Alcoa Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 18, 2023

There are 13 speakers on the call.

Operator

Good afternoon, and welcome to the Alcoa Corporation Third Quarter 2023 Earnings Presentation and Conference Call. All participants will be in listen only mode. Followed by 0. After today's presentation, there will be an opportunity to ask questions. Please note, this event is being recorded.

Operator

I would now like to turn the conference over to James Dwyer, Vice President, Investor Relations and Pension Investments. Please go ahead.

Speaker 1

Thank you, and good day, everyone. I'm joined today by William Oplinger, Alcoa Corporation President and Chief Executive Officer and Molly Behrman, Executive Vice President and Chief Financial Officer. We will take your questions after comments by Bill and Molly. As a reminder, today's discussion will contain forward looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings.

Speaker 1

In addition, we have included some non GAAP financial measures in this presentation. For historical non GAAP financial measures, Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. We have not presented quantitative reconciliations of certain forward looking non GAAP financial measures for reasons noted on this slide. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, The earnings press release and slide presentation are available on our website.

Speaker 1

With that, here's Bill.

Speaker 2

Thank you, Jim, and thanks to everyone for joining the call today. Before we get started, I want to acknowledge the important contributions from our former CEO, Roy Harvey. Roy played a key role in our evolution into a stronger and more resilient business, and he was pivotal in our 2016 launch as a pure play upstream aluminum company. He led the company through some difficult market environments, including COVID and his commitment to making Alcoa successful never wavered. He is serving as a strategic advisor to me for the remainder of the year, and I appreciate his counsel.

Speaker 2

I've interacted with many of you over my 23 years and Alcoa Corp, both in my CFO and COO roles, and I'm glad to be with you again today. In my 1st few weeks in this role, I've met with Employees, customers and industry participants, several questions keep coming up in those conversations, such as what are our priorities And what are Alcoa's key challenges? 1st, to address the constant in our company, our values. At Alcoa, we act with integrity, operate with excellence, I'm proud to lead the company guided by strong values. Our relentless focus on the safety of our employees, contractors and visitors to our sites will continue as well our efforts toward our sustainability targets.

Speaker 2

As I step into the CEO role, I want to make it clear that I have ambition for this company. That ambition manifests as an expectation of excellence in everything we do, from and S, operations, maintenance and commercial excellence. Alcoa has an impressive history of innovation and leadership in the industry, and we plan to further build on that and strengthen our market connections. We will be action oriented and make decisions guided by our values, Sound business principles and with a focus on creating value for our stockholders. We've made good progress this year.

Speaker 2

Across our system, we've improved stability and we intend to build on that operational momentum. So for the near term, The focus will be gaining approvals for bauxite mining in Western Australia. This is our top priority. We are making progress. We have the right team in place for success, and we understand the improvements that our stakeholders are expecting.

Speaker 2

We will be driving for further operational improvements in Brazil. The ongoing start up at the Alumar smelter in San Luis hasn't gone as planned. We now have conditions in place for a successful restart from here forward. Next, we will be focusing on productivity across our system with every site focused on margin improvements through operational productivity going into 2024. And we have action plans in place to improve the financial results of certain locations in the system that has been underperforming.

Speaker 2

Each operation is working to become more globally competitive. In the long term, we remain bullish on aluminum as the material of choice. Megatrends continue to drive increased aluminum usage globally from further EV penetration to the substantial future demand in Alcoa is uniquely positioned in the aluminum industry for a world focused on carbon emissions and other sustainability issues, which we are addressing from 3 vectors: primary metal production with our joint venture, Elesys post consumer scrap usage and we are working on developing unmatched industry leading technology for the long term. Let's begin with safety. I'm disappointed that we had one serious injury with life altering implications in the Q3.

Speaker 2

A worker at our Juruti bauxite mine lost portions 2 fingers while performing maintenance on a bulldozer. While this event is unacceptable, overall, we are making progress on preventing fatalities and serious injuries. So far this year, our total recordable injury rate has improved by 16% and days away and restricted time injury, our DART rate, is 7% better on a year over year basis. Also, we are increasing the number of on-site field verifications for leaders to evaluate the effectiveness of critical safety controls and coach workers on safety improvements. Now moving to the financials.

Speaker 2

We reported an adjusted net loss for the Q3 of $1.14 per share and $70,000,000 in adjusted EBITDA excluding special items driven by lower average realized prices for both alumina and aluminum. Improvements in both raw material and production costs Did not fully offset the impact from lower realized pricing in both of our segments. We ended the quarter with a strong balance sheet and a cash balance of $926,000,000 We've made meaningful progress on our approvals for bauxite mining in Australia during the quarter and have more visibility on the time line for decisions from the government and regulators. I'll address this more fully later. In our operations, our Quebec smelter system set production records in the quarter, and we're investing there to increase our casting capabilities for value add products.

Speaker 2

From a commercial perspective, we also continue to be encouraged by the reception from customers for our SUSTAINA line of low carbon products, which includes Eculum Metal and EcoSource Illumina. And while demand in some key end markets remain soft, there are signals for a rebound in 2024. We'll talk more about that macroeconomic view of the market in a moment. But first, let me turn it over now to our CFO. Molly, please go ahead.

