Alcoa’s (Other) Earnings Surprise: Metal Production Outperforms

  • Less-sexy alumina, primary metals units beat analyst estimates
  • Results ‘soften concerns’ about post-split Alcoa: Morningstar

Alcoa Inc.’s earnings surprised analysts not so much for the results at its components units than for the not-bad performance of its metal-producing segments.

Wait, what?

Even before Chief Executive Officer Klaus Kleinfeld said in September he’ll spin off the less-sexy aluminum-producing assets, the generally accepted narrative was that Alcoa’s only hope was to jettison the so-called upstream assets and focus on supplying space-age parts to jet, car and energy companies.

The second-quarter results indicate the soon-to-be-independent mining and smelting company may have a better future than many expected. In the earnings report released Monday, the upstream units outperformed some analysts estimates even after prices for aluminum and its precursors fell from a year earlier.

“I was surprised by the improvement of alumina and primary metals,” Andrew Lane, a Chicago-based analyst at Morningstar Inc., said by phone. “Profit for both of those segments was higher than we expected. It should soften concerns about how well the upstream segments will stand on their own two legs after the split.”

Downsizing Giant

Since he became CEO in 2008, Kleinfeld has been working to reduce costs in the company’s aluminum-making business as prices tumbled by about 50 percent. The New York-based company has shut expensive factories and built a $11 billion integrated complex in Saudi Arabia as new production from China contributed to a global glut and drove down prices.

Last month, Alcoa released some details on the execution of the split. Alcoa Corp. will be spun off with the 128-year-old company’s mining, energy and smelting assets, and will keep about half of the employee liabilities. It also will borrow about $1 billion to send to Arconic, the company that will retain Alcoa’s legal identity, debt, and three so-called downstream businesses.

Alcoa said Monday that second-quarter net income for the still-united company fell to 9 cents a share from 10 cents a year earlier. Profit excluding one-time items was 15 cents a share, beating the 9-cent average of 12 estimates compiled by Bloomberg.

Alcoa’s sales dropped 10 percent to $5.3 billion as aluminum futures declined. The price for delivery in three months on the London Metal Exchange dropped by 11 percent from a year earlier in the second quarter to average $1,583 a metric ton. Morningstar’s Lane expects aluminum, which closed Monday at $1,652 a metric ton in London, to fall to 1,440 a ton by 2020.

Profit rose at two of the three manufacturing units in the second quarter. As well, Alcoa’s upstream segments topped Cowen & Co LLC. analyst Anthony Rizzuto’s estimate for adjusted earnings before interest, taxes, depreciation and amortization by $101 million. One reason is that the company showed better-than-expected progress in streamlining, Rizzuto said in a note Tuesday.

“The upstream continues to deliver solid results in the current environment,” Rizzuto said in the note.

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