By Barry Sergeant, Mineweb.com
Alcoa has kicked off the 2010 first quarter reporting season with numbers that have been received with some concern, but, as so often at the income statement level, override an underlying story that could be more useful. The more detailed numbers show that Alcoa's first quarter 2010 continued to succeed in turning cash flows around, after poor numbers for 2008 and 2009 as a whole.
Capital expenditure has been heavily pared, a trend that set in as necessity during 2009. Overall, Alcoa's net debt (including cash) remains high, at USD 8.5bn, but is more than a billion dollars down on the number seen at the end of 2008. Alcoa's prevailing take is that "cash sustainability efforts helped improve the cost of goods sold as a percentage of sales by 8.2 points from the fourth quarter 2009 to 82.1 percent. The company is on track to deliver its new increased 2010 annual cash sustainability goals".
Cash generation seems to be king; the longer term impact of heavy cuts in capital expenditure can only be assessed in years to come. Alcoa's revenue line, sometimes conveniently oversimplified as a reflection of conditions in the US economy, fell 10% from the 2009 fourth quarter, to USD 4.9bn for the first quarter 2010.
The 2010 first quarter revenue line was materially higher than the USD 4.1bn recorded for the first quarter of 2009. Alcoa's revenue line is impacted by the transnational nature of its business, and the reality that it does much more than produce aluminium ingot.
For now, the bottom line is that Alcoa, which by its own advertisements, lays claim to "inventing the modern-day aluminum industry" remains under heavy pressure to reinvent itself. As recently as 2008, Alcoa's mood was sufficiently buoyant to be buying back its stock; in 2007, USD 1.6bn was spent buying back its own stock. This was also the year when transnational diversified miner Rio Tinto spent nearly USD 40bn in cash buying Alcan, literally saving Alcoa, which had bid first, from certain ruin. Rio Tinto's hugely expanded aluminum division, including bauxite and alumina, has struggled.
|
|
|
Underlying earnings, USD m |
2009 |
2008 |
Iron ore |
4126 |
6017 |
Bauxite & alumina |
-356 |
212 |
Primary aluminium |
-299 |
1025 |
Copper |
1866 |
1597 |
Energy |
1420 |
2581 |
Diamonds & minerals |
800 |
474 |
Other |
-1259 |
-1603 |
|
6298 |
10303 |
The record now shows that none of the aluminium giants - and there are other pretenders for the throne such as UC Rusal - either knew, or perhaps accepted, that China had moved to the forefront of competitive aluminum production. This base metal is quite different from the vast majority of other commodities, in that competitive primary production relies first and foremost on low cost electricity. China has been completing one new power plant after another, on time, and on budget.
More broadly, aluminum producers globally have persistently refused, or have been unable, to better tailor supply with demand, such that dollar aluminium prices have for many years underperformed most other commodities.
BHP Billiton, a big aluminum producer, has had a more sober view on the story, and for some years has identified the production of aluminum oxide (alumina, normally refined from bauxite) as the longer term way to stay profitable in the business. The business model here calls for the production of low cost, high grade alumina, which is shipped to China for smelting, where the electricity cost risk remains with the smelter owners.
Alcoa has been in the business for 120 years, and by many measures, stands out as one of the world's greatest companies. But it must gall many investors that just five years ago, the group ranked as No 1 mining company in the world, measured on market value; today, Alcoa's ranking is around 30.