Speaker 3

Thank you, Bill. Revenue was down 3 percent to $2,600,000,000 as higher shipments only partially offset lower realized prices for both alumina and aluminum. The net loss attributable to Alcoa increased $66,000,000 to $168,000,000 and the loss per share increased from $0.57 to 0 point 9 $4 On an adjusted basis, the net loss attributable to Alcoa increased $140,000,000 to $202,000,000 The difference in net loss is primarily related to the reversal of a valuation allowance on deferred tax assets in Iceland. Adjusted EBITDA declined $67,000,000 to $70,000,000 as part of the decrease in revenue was offset by lower costs. Let's look at the key drivers of EBITDA.

Speaker 3

3rd quarter 2023 adjusted EBITDA declined $7,000,000 to $70,000,000 as lower metal and alumina realized prices were only partially offset by lower raw materials, Energy and production costs. Alumina segment EBITDA increased $20,000,000 sequentially. Lower raw material costs, primarily caustic soda and lower production costs in Brazil and Spain more than offset lower alumina index prices. We also saw the benefit of lower raw materials and production costs in the aluminum segment as well as energy improvements, but not enough to come the impact of lower metal prices. Other costs outside the segments were unfavorable $56,000,000 They reflect unfavorable intersegment elimination, higher transformation demolition costs and higher other corporate costs.

Speaker 3

Here's a deeper dive on raw material costs. This year, we've seen substantial improvement in our segment EBITDA due to lower prices For our key raw materials, market prices for caustic soda, calcined petroleum coke and coal tar pitch continued to decline in the quarter and are expected to improve further. Company wide, we have seen an $86,000,000 EBITDA improvement over the 1st 9 months, dollars 32,000,000 in the alumina segment and $55,000,000 in the aluminum segment. These lower raw materials market prices work through our financials on a lag basis, so we expect further improvement in the 4th quarter. Let's now move to other key financial metrics.

Speaker 3

Our key financial metrics are consistent with our earnings results. Year to date return on equity is negative 8.7 percent. Our 3rd quarter dividend added $18,000,000 to stockholder capital returns, which totaled $54,000,000 year to date. Free cash flow less net NCI contribution was negative $36,000,000 in the quarter, Increasing proportional adjusted net debt by $100,000,000 and decreasing the cash balance by a similar amount. Year to date, capital expenditures and cash income taxes remained our largest use of cash.

Speaker 3

In the 3rd quarter, Days working capital improved 5 days to 50 days on lower inventories. The improved working capital performance provided a significant source of cash in the 3rd quarter entirely offsetting the previous year to date working capital cash use. The working capital improvement is evident on the next slide. Cash balance declined $64,000,000 in the quarter. The largest source of cash was a working capital reduction $183,000,000 primarily from lower inventories, followed by EBITDA of $70,000,000 and net non controlling interest contributions of $40,000,000 We expect working capital to be a source of cash in the 4th quarter.

Speaker 3

Capital expenditures were the largest use of cash at $145,000,000 as CapEx typically increases as we move through the year. Notable this quarter were settlement payments of $75,000,000 to former workers at 2 smelters that Alcoa previously owned in Spain, as well as environmental and ARO spending of $52,000,000 Let's turn to the outlook for the final quarter of 2023. Our full year outlook has one favorable adjustment. We expect other corporate expense to improve $10,000,000 to $120,000,000 At the segment level, in alumina, we expect an improvement of approximately $50,000,000 due to lower raw material prices, better production costs and higher volumes, partially offset by approximately $10,000,000 in higher energy costs. In addition, we expect impacts related to lower bauxite grades in Australia to be consistent with the prior two quarters.

Speaker 3

In the Aluminum segment, we expect unfavorable energy impacts of approximately $30,000,000 mainly due to CO2 compensation changes in Norway. Additionally, we expect $35,000,000 in raw material price improvements to be offset by unfavorable product mix and higher production costs. Finally, alumina costs in the aluminum segment are of $35,000,000 primarily foreign currency losses, and we expect the 4th quarter operational tax to range between $10,000,000 to $20,000,000 Now I'll turn it back to Bill.

Speaker 2

Thank you, Molly. Next, I'd like to recap some key items from our global operations. Each of the 3 smelters in Quebec, De Chambault, Baix Omo and ABI and Becancor have set year to date production records for tons per day. When totaled together, they've performed the best since our 2016 separation. This week, one of those smelters, ABI, announced a planned investment to further improve its casting capabilities for a broader array of alloys for value add products.

Speaker 2

The new equipment should enable us to deliver products with additional sizes, smoother surfaces and better dimensional control for the automotive and packaging markets. We took our first action last month at our Kwinana Refinery in Western Australia with a restructuring plan that is intended to improve that facility and save $10,000,000 annually with more improvements under consideration. In Brazil, we're employing a deliberate and methodical approach to the which is now operating at approximately 65% of the site's total capacity and has restored stability to the pot that has been restarted. Finally, we are committed to conformance with the global industry standard on tailings management. Alcoa has voluntarily information from all of our Global Tailings, and we've worked with the International Council on Mining and Metals, or ICMM, to improve the industry's management of tailings.

Speaker 2

This has been a significant undertaking, and we work diligently, including with 3rd party reviewers, to provide additional information about impoundments with the highest classification ratings before an August deadline set for ICMM members. Now let's turn to an update on our mining approvals in Western Australia. Our teams have continued to work with relevant state government departments to advance our annual approvals for bauxite mining at the Huntley and Willowdale mines. Securing an approval is an absolute priority for our company, and we are working toward a final resolution in the 4th quarter. We have submitted a revised mine management program or MMP for the period 'twenty three to 2027.

