The Silent Boom In Aluminium

I have been a long-term bull on aluminium and there is a secretly quiet boom that has been occurring for over a decade. Now before discussing this boom, it needs be stressed that this is a boom in usage and not in the aluminium price as we, as investors, are typically accustomed to focusing on. A price boom in aluminium will come with time but there are ways in which investors can profit from now while still being exposed to the future potential of the aluminium industry.

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Alumina Gains As Costs Fall

Improved margins reported by leading US aluminium/alumina producer Alcoa in the second quarter have given brokers a reason to expect a better performance from Alumina Ltd ((AWC)) this year. Alcoa reported a surprise quarterly increase in the alumina division’s earnings margin to US$47/t from US$44/t. Costs have fallen faster than realised prices. The better cash flow means Alumina’s 40% stake in the AWAC joint venture with Alcoa should deliver more than the guaranteed US$100 million in dividends in 2013. AWAC, the world’s largest aluminium producer, achieved US$32m in absolute cost savings in the second quarter from weaker key currencies and productivity gains.

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AWC – Deutsche Bank rates the stock as Buy

Target $1.42 (was $1.35). The broker believes the company has found itself in a good position to take advantage of the near term structural changes in the alumina market as a result of the Indonesian bauxite ban. While Deutsche admits it will only provide a temporary bump in the road, the near term impact on the alumina price could still be quite significant.

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Significant Valuation Upside For Alumina?

Alumina Ltd (AWC) has long been a stock market disappointment. The company holds considerable legacy value in its alumina production assets but the AWC share price has been perennially dampened by the underperformance of aluminium within the base metal spectrum. The problem is not so much one of weak global aluminium demand, but one of excess supply through smelting capacity, particularly in China.

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AWC – Deutsche Bank rates the stock as Buy

Alcoa’s Q2 result may have surprised Wall Street in a positive sense, the details were not so sweet for Australian partner Alumina Ltd, report analysts at Deutsche Bank. Higher costs and extra charges have led to some serious cuts to forecasts. However, the stockbroker simply cannot look past the long term value of the assets, and hence the Buy rating remains in place.

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