On Friday, aluminum-giant Alcoa (AA) announced that it would reduce system capacity by 12% to lower its cost structure in the wake of lower aluminum prices. We’re not surprised by the news as the firm’s third-quarter performance (click here), released in October, was among the worst reports during earnings season. Our fair value estimate remains unchanged for Alcoa.
Specifically, Alcoa will curtail roughly 531,000 metric tons of global smelting capacity via permanent closure of its smelter in Alcoa, Tennessee, and two of its idled potlines in Rockdale, Texas. In additional to these closures (which account for about 291,000 metric tons), the firm will curtail an additional 240,000 metric tons in the “near future.” Aluminum prices have dropped almost 30% since their peak in 2010, underscoring the risk inherent to investing in commodity-producing firms. Total restructuring charges related to the capacity reductions will cost Alcoa as much as $165 million (or $0.16 per share). All things considered, we remain on the sidelines with respect to Alcoa’s shares and point to Precision Castparts (PCP) as a better metals play that is heavily levered to the burgeoning aerospace end market.
<< Our 16-page Report on Alcoa (AA)