Speaker 2

This updated MMP is now being reviewed by regulators. We believe this revised plan meets evolving stakeholder needs as it includes numerous enhancements designed to specifically address expectations of the government. It includes additional controls for the protection of drinking water, including increased distances from reservoirs and addresses biodiversity concerns through a plan to accelerate rehabilitation. Separately, let me briefly discuss the Western Australian Environmental Protection Authority process. In August, the agency completed A public consultation period on whether it should assess all or part of the current and next MMPs.

Speaker 2

The WA EPA has indicated that it to decide on this before the end of the year. We have demonstrated our commitment to transitioning to a more modernized approvals framework for new major mine regions. That's why we proactively began a formal assessment in 2020 from the WA EPA for our 2 new major regions for the Huntley mine, Myara North and Holyoke. But this will take some time. The assessment for Myara North Holyoke is ongoing and we do not expect the 1st bauxite ore from these new regions any earlier than 2027.

Speaker 2

We do expect the bauxite grade from these regions to be more consistent with the higher grades we previously experienced at the existing Mayara Central. However, until then, we expect similar bauxite quality as compared to recent grades. As Molly described, we are actively working to mitigate the Financial impacts of these lower grades, while also looking for opportunities to optimize productivity. Next, let's move to some highlights from a commercial Perspective and discuss some demand trends. First, customers are increasing demand for our Sustainer line of products.

Speaker 2

The Sustainer line is a small but growing proportion of our overall sales volume. Sales of ecolum, our low carbon aluminum, are strong in Europe and orders are being placed in North America too. Overall, we expect our annual global sales volume for Equilum to increase approximately 60% 2023 when compared to last year. Also in the Q3, we made our first sale of the non metallurgical variety of Ecosource, Our low carbon alumina brand. Earlier this year, we started offering non metallurgical varieties in addition to existing smelter grade eco source.

Speaker 2

Acoa is one of the world's largest producers of non metallurgical alumina, which is used in everything from refractories, sandpaper and water treatment processes across the world. Our Sustainer line has the aluminum industry's most comprehensive portfolio due to the range of products we offer from alumina to metal. Meanwhile, we also have customers coming to us due to our history of alloy development. Last month, we were recognized for the 2nd year in a row with an award from the North American Die Casting Association for an Alcoa developed alloy used in mega castings for electric vehicles. We are selling and licensing alloys that can be used to make these 1 piece high pressure die castings.

Speaker 2

With our alloys, OEMs can get a 1 piece casting rather than many separate pieces creating greater efficiency. On the cost side, our energy team signed a new 9 year power agreement in August that will The smelter's remaining electricity requirements with a strong focus on renewable energy. The global alumina and aluminum markets are both balanced to a slight surplus. At the same time, aluminum inventories in terms of days of consumption remain at historically low levels, positioning the market well for when demand improves. In 2024, there is uncertainty in the markets due to a range of geopolitical and macroeconomic factors.

Speaker 2

One of the biggest questions revolves around demand outside of China. Our base view is for continued growth in transportation and recovery in the packaging and in the building and construction sector. Within transportation, the automotive market typically drives the major trends. At this point, most of the COVID related automotive supply While uncertainty remains due to the labor actions in the United States, we anticipate year on year growth in tons of aluminum as automotive production In building and construction, high interest rates have negatively affected that sector in the last year, particularly in North America and Europe. A relative recovery in building and construction is expected next year compared to 2023.

Speaker 2

This is based on analyst projections for slowing inflation and In closing, we are encouraged by the positive operational momentum in the Q3 and intend to build on that performance. Our company's primary objective is to gain approvals for bauxite mining in Western Australia. We believe we're on the right With an updated mine plan that has an enhanced commitment meant to address the government's expectations. And importantly, we now have line of sight to decision timing, which is expected before the end of the year. Across our global operations, we are focused on improvement.

Speaker 2

We will work to increase productivity, reduce and control costs and manage our working capital. We also are continuing work on our future focused breakthrough technology programs, which have the And finally, while some end use sectors for aluminum are softer now, we remain bullish on the long term I'm not alone in this view. I attended LME Week, where the prevailing view was that aluminum is poised for long term growth. Alcoa is well positioned for this future. We have the distinct advantage of being active in all aspects of upstream aluminum production, and I'm excited about our prospects and the work ahead.

Speaker 2

With that, Molly and I are ready to take your questions.

Operator

We will now begin the question and

Speaker 2

answer

Operator

When called upon, please limit yourself to 2 questions. Our first question is from Lawson Winder with Bank of America Securities. Please go ahead.

Speaker 4

Hello. Thank you, operator. Good evening, Bill and Molly. Bill, congratulations on your new role. You're welcome.

Speaker 4

Yes. It's very nice to hear from you today. I just wanted to ask about Kwinana. And just with the lower grades I now expect it to continue through 2027 at the earliest. Is there a point at which a complete

Speaker 2

So at Kwinana, we're Essentially looking at all options and in the near term, as you see, we've announced a restructuring that takes some cost out. In addition to that, we're looking at a variety of different levers to be pulled to drive costs down and improve profitability there. But ultimately, as with any marginal asset and Kwinana is a marginal asset at this We'll consider options on the table, including curtailment and closure.

