioning since 1888 and considered a leader in the production of Bauxite, Aluminum, and Alumina. Alcoa operates in 10 countries and has more than 13,800 employees. The major emphasis of Alcoa is producing primary aluminum, fabricated aluminum, and alumina, but it actively works in other aspects such as mining, refining, fabricating, smelting, recycling, and developing new technology. Alcoa is the largest bauxite miner and alumina refiners and supplies the aluminum to various sectors of the market, such as aerospace industry, automotive, construction, and commercial transportation.

Alcoa owns and runs the 7 active bauxite locations close to Atlantic and Pacific markets, but the company also restores the land once the mining and extraction work is done. The restoration work and corporate social responsibility also led Alcoa to win the award of the ‘Society for Ecological Restoration International Award’ in 2003. The award authenticates the work and effort of Alcoa for caring about the aesthetic, social, and economic values of the communities.

History of Alcoa

Alcoa was founded by Charles Martin Hall on July 9, 1886, in Pittsburgh and initially called the ‘The Pittsburgh Reduction Company.’ The founders of the company include Charles Martin, who was a young chemist and Alfred Hunt, who is a metallurgist. The only property of the company was its patented process of using electrolysis to extract aluminum from bauxite ore.

At first, the process of extracting aluminum was quite expensive, so the aluminum was used only in a limited capacity. Pittsburgh Reduction Company had two challenges: first was to increase the production of aluminum along with keeping the costs low, and second, was finding the market where aluminum could be used for different purposes. Aluminum began to be used for a wide range of cooking utensils that propelled the company to form its cookware subsidiary in 1901. In 1907, the company changed its name to the Aluminum Company of America (Alcoa).

The big break for Alcoa came in 1958 as the company joined Lockheed and Japanese manufacturer Furukawa Electric Company to form ‘Furalco’ that began making airplane parts. In 1972, Alcoa decided to sell its technology to other aluminum manufacturers. 1987, Paul O’Neill became Chairman and CEO of Alcoa and began reviving the business and value of the company.

In 1999, Alain J.P Belda became the new CEO, and the company changes to Alcoa Inc. In the following year, the company acquires Reynolds Metals Company for $5.8 billion. Alcoa owns many subsidiaries such as

• Alcoa Brazil Holdings Co.
• Alcoa Power Generating Inc.
• Alcoa World Alumina LLC
• Alcoa International Holdings Company
• Reynolds Metals Company
• Alcoa Securities Corporation
• Howmet International

Alcoa World Alumina and Chemicals (AWAC) signed an agreement with third-party bauxite contracts with external customers in the USA, Europe, China, and Brazil to allow the supply of bauxite from four of the mines. The contracts increased the total value of third party supply agreements from 2016 and 2017 to almost $665 million.

In 2007, Alcoa made a bid to takeover Alcan for $27 billion and became the largest aluminum producer; however, the bid was withdrawn as Alcan announced a takeover deal with Rio Tinto, which was worth $38.1 billion.

In November 2016, Alcoa Inc. was divided into two new entities that were Alcoa Corporation, which would run the mining and production of raw aluminum, and Arconic, which would process aluminum and other metals. The focus of the division was to improve returns, streamline the processes, and strengthen the balance sheet. The move resulted in record efficiency in production, refining, and smelting processes along with a reduction in overall cost.

Current Business and Investment of Alcoa

Alcoa has the largest bauxite mining portfolio in the world, and the company has a global alumina refining system. Alcoa uses almost 90% of bauxite to make alumina, and then 30% of alumina is refined to make aluminum. The bauxite and alumina that are not used is later sold to third parties. Alcoa focuses on three main segments that are Bauxite, Aluminum, and Alumina.

• Bauxite: Alcoa owns and runs the largest bauxite mining operations.
• Alumina: This segment is responsible for managing the worldwide refining system that processes the bauxite into alumina.
• Aluminum: This segment includes the smelting and casting functions that results in primary aluminum. The smelting process gives primary aluminum in a molten form, which is then formed into an ingot, rod, slab, or billet through the casting process.

The aluminum that the Alcoa produces is mostly sold as a commodity to third parties. The aluminum is then used to make airplane parts and in other products. The stock value of Alcoa will fluctuate according to the movements of the commodity prices. The increased demand for aluminum in the aerospace and automotive industry will improve the share price of Alcoa.

The assets of Alcoa include a world-class bauxite mining portfolio, a large global refining system, and a portfolio of aluminum products. Alcoa produced 45.8 million dry metric tons of bauxite in 2017. The company operates a network of cast houses where primary aluminum is produced according to the specifications of clients and customers.

The rolling mills of Alcoa provide aluminum sheets for packaging purposes in the food and beverage companies. The energy assets of the company are used to support the production of other vital metals and also in getting revenue from power sales of a third party.

Over the years, the Alcoa has expanded its reach and signed strategic partnerships with countries for bauxite mining, such as in the Brazilian Amazon rainforest and the foundation of a fully integrated aluminum complex in Saudi Arabia.

Risk and Potential in Alcoa Business Environment

Since the last few years, Alcoa has implemented a comprehensive strategy that allows the company to become a competitive cost leader in bauxite mining, aluminum production, alumina refining, and premium provider of rolling and casting services. The company has an efficient productivity program that allows cost-effective use of raw materials, resources, and other inputs. The SWOT analysis of Alcoa demonstrates the key strategic aspects of the company given by

• Strengths

Alcoa is the global leader in aluminum production, along with bauxite and alumina. The company has global reach and proximity with major markets that ensures proper management of the supply chain to clients and customers. Alcoa has a strong financial position and operates in more than 30 countries.

• Weaknesses

The company has a dependence on revenue only through its aluminum production and alumina refinery, which can be a problem. The company invests heavily in subsidiaries and strategic partnerships that can sometimes lead to lower margins of potential return

• Opportunities

Alcoa has the opportunity to discover new aluminum sites and grow in emerging markets. The company is a benchmark in aluminum production and can consolidate global business activities and look for suitable mergers and acquisitions. The company can also expand its products and services.

• Threats

Alcoa faces threats and competition from rival mining companies such as Rio Tinto, Aluminum Corporation of China Limited (CHALCO), and Emirates Global Aluminum (EGA). The performance of the company also suffers through the economic slowdown, government policies, taxes, regulations, and imports.

Stock Analysis of Alcoa

Alcoa is listed and actively trades on the New York Stock Exchange (NYSE) under the ‘Non-Energy Minerals’ Sector, and the industry is ‘Aluminum.’

Alcoa has effectively reshaped its portfolio according to market trends that allow the company to remain flexible in downward market swings, and try to take advantage of upswings. Alcoa practices strong cost control measures, and proper capital allocation that ensures that the company gets good return and share the dividends with its shareholders until today. The information above is for education purposes only and cannot be considered as investment advice. Past performance is not reliable indicator