AWC is an Australian based mining company.
Its only asset is its 40% stake in Alcoa World Alumina and Chemicals (AWAC). AWAC is the world's largest producer of bauxite and alumina.
The attraction of AWAC is its low-cost advantage. This stems from its high quality bauxite mines and proximity to low cost energy supplies. The two critical input costs in the refining of alumina.
Given the de-linking of the alumina and aluminium price, AWAC will experience a strong tailwind going forward.
Up until late 2010, the price of alumina was set as a percentage of the cost of the end-product aluminium.
But, significant over capacity in aluminium caused its price to plummet. The low price meant even the most efficient producers barely made a profit.
With this pricing mechanism no longer in place, we expect the alumina price to gravitate higher over time to a level that is consistent with the cost of production.
AWC will be a big beneficiary of this trend with the majority of its existing contracts expiring over the next three years.
The bears, counter that the alumina price will remain subject to the whims of various governments in the near term.
While this risk should not be downplayed, we are happy to look through any potential near term volatility with an eye on the medium-term.
With gearing a negligible 5% and our expectation of strong growth in earnings over the next few years, we expect the company to resume paying a healthy dividend.
AWC is trading at a significant discount to our fair value.
But, it is suitable only for risk-tolerant clients with a medium-term investment horizon.
For more information about Alumina Limited (AWC) please contact us on 07 4771 4577.