Speaker 4

Okay. That's very clear. And then in a similar vein, Alcoa has had this goal of reducing its cost to 1st quartile level globally. With you now in the lead seat, what are your thoughts on that goal in terms of timing and achievability. Thank you.

Speaker 2

Thanks, Lawson. I think we first of all, if you Step back and look at where crew has us today on the cost curve. We are still 1st quartile bauxite mining, 1st quartile refining and 2nd quartile smelting. The current situation in Western Australia puts pressure on the refining segment. So that could move us into the 2nd quartile.

Speaker 2

But to answer your question very specifically, You see in the presentation that we did today, we highlighted productivity and competitiveness a couple of times in the presentation. We have launched a program across the company to enhance competitiveness plant by plant. And so we're essentially going after that. I think there's opportunities even in our best plants and we highlighted the great success that we've had In Quebec, so far this year, I still think there's opportunities to make those plants more competitive, take cost out and more productive. So We'll continue to strive for those targets.

Speaker 4

Okay. Thank you very much. I'll get back in the queue.

Operator

Thanks, Lawson. The next question is from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 5

Thank you so much, operator. Bill, I'd like to add my congratulations. Thank you also for taking my question. And I wanted to pick up where the last question left off on the competitiveness. Can you maybe add a little bit more detail on what dials you can tweak?

Speaker 5

Is there capital needed to modernize plans? Is it streamlining some of the labor relationships? Is it energy? If you could maybe just peel the onion a little bit further, would really appreciate your perspective. Thank you.

Speaker 2

Yes. Sure. So we'll peel the onion back a little bit. We and the plants are at varying stages of where they sit on this Effort, probably the earliest one to undertake it was Kwinana, given some of the difficulties that we're having at Kwinana. We're looking at Kwinana from 2 perspectives.

Speaker 2

The first is an overall profitability perspective where we were looking at are there additional Markets that we can address because Quinata has NMA capability or non metallurgical alumina capability. Are there opportunities for pricing improvements for specific products? But then on the cost side, it's about labor productivity And maintenance productivity. So really getting down, not to use a pun, but to get down to the nuts and bolts I'm trying to determine are we effective on the maintenance side and can we significantly improve our wrench time. So that was the work that's being done at Kwinana.

Speaker 2

We subsequently launched what we're calling Workforce Blueprint exercise and it started in some of our best facilities up in Quebec. And you say why start in some of your best facilities, because I think if we can get gains in places like Quebec that are really, really performing well, We can probably get better gains in other parts of the system. So that is actually going through and looking at The labor that we have and the amount of time it takes to do specific tasks and a very scientific comparison Of the people that we have in each plant and whether there's opportunities across the system to streamline and take cost down.

Speaker 5

Thank you very much for that color. I want to follow-up On Western Australia, a couple of quick questions there. First, I think the company had previously guided to, I think 2024 at the earliest in terms of a transition back to higher grades now 2027, could you remind us what changed? Why 3 more years? And then if there is a kind of formal At the EPA level in Western Australia, could that change the timeline?

Speaker 5

Would appreciate your thoughts on that. Thank you.

Speaker 2

Sure. So if we address Kind of the suite of questions that you have. I think we made good progress in the Q3 on this issue. We have been working with the government and we've been working with the agencies in the government That decisions will be taken this quarter both on the mine plan approvals and the EPA assessment process. So I think it's a big step forward for the company.

Speaker 2

We should have some clarity this quarter. Now to address your question about what changed Between our prior guidance and today's guidance, if you go back and look at our prior guidance, we were very careful to note that We are expecting the lower grades for a 12 to 18 month period. Since that time, with The concessions that we have made in the MMP process, we now have some better clarity. We've been able to Work those concessions through the mine plans and the mine models, and we've developed the detailed plans And even with our best thoughts as far as mining and blending plans, we can't get back to the historical grades that we've seen prior times. However, as we transition to Mayar North, we believe that the geological sampling in those new regions will support The better grades that transition will occur we expect in the 'twenty seven timeframe.

Speaker 2

I hope that addresses your question.

Speaker 5

That is very helpful. There are more questions there, but I'll jump back in queue. Thank you so much and best of luck.

Speaker 2

Okay. Thanks.

Operator

The next question is from Michael Dudas with Vertical Research. Please go ahead.

Speaker 6

Good afternoon, Jim, Bill and Molly.

Speaker 2

Hi, Michael. Hi, Michael.

Speaker 6

So, I want to share some thoughts since you were promoted to the Chief Operating Officer earlier this year, I guess, maybe 6 or 7 months in that job. What did you find out after moving from the finance chair about the company? And I'm assuming some of these implementations were your ideas. And how you're going to translate that as CEO to allow Alcoa to capture more of the Anticipated cost reductions and likely hopefully pricing improvements that should run through the business in a more normalized environment over the next couple of years.

Speaker 2

So what I found out when I transitioned from a long stint as the CFO, 10 years as the CFO into what turned out to be a short stint in the COO role Was a couple of things. First of all, I was happy to find that we have great people in operations. We have people who have long tenure, 20, 30 years with the company that have tremendous But we've also brought in a lot of newer people who see things new ways and do things new ways. So I was really pleased to get to see that. And just as an aside, loved my COO role for 8 months.

