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Morningstar | Alumina Limited's Profits in 2018 Will Ultimately Represent a Cyclical Peak; Lower Margins Ahead

Alumina Limited delivered impressive profits in 2018, as alumina prices soared. Due to supply shocks, prices remained well above our estimate of marginal cost for much of the year. Thanks to its low-cost position and bauxite self-sufficiency, Alumina Limited was able to fully capitalise on the higher prices to boost profitability. Refining margins per tonne rose to USD 221 in 2018 from USD 137 the prior year. Having updated our valuation model to reflect the company's full-year results, our fair value estimate is unchanged at AUD 1.70 per share. Our no-moat rating also remains intact.

Although the company carries strong momentum into 2019, alumina prices have moderated in recent months. We forecast that Alcoa World Alumina and Chemicals, or AWAC's, EBITDA will fall to USD 2.31 billion in 2019 from USD 2.63 billion in the prior year. However, as alumina prices deteriorate further, we expect larger profit declines through the end of our five-year explicit forecast period. Regardless, we expect Alumina Limited to maintain its low-cost position on the global cost curve for alumina refining. The company's 2018 refining unit costs of $226 per tonne place it safely within the lowest quartile of the cost curve.

We expect management to hit its 2019 guidance for 12.6 million tonnes of alumina production and 6.2 million tonnes of third-party bauxite volumes. Higher volumes will help minimise profit declines amid what we anticipate to be a less favourable pricing environment.

We continue to view shares as overvalued. Our below-consensus profit estimates stem largely from our negative outlook for Chinese fixed asset investment. We expect China's aluminum consumption to decelerate materially over the next decade. Weaker aluminum demand will weigh on alumina prices and, in turn, Alumina Limited's profit potential.