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Morningstar | Alcoa Reports Another Adjusted Loss in 2Q; Lowering Our FVE to $22 on Lower Near-Term Profits

Alcoa's struggles continued in the second quarter. Having reduced our near-term profit outlook for the aluminum segment, our fair value estimate falls to $22 per share from $24. Our no-moat rating is unchanged, as we expect depressed returns on invested capital to remain in place for years to come.

Second-quarter adjusted EBITDA of $455 million was effectively cut in half from the prior-year period and declined slightly on a sequential basis. Although bauxite segment profits have remained steady, alumina and aluminum profits plummeted year on year. We've long expected alumina prices and, in turn, alumina margins to contract materially from 2018 levels, a trend that is now playing out. However, the company's aluminum operations again produced relatively soft results. The aluminum segment generated only $3 million of adjusted EBITDA. Although this represents a meaningful improvement from negative $96 million in the first quarter, we were hoping to see more progress. Management will continue to assess profitability across Alcoa's smelting portfolio and we see additional curtailments of high-cost facilities as a likely outcome.

The evolution of the aluminum smelting cost curve has proven adverse for Alcoa. The company's once-middling position on the aluminum cost curve has worsened in recent years amid low-cost capacity additions in China and the Middle East. Over the last decade, the closure of high-cost facilities hasn't catapulted the company to an improved position on the cost curve. We remain concerned that additional pruning would be "running just to stand still" but might not yield material margin improvement. Selling the Avilés and La Coruña plants is a step in the right direction, but additional smelting asset sales will likely prove necessary.