Speaker 2

The other thing that I learned though is that there is a tremendous amount of opportunity out there. And people were really wanting to do things differently, Wanting to aggressively address some things and so I thought there was a tremendous amount of opportunity. So if I transition to some thoughts around the CEO role, just to be clear, and I'm sure this question maybe was embedded in your original question or will be asked Later on, the strategy and direction of the company is largely unchanged. We know where we're going from a strategic perspective. The thing that I'm trying to drive as CEO and you see this changing over the last year or so is really a cultural change.

Speaker 2

That cultural change is making decisions at a faster pace. It's having a performance orientation in everything we do And really an expectation of excellence in everything we do. And I hit upon this in my prepared remarks, whether it's operations, maintenance, Finance, an expectation of really being excellent. If we then couple that with what I think are the inherent advantages of Alcoa, So some of the inherent advantages of our company. We are present in all aspects of the value chain.

Speaker 2

We're a pure play aluminum company. We're not spending time on other parts of battery minerals. We are focused exclusively on being successful in aluminum. We have a global presence. And back to that first part of the question, I think we have unmatched Technical expertise still in this company.

Speaker 2

We haven't really shown it the last couple of years on the operation But I think it's there and we're starting to show it now. So when I combine all of that, I Translate that into an ambition for the company that we want to reestablish ourselves as the premier aluminum company in the world. And I think we can do that. And not to go on too long, Michael, I'm really excited and really happy to be in the role that I'm in.

Speaker 6

I appreciate those observations. Looking out, how quickly do you think You can implement the culture and kind of get best practices throughout the organization and productivity enhancements to show meaningful The results or achieve those goals, is it a 3 month, 6 month, a year? Is it How urgent do you see that process even though the overall strategy has not changed?

Speaker 2

Right. So Rome wasn't built in a day. We're not going to change the culture of this company in a day, a week, a quarter. However, look at the bridge that Molly showed. We saw And just so you understand how that bridge works, that's largely because We were able to make the tons.

Speaker 2

And so we were able to make the tons in the Q3. And the guidance that she gave Was a pretty strong guidance with the exception of the carbon change from the Norwegian government, which is totally outside of our control. So I think we're seeing some of that change today already, and I think you'll see more in the future. And everybody I talk to within Alcoa here is the story of performance Culture, we're trying to drive a performance culture and it's all about having expectations of excellence and driving those expectations And I think we've seen that on the upside to some extent, we set records in Quebec. We're getting better Stability in places like Brazil and the restart, much significantly better stability and operational performance in our Western Australia assets, even though they have worse bauxite quality.

Speaker 2

So I think we're seeing it now and hopefully accelerates into the future.

Speaker 7

Excellent, Bill. Thank you.

Operator

The next question is from Bill Peterson with JPMorgan. Please go ahead.

Speaker 8

Yes. Hi. Good afternoon.

Speaker 9

Thanks for taking the questions. And Bill, good luck in the new role.

Speaker 2

Thanks, Bill.

Speaker 9

So I Wanted to take a step back to maybe more macro supply demand. So you just said you mentioned LME. I guess what is the latest you're seeing in terms of supply demand balance, I guess in the context of restarts in Unon, relatively weak macro backdrop. And I guess maybe

Speaker 2

on the end market demand side, where

Speaker 9

do you see the most resilience? What's and then what remains the most muted and any sort of color between regions?

Speaker 2

So, 2023 is going to go down as a pretty tough year for the aluminum industry. In 2023, we see a slight surplus On the aluminum side, on alumina, it's fairly balanced. And On the aluminum side, we see about an 800,000 ton surplus in 2023. The reason for that is demand in rest of world actually contracted in 2023. So some of the big demand drivers in the rest Significant reduction in building and construction, actually a reduction of demand in packaging of all places, Ever so slight.

Speaker 2

And so across the board, we're seeing some weakness In the end markets. Now you referenced my trip to the LME week. Pretty resoundingly what we hear Amongst all the industry players is that 2023 and maybe going into 2024 can still be difficult times But it's just a matter of time where aluminum has significantly better market environment. The reason why we see that is that demand continues to grow, Starting to see even in 2024 a rebound in places like building instructions, some of the destocking that we saw occur In can sheet is now over, so we should see a rebound in demand there. And we fundamentally believe That the Chinese cap on supply will be maintained at the 45,000,000 metric tons and we can address why we believe that.

Speaker 2

But over time, we see that the market fundamentals for the metal itself really driven by some of the macro Trends over the longer period of time with EVs and solar should be significantly better than they are today. But with that said, it's been a pretty tough year on demand in aluminum.

Speaker 9

That's great color. I may have missed it, but I believe last quarter there was an update about Sensiprian Discussing planned phase restart starting at the beginning of 2024 with full restart by October 25. And then, obviously, trying to basically capture and set the PPAs in motion. But Can you give us an update there? Again, I may have missed it, but I didn't see that in the prepared remarks.

Speaker 2

Yes. Let me give you an update. We continue to work toward Really achieving long term economic viability of the site in Spain. And that and in the case of the smelter, that allows for However, as basically the question that you just asked, we're starting we see significant challenges that need to be overcome for that site to be viable, including soft demand for the value add products that site makes slab and billet, Low aluminum prices in this in the case of Europe, high power costs and the land permitting and Construction of some of the alternative power supplies that we have been looking at. We hope to overcome these challenges to allow for a progressive restart through the end of 2025, but it's been and it remains very difficult.

