Alcoa Completes Its Spinoff From Newly Renamed Arconic

On November 1, Alcoa(AA) completed its spinoff from the former Alcoa, now named Arconic(ARNC).  The new Alcoa is “is a globally cost-competitive industry leader in bauxite, alumina and aluminum products, positioned to succeed throughout the market cycle.”

“We are launching Alcoa Corporation as a world leader in the aluminum industry with distinct competitive advantages across the value chain,” said Roy Harvey, Chief Executive Officer of Alcoa. “Our bauxite and alumina portfolios enjoy strong first quartile cost positions and our aluminum portfolio has a highly competitive second quartile position. We’ve made a commercial success of our cast products business, our can sheet business is a leader in North America, and our substantial energy assets are also driving value for maximum profitability. We achieved all of this during difficult market conditions, remaining resilient thanks to the hard work and dedication of our talented 16,000 employees. As we look towards the future, we intend to continue operating with excellence and innovating within the industry we pioneered, always driven by our values and our strong will to succeed.”

Strength across the aluminum value chain

Alcoa has an industry-leading, cost-competitive portfolio comprised of six businesses across the aluminum value chain—Bauxite, Alumina, Aluminum, Cast Products, Rolled Products and Energy—that are positioned to succeed throughout the market cycle. The company’s footprint includes 25 manufacturing facilities worldwide, and approximately 16,000 employees.

Alcoa’s world-class asset base includes:

  • The world’s largest bauxite mining portfolio, with 45.3 million bone dry metric tons (bdmt) of production in 2015, and access to large bauxite mining deposits with mining rights that extend in most cases more than 20 years;
  • The world’s largest alumina producer, with nine refineries on five continents;
  • A newly optimized smelting portfolio well-positioned to benefit from improved future market conditions;
  • Casthouses offering differentiated, value-added aluminum products alloyed and cast into specific shapes to meet customer demand;
  • Rolling mill operations in Warrick, Indiana, and Ras Al Khair, Saudi Arabia to serve the North American aluminum can sheet market; and
  • A portfolio of energy assets of which approximately 55 percent is low-cost hydroelectric power to meet in-house energy requirements at the lowest possible cost, and to sell to external customers.

Alcoa projects global aluminum demand growth of 5 percent in 2016 and expects growth to double between 2010 and 2020. Alcoa Corporation is well-positioned to meet this robust demand.

Cost-Competitive Position

In the third quarter, Alcoa reported that it had exceeded its three-year 2016 target of moving down the global alumina cost curve. It also achieved its global aluminum cost curve target.

The Company now occupies the 17th percentile on the global alumina cost curve, 4 points better than target, and a 13-point improvement from the 30th percentile in 2010. Alcoa has also met its goal of moving to the 38th percentile on the global aluminum cost curve, a 13-point improvement from the 51st percentile in 2010.

Arconic will retain 19.9% of the new Alcoa. Alcoa shareholders as of October 20 received 1 share of New Alcoa for every three shares held, and retained their old Alcoa shares as Arconic. Arconic is “a global leader in multi-materials innovation, precision engineering and advanced manufacturing, strongly positioned in attractive markets.”

n 2015, the businesses that today comprise Arconic recorded revenues of approximately $12.5 billion. Of this, approximately 65 percent derived from markets characterized by secular growth and compelling margins, including aerospace and automotive; the balance – 35 percent – was from markets with solid growth and attractive margins, such as specialty and industrial products, and building and construction.

“Today we launch Arconic as a strong independent company,” said Arconic Chairman and CEO Klaus Kleinfeld. “Our multi-year transformation while part of Alcoa Inc. substantially improved our competitiveness and profitability. Today, we are very well positioned as a leader in attractive markets. Our culture combines driving innovation with a relentless focus on operational excellence and cost control; this positions Arconic to create significant value for our customers and profitable growth for our shareholders.”

The company has a compelling financial profile with attractive margin profile and significant future profitable growth upside. The businesses have a relentless focus on cost reduction and strong track record of productivity improvements, having consistently delivered savings above $600 million per year. The Company takes a disciplined approach to capital allocation, with a priority on high return uses. Additionally, Arconic’s 19.9 percent retained interest in Alcoa Corporation is available for monetization.

A leader in advanced technology solutions, Arconic is a major supplier to the industry leaders in all sectors it serves. The Company’s position as a development partner to industry leaders is a key driver of share gains. The Company holds strong positions in attractive markets; 70 percent of Arconic’s 2015 revenues1 came from products where the Company holds either the number one or two market position.

Within aerospace, which accounts for approximately 40 percent of Arconic total revenues, the Company develops and manufactures high performance, engineered products and solutions for airframe structures and aero engines. Since 2008, the Company has significantly grown its capabilities through a combination of organic and inorganic technology and innovation-focused investments. As a result, Arconic has gained significant share on next generation aero engines and aero structures. The Company can today supply over 90 percent of the components within the jet engine, and it is a leader in structural parts for both metallic and carbon fiber reinforced plastic (CFRP) aircraft. In fact, 85 percent of the Company’s aerospace revenues come from products where it holds either the number one or number two market position.

In the North American automotive market, Arconic invented the bonding process to enable the mass-market shift from steel to aluminum, and it is today at the forefront of capturing growing demand for aluminum sheet as the industry shifts to light-weighting. The Company expects its North American automotive sheet revenues to grow six-fold, from $229 million in 2013 to $1.3 billion in 2018. Across its North American automotive portfolio, 96 percent of the Company’s revenues come from products where it is number one or number two in its market.

Barron’s reports that Goldman Sachs has a negative view on both new companies.

Goldman Sachs analyst Andrew Quail and team aren’t feeling optimistic about either. They explain why they started Arconic with a Sell rating…

On November 1, 2016 Alcoa Inc. completed the separation of its upstream and downstream businesses into two separate vehicles. Arconic Inc. (ARNC) is made up of the downstream aluminum business segments. Alcoa Corporation (AA) consists of all the residual upstream businesses, in addition to Rolled Products.

Arconic (ARNC, Sell): Bearish aero OE view not priced in. We initiate coverage on Arconic at Sell with a 6-month $15 price target. A negative outlook for greater than half of Arconic ’s end markets along with its elevated leverage position drive our Sell rating.

(1) Muted Aero outlook: Arconic generates ~30% of its 2016E revenue from a commercial aerospace OE market facing record levels of supply and a slow-down in key demand drivers. (2) Secondary markets pressured (20% of sales): Our US Autos team expects U.S. SAAR to begin declining toward normalized levels in 2018. Meanwhile, commercial transportation remains pressured with Class 8 orders down 38% ytd. (3) Relatively high financial leverage: We forecast Arconic to have a Net Debt/EBITDA multiple of 3.7x as of 2016 year end, 37% above our Base Metals coverage average. This elevated leverage drives our interest expense forecast to 45% of EBIT, well ahead of peers at 27%.

…and Alcoa at Neutral:

We initiate coverage on Alcoa at Neutral with a 6-month $23 price target. We believe Alcoa is uniquely positioned as a pure play upstream aluminum company. The majority of its core assets now sit deep in the bottom half of their respective global cost curves (Bauxite 16%ile, Alumina 17%ile) following years of mine optimization and productivity improvements. On the current GS commodity price deck, we forecast Alcoa to generate strong FCF in 2017 which would enhance its ability to delever and reach net cash on a Net Debt/EBITDA metric by year end 2017. However, this does not include its $2.9bn unfunded pension obligation. We expect Alcoa to trade slightly below the global peer group at 7x EBITDA.

Disclosure: The author holds no stock in any stock mentioned