Morningstar | Norsk Hydro Receives Key Authorization for Alunorte Facility; FVE Unchanged
On Oct. 5, Norsk Hydro announced that it received authorization from the IBAMA Brazilian environmental agency to utilize a bauxite residue press filter at its Alunorte alumina refining facility. This news comes just days after executives announced the full curtailment of the refinery. The agreement is a critical step in allowing the Alunorte facility to resume operation at 50% of capacity. However, before production can be restarted, Hydro must receive authorization from Brazil’s Secretary of State for Environment and Sustainability. While this is a step in the right direction for Norsk Hydro, no concrete timeline has been provided by management as to when production at the facility will be restarted.In reaction to the news, shares of Norsk Hydro are up around 4%, while shares of Alcoa and Alumina Limited are down by around 8% and 7%, respectively. If Alunorte, the world’s largest alumina refinery, is restarted (even at just 50% of capacity), this would likely provide downward pressure on near-term alumina prices. Regardless, alumina prices remain elevated. The rally for Hydro shares reflects the expectation for a restoration of higher alumina refining cash flows. For Alcoa and Alumina Limited, however, the sell-off simply reflects the aforementioned expectation that near-term alumina prices will be reined in.
While this news is certainly a positive development for Norsk Hydro, we still expect the environmental dispute to drag on until 2019, after which the Alunorte facility will resume production at full capacity. Accordingly, we maintain our fair value estimates for Norsk Hydro, Alcoa, and Alumina Limited of NOK 36, $31, and AUD 1.70 per share, respectively. Our no-moat rating for all three companies is unchanged. We continue to view all three companies as materially overvalued, given our below-consensus forecasts for alumina and aluminum prices alike.
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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