Speaker 2

So that's the situation in Spain.

Speaker 9

Okay. Thanks again and best wishes here moving forward.

Speaker 2

Thank you.

Operator

The next question is from John Tomazos with John Tomazos Independent Research. Please go ahead.

Speaker 8

Thank you very much for taking my question. Comparing to the containerboard market today, International Paper announced they were shutting 900,000 tons or About 2.5 percent of U. S. Supply. In the world aluminum market, Obviously, China is 59% of output and some of the other continents don't have very much production left.

Speaker 8

The bigger other regions are Russia, which is hydro Canada, which is hydro India, which is coal and the Persian Gulf, which is gas. Do you think it's possible

Speaker 2

John, that's a Hard question and give me just a second to formulate an answer.

Speaker 8

Sure. I'm sorry to compare. There's never been a 10% non recessionary fall in the containerboard industry before. It took that industry a long time to Get a grip on it.

Speaker 2

Right.

Speaker 8

And aluminum isn't down 10%, it's just not growing the way Would be horrible.

Speaker 2

So let me give you and you and I have known each other a long time and we've both been around this industry So let me give you a qualitative historical perspective. This industry has not had a problem On the demand side, with the exception of the global financial crisis, where we saw demand fall off and that inventories build. This year, we've seen demand fall off and yet inventories have not built been built significantly. So inventories and whether they're on the LME or on the market or off market inventories remain historically pretty low. As we look forward, we see a rebound of demand Going into 2024, and really see strong demand trends that are driven by the megatrends going out The question has historically been, will the Chinese maintain the 45,000,000 metric ton cap?

Speaker 2

We are seeing indications that we believe that they will maintain that cap. If they do maintain that cap And demand continues to grow that should assist the fundamentals of the industry. As far as A significant and to address your question, 2.5% cut in supply. The areas around the world where Supply is under pressure, specifically is in Europe. And we know that there are some plants that have hedged That those hedges will be rolling off over time.

Speaker 2

We have our own challenged plant in Europe. And so It will remain to be seen whether the industry takes a 2.5% cut out or not.

Speaker 8

Thank you. We're all looking for demand, Bill.

Speaker 2

Yes. Thanks. Thanks, John. It was good to talk with you.

Speaker 8

Thank

Operator

you. The next question is from Alex Hacking with Citi. Please go ahead.

Speaker 7

Yes. Thanks, Jim, Bill and Molly. And let me add my congratulations, Bill, on the new role. Thanks, Doug. Just following up on WA, right?

Speaker 7

So it seems like we're in the low grades now until 2027. As we think about the mine moves north that are going to start producing a mining in 2027, What are the major risk factors around that? How should we think about that? And how should we think about the timeline? Because if you're going to be mining in 2027, I I assume you need infrastructure pre stripping, all kinds of things that are going to need to be done ahead of that.

Speaker 7

So I guess, how should we think about the risks and timelines? Thanks.

Speaker 2

So Molly and I are going to team up on this one a little bit. The permitting process that we have undertaken for the Meyer North move is what's called a Part 4 permitting process. It is a modernized, Recognize permitting process within Western Australia for starting a new mine site. And it requires a lot of information. And so we made that choice going back, I think it was in 2020, to move that modernized process for MyR North.

Speaker 2

We made that choice because we recognized that the customized process that we have Currently, really needed to be modernized and our stakeholders wanted the more modernized process. So the risk that I see is around that permitting process. Now, we're doing everything that we can to mitigate that risk. And when we get closer to that time period, we will have line of sight. I can tell you we are Very energized around reducing the time between when we get that permit to go and when we open up the mine phase.

Speaker 2

And given the fact that we've had some delays in permitting, we're really trying to focus our efforts On making sure that we minimize that time between getting the permit and actually getting bauxite out of the ground. So Molly, anything you want to add to that?

Speaker 3

No. I'll just add as far as our guidance on the about $45,000,000 impact that we're currently seeing in the quarter. We have plans to continue to mitigate that number. You saw the first action announced this quarter with Quinones Severance program there. So that will save $10,000,000 and it's just the first bit of announcement, but we will keep moving through and finding

Speaker 7

Hi, thanks. That's helpful. I guess when you talk about the permits obviously being the key risk, If I remember correctly, there are some potential issues with proximity to local communities. Are there other Major permitting hurdles that you could foresee. I know this is a very kind of generic question, but Any more color would be helpful.

Speaker 7

Thanks.

Speaker 2

Not forecasting any issues around the Part 4 process per That's what we anticipate to be decided by the end of this year. We've added additional controls for protection of drinking water. We have agreed on distances from mining a certain distance from some of the key reservoirs, and we've agreed to accelerating rehabilitation and to increase the biodiverse In the near term, on the rehab. So those are the three areas that we have been discussing with the stakeholders and to try to get the current mine approvals through the process.

Speaker 7

Okay, thanks. And then just a quick follow-up on Alamar, if I may. I think the message last quarter there was you'd fix the conveyor issues and Above 60%, has something else gone wrong in the last quarter? Or are you Still on track from where you were then? Thanks.

Speaker 2

Something big happened in Brazil in the quarter. There was a massive power outage. And if you follow our competitor there, Alunorte had the same issue. Albras had the same issue. We lost Power for close to 3.5 hours in the smelter at Alumar.

