Alumina: Sell On Metals Strength, Says Morgan Stanley

Morgan Stanley downgraded Australia’s Alumina (AWC.Australia) to sell this morning, seeing 10% downside.

Alumina has rallied 58% this year, on the back of improving aluminum prices and the company’s decision to end a legal dispute with its joint venture partner Alcoa (AA), opening door to potential acquirers. Alcoa, by comparison, has risen only 43.6%.

However, this rally is over and the market has already priced in corporate actions and a big chunk of the metals rally this year. Analyst Brendan Fitzpatrick wrote:

We see further cost improvements in the group; high-cost Point Comfort tonnes will be replaced by low-cost Ma’aden production. We expect costs to drop to US$186/t in 2H16 and US$173/t in 1HCY17 (using Morgan Stanley’s FX profile). However with the spot alumina price now above US$310/t the US$13/t cost improvement could be overwhelmed if commodity prices trend back to our 2017 estimate of ~US$250/t, a level passed through only two months ago.

After inputting the 3Q production data, capturing Morgan Stanley’s 3Q price deck – which includes a higher AUD – and adjusting the D&A profile to better match recent levels, we reduce our EPS forecasts ~20% in 2016/17, although a positive trend does remain. We trim our price target 9%, to A$1.55/sh.

Overnight, industrial metals continued to rally, with iron oar soaring 6.5% and aluminum gaining 2.2%.

Alumina fell 1.6% this morning. BHP Billiton (BHP) jumped 5.7%, and South32 (S32.Australia) soared 8.9%.