Alumina Ltd set to re-rate in 2014

Is Alumina Ltd (AWC) about to shake investor apathy?

China's aluminium production industry is becoming more rational and CIMB considers this will benefit the pricing of alumina. CIMB's analysis suggests there's now much less chance that alumina prices will ease over the medium term. The broker forecasts earnings for AWAC - the joint venture between AWC and Alcoa - will expand to US$80/t in 2015 from US$45/t in 2013, driven by a weaker Australian dollar, slightly lower costs and about 10% higher realised alumina prices. This should allow for a substantial dividend from AWC and the broker suggests a yield of 6-7%. Should the historical correlation continue between AWC's share price and the distributions the company obtains from AWAC, then CIMB is flagging a substantial re-rating of the company.

The company has historically paid a relatively high dividend yield compared to sector peers but did not declare a dividend in 2013 because of a challenged operating environment. CIMB thinks the dividend yield over 2014 and 2015 will be more in line with the prior period averages, as improved profitability can be demonstrated. The company's policy has been to distribute cash to shareholders after servicing debt and corporate costs. CIMB expects a dividend of US4c per share in 2014 and this equates to a yield around 3.4%. The broker retains an Add rating.

CIMB observes Chinese aluminium production costs have declined by an average of 8% over the past two years, largely because of the idling or closure of expensive capacity. Production growth is expected to slow this year to under 10% in China, while the rest of the world is either flat or negative. Yet the robust global demand outlook suggests growth around 6-7% and CIMB thinks the disconnect between supply and demand will tighten the market sufficiently to put upward pressure on prices. At current prices the analysts do not expect producers are receiving much of a premium over the all-in cash cost of aluminium production, hence it is not surprising that capacity is being reduced.

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