Speaker 2

And that has knock on impacts Not only on the smelter, but on the refinery too. Now, thank goodness, we had good stability. We had recovered stability going into that. We were able to get through that power outage. What happens in a power outage in a smelter is that you stress The pots bringing them back online, we lost a few pots.

Speaker 2

I think we probably lost close to a dozen pots Bringing the plant back online from that power outage. So that was a setback that really is out of the control. It impacted something like 2 thirds Of the country in Brazil. And so it was a setback for the plant. They've recovered.

Speaker 2

They have a daily action plan. It's a daily go, no go on restarting pots and increasing amperage. And as we said In the prepared remarks, we're at about 65% today.

Speaker 7

Okay. That's super helpful. Thank you.

Operator

The next question is from Timna Tanners with Wolfe Research. Please go ahead.

Speaker 10

Yes. Hey, good afternoon. I thought I would pivot a little bit if I Good talking a little bit about some of your strategic initiatives and the cash flows, if I could. So first off, I just wanted to I know you talked about advances in Ecolume and Ecosource, but can you elaborate a bit on the premium that you're garnering there?

Speaker 2

So the premiums are consistent with the premiums that you see quoted on various sources. So it depends on the product, but the premiums are anywhere between $10 $30 a ton.

Speaker 10

Okay. That's helpful. Thanks. And then if we look at your cash balance, I know in the past you've said that you wanted to keep it at or below at or above $1,000,000,000 and it crept below that. I know it's not a perfect number, but if we look at the cash's sources and use Year to date, there's not a lot of free cash flow at these commodity prices even with the Q3 strong working capital release.

Speaker 10

And then we had from your Investor Day a great amount of initiatives that you are progressing on. I know you referred to them in the beginning as well like Astraea And I'm just wondering how do we reconcile again this commodity price environment with some of those initiatives and some of the

Speaker 3

Okay. Thanks, Timna. First of all, thanks for asking me a question. So let me just say on our cash position now we're at $926,000,000 We still have access to significant liquidities. We have our undrawn Revolving credit agreement, we have our auxiliary credit line.

Speaker 3

So those are available to us as needed. As you know, we've taken action in the past, Working capital programs to monetize that, we can take more aggressive actions on cost control and portfolio actions. But for us, if I look at kind of the short term cash preservation, it really is focusing on our operations That are consuming more cash than generating. So that is the focus Bill mentioned earlier, we have key sites that we are working to improve. So that's the near term on the cash management.

Speaker 3

On our CapEx, you can even see from this year, Instead of adding to our CapEx project list and filling the queue to spend the whole budget, We ended up staying just with the capital plans that were already on the agenda. As they slowed spending, which typically happens, We allowed that just to happen and so we saved some money on CapEx. We can do that again with the programs that are in the next Q. And if you look out to our breakthrough technologies, each of those has to meet a certain criteria before they're going to receive funding. Most of those now are pointing toward funding in 2025 and later.

Speaker 3

So we still have time for those and working through that financing and funding. Got it. So put bluntly then,

Speaker 10

Got it. So put bluntly then, if the commodity price stays at these levels, no concerns in terms of proceeding with some of those initiatives, LSAS, Astraea, Refinery Future, etcetera. But if we started to get into 2025 and didn't see much aluminum price improvement, Then it might be needing to rethink some of those capital outlays. Is that a fair conclusion?

Speaker 3

Yes, that's fair, Timna.

Speaker 10

Okay, great. Thank you for the help.

Operator

The next question is from Carlos de Alba with Morgan Stanley. Please go ahead.

Speaker 11

Yes. Thank you very much. Congratulations, Bill. Just Coming back to Western Australia, so I just want to understand if you know what might be the Potentially, the implications of the EPA deciding to do a formal assessment of your MMPs and mining plans. Would that result primarily on just a longer Through our process, maybe more detailed analysis and requirements or will also Result in higher cost, maybe above or not beyond the $45,000,000 that you have, but that would prevent the 45 to completely come back to 0 once you are getting into the 2027 minuteing plan or those areas in 2027 with better box height quality.

Speaker 2

So Carlos, you can imagine we completely understand what the process is at least from a legal and a technical Going forward, I really hate to speculate on what an assessment would look like, What an assessment would cover, and until we had better insight into the EPA's decision making process Around what they would actually be assessing, it's really hard to answer that question. We're moving forward on the path to over the next 75 days to ensure that our permits get approved And that's the focus. If we find ourselves in an assessment Part of the process, we'll have to determine what is assessed and what the impact will be at that point and we'll let you know.

Speaker 11

All right. Okay. And before I ask a question on smelting, just a clarification, maybe, Molly. I thought you were you had guided to around $55,000,000 impact in the 3rd quarter because of the bauxite issues, increasing from $45,000,000 in The Q2, so you did better than that, right? And just to make sure that, that is based on the initiatives and the efforts you are Doing to control this cost?

Speaker 3

Yes, Carlos, it's actually three things. We did draw on stockpiles that had Slightly better quality than we expected during the Q3. We also see the refineries operating very well With the lower bauxite quality. And then 3rd, you're right, the mitigation efforts are just starting to drive down costs.

Operator

All right.

Speaker 11

Thank you, Molly. And then finally, is there any update or any comment that you can provide on the situation of European smelters? I mean, Alista remains with a third of the capacity shutdown. I don't know if there is any Renegotiation or upcoming renegotiations of contracts for energy in Liza or Motion or the smelter in Ireland that Is relevant given where prices are today?

