Morningstar | Hydro Takes Another Step Toward Full Production at Alunorte Alumina Facility; Shares Fairly Valued
Norsk Hydro shares rallied on March 27 on speculation that the company's Alunorte alumina refinery might resume operations in the near future. As we wrote in earlier updates, this is consistent with our prior view. We'd be surprised if the production embargo remains in place beyond the first half of this year. Even after today's rally, Hydro shares are trading roughly in line with our unchanged NOK 34 per share fair value.Our no-moat rating is unchanged. Hydro continues to operate toward the low end of the global cost curve due, in large part, to favorable energy costs. However, we maintain a negative outlook for the global aluminum industry. We remain skeptical that the company will generate returns on invested capital above its weighted average cost of capital in a midcycle environment.
Hydro announced that a third-party assessor will investigate whether or not the Alunorte facility can safely resume normal operations, with a determination to be provided by April-end. If all necessary safeguards are deemed to be in place, the Brazilian Federal Court would subsequently decide if the production embargo should be lifted. Although there is no specific timeline for the Federal Court's decision, we anticipate that it would come soon after the investigation is concluded.
Although the company's update lacks firm details, the implications on global alumina prices are substantial. With Alunorte being the largest alumina refinery in the world, its limited production has supported elevated alumina prices since early 2017. A resumption of full production will likely drive alumina prices lower. Accordingly, the update weighed on Alumina Ltd. share prices, which moved sharply lower. We continue to forecast materially lower alumina prices over the next five years as Chinese fixed asset investment growth stagnates. In turn, this dynamic will support a downward shift in the global cost curve for aluminum smelting.
Alumina is engaged the business of the global bauxite, alumina and aluminium industry, which it conducts primarily through bauxite mining and alumina refining. All of those business activities are conducted through its 40% investments in Alcoa World Alumina and Chemicals ("AWAC"). Co.'s equity interests in AWAC forms a reportable segment.
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