Bauxite likely to be a key growth driver for Alcoa after the split

Alcoa is betting big on bauxite as the key growth factor that would drive the company after the split, observed an analyst at Market Realist. Until now, Alcoa would consume a major percentage of bauxite that it produces for its captive alumina operations. In the financial year 2015-2016, the integrated aluminium behemoth generated evenue of only $71.0 million from third-party bauxite sales. Since then it has upped its bauxite sales pursuits and has inked deals valued at nearly US$370 million for the next two years.

As per Alcoa's last financial disclosure, the company's bauxite operations generated an EBITDA margin of 37 per cent in fiscal 2015 compared to 15.5 per cent of the consolidated upstream business comprising bauxite, alumina, and primary aluminium divisions.

Bauxite prices, unlike alumina and aluminium prices, are not as volatile. The ore pricing is settled on a contract basis, whereas, aluminium and alumina are sold mainly on a spot basis, and hence, are quite volatile.

There are several challenges that Alcoa Corporation could face after the split, but given the pricing dynamics of bauxite, the aluminium ore divisions seems to be better guarded from the vagaries of world market in comparison to other commodities it deals in, observed Market Realist.

Alcoa’s much awaited split is scheduled for November 1, 2016. After the split, the value-added company—Arconic—will produce value-added products and precision components. Alcoa Corporation, or the upstream business, will become a pure-play commodity producer (RIO).

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