Speaker 2

So let's look at them independently. Motion is very well positioned and has a good energy source is probably one of our most profitable plants in the system. The motion is in good shape. However, this new carbon legislation that is Potential that could be passed into law in December. I think we've noted the fact that we could have up to $24,000,000 negative In the Q4 associated with Motion and Lista based on that new carbon legislation.

Speaker 2

That type of a change in legislation Makes it really difficult to make long term decisions around investments in places like Norway. So it's one of the disappointing things That I continue to see out of the Norwegian budgeting system that it really, really makes it hard to that you're going to put a lot of capital into an environment where there's not a good structure around carbon or At least a predictable structure around carbon. In the case of Lista, Lista is slightly different. No plans at this point Potentially restart that idle capacity. List, given its size, given its age, given its cost structure Sure.

Speaker 2

It's under a lot of pressure. And so revert back to my comments from earlier in the presentation, Listed is an area We're looking at very similar to Kwinana, every opportunity to try to make that plant more competitive and we need to given some of the headwinds it's facing, Especially on the carbon side.

Speaker 11

All right. Great. And I don't You have also a good contract there and no changes in the short term, right?

Speaker 2

We have a long term power contract in Iceland. There is a repricing mechanism that comes up later in the decade, but that's later in the I want to say in the 2027, 2028 timeframe.

Speaker 11

Thank you very much, Bill.

Operator

The next question is from Chris Laffamino with Jefferies. Please go ahead.

Speaker 12

Thanks. Hey, Bill. Congratulations on the

Speaker 6

new role and good luck.

Speaker 2

Thank you.

Speaker 12

So just a Question on the WA Mining situation. So if the EPA does an assessment on the 2022 5 year plan, which is, I guess, the one that you're operating under right now, Can you continue to mine? So I understand the point about low grades until 2027 when you move up to Mayaura and Holyoke. But Before that, is there a risk that they would basically not allow you to mine because they're reviewing the plan that you're currently operating under? Or do you have confidence that You'd be able to continue to mine under the existing plan.

Speaker 2

Well, I think that there are a variety of different outcomes that could occur if they go to a full assessment. But again, as I answered to Carlos, let's see what gets assessed and we will react accordingly. We're confident that we are doing all the right things to avoid either having an assessment or not getting our mine Permits approved. So we're doing all the right things. We have line of sight that have an answer this quarter, we believe.

Speaker 2

And if we depending on that outcome, we will take the right actions.

Speaker 12

And does the decision that the EPA makes as to whether they'll do an assessment I get impacted by the concessions that you're offering to make now? Or do they just base it on what the existing plan basically allows you to do?

Speaker 2

I don't know the answer to that one. So we would need to revert back to you. I'm not certain of that. All right.

Speaker 12

Thank you very much. Good luck. Thanks.

Operator

And our final question today is a follow-up from Lucas Pipes with B. Riley Securities. Please go ahead.

Speaker 5

Thank you very much, operator. Thank you very much for taking my follow-up question. Western Australia again, The $45,000,000 order of magnitude, what sort of savings could you be looking at? I think you noted $10,000,000 at Kewana, That would take it down to $43,000,000 or so per quarter going forward. Order of magnitude, how much more could you be looking at?

Speaker 5

Thank you very much.

Speaker 3

Lucas, I don't have a number. Again, these are efforts that we're going to continue to work through. And as they are restructuring our programs that need to be announced, we'll certainly do that. Otherwise, you'll simply see the Additional savings work into our outlook as we progress through time, but I can tell you we have dedicated teams on it. They're working very aggressively to identify savings.

Speaker 3

We've got a great pipeline of opportunities. So I do believe we will have Meaningful mitigation to share, but I don't have a number for you today.

Speaker 5

I appreciate that. Again, best of luck. Thank you.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Opplinger for closing remarks.

Speaker 2

Thanks for your questions and interest in our company. As you can hear from my comments, it's True honor to lead this company as we position for long term success. I really believe with disciplined focus and you've heard a lot of

Powered by Quartr

Key Takeaways

  • Leadership transition: Bill Oplinger assumed the CEO role, emphasizing a culture of excellence, strong values, and shareholder value while leveraging Alcoa’s technical expertise across the upstream aluminum chain.
  • Bauxite mining approvals: Securing updated Western Australia mine management program permits for Huntley and Willowdale is the top priority with a final decision expected in Q4, though lower ore grades will persist until higher-grade zones start production around 2027.
  • Q3 results: Alcoa reported an adjusted net loss of $1.14 per share and $70 million in adjusted EBITDA, with a third-quarter cash balance of $926 million; working capital improvements were the primary driver of positive cash flow.
  • Raw material cost tailwinds: Declines in caustic soda, calcined petroleum coke, and coal tar pitch prices delivered an $86 million EBITDA gain year-to-date, and further benefits are anticipated to flow through in Q4.
  • Sustainability and long-term demand: The SUSTAINA line of low-carbon alumina and aluminum (Ecolum and EcoSource) is gaining customer traction with 60% volume growth expected, while megatrends like EV adoption and low inventories underpin a bullish aluminum outlook.
AI Generated. May Contain Errors.
Earnings Conference Call
Alcoa Q3 2023
00:00 / 00:00