Morningstar | Production Emargo Lifted at Hydro's Alunorte Aluminum Refinery in Brazil; NOK 37 FVE Unchanged
Norsk Hydro shares traded higher after the Jan. 15 news that SEMAS, a local government agency in Brazil, had lifted production limitations at the company's Alunorte alumina refinery. The sanctions had been in place for nearly a year (since late-February) due to environmental concerns, but SEMAS now believes that the facility will be able to operate safely going forward. However, normal production levels still can't be resumed until Brazil's Federal Court lifts its own embargo. Although we'd expect this to take place in relatively short order, the facility's ramp up to higher production levels won't be immediate.Our valuation model has long assumed that the sanctions would remain in place into 2019 but would be fully resolved before year-end. We maintain this outlook. Accordingly, we continue to forecast lower alumina shipment volumes in 2019, with 2020 volumes reflecting full production levels. As such, our valuation model is unchanged. Our NOK 37 per share fair value estimate and no-moat rating also remain intact. Shares are currently trading modestly above our fair value estimate, but the stock remains in 3-star territory.
Regardless, Hydro shareholders should be encouraged by this news. Alunorte is the largest alumina refinery in the world and the resumption of full production will have a material impact on Hydro's consolidated profitability. Alumina prices remain high relative to historical levels, so the Alunorte facility will be able to capitalize on the current favorable pricing environment. We forecast alumina prices of $375 per ton for 2019 (in real terms) but our midcycle (2022) forecast is only $270. Over time, lower prices will stem from decelerating alumina demand growth in China and faltering cost support for alumina production.
Norsk Hydro is an aluminium group based in Norway. Co. is engaged in the supply of aluminium and aluminium products. Co. supplies casthouse products, such as extrusion ingots, sheet ingots and foundry alloys. Co's customers are active in sectors such as the packaging, lithographic, building, automotive and transport sectors. In addition, Co. is engaged in the production of power in Norway. Its business is divided into six operating segments: Bauxite & Alumina, Primary Metal, Metal Markets, Rolled Products, and Energy and Other and Eliminations.
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