Price Movement
The accompanying
graph shows the old WMC and, since
early December, its change to
Alumina Ltd. The added vertical line
designates the changeover. After a
brief rally to more than $5, the
trend has been negative. The former
WMC board under chief executive
Hugh Morgan rejected a $10.20
offer by Alcoa Inc for WMC. The
board’s premise was that WMC was
worth more in parts than as a
whole. It seems it was wrong.
Profile
Alumina Ltd was formed as
a result of a demerger of WMC Ltd
in late 2002. The demerger resulted
in two ASX-listed companies: WMC
Resources Ltd and Alumina Ltd.
Alumina Ltd took over WMC’s 40
per cent interest in Alcoa World
Alumina and Chemicals (AWAC). All
of the other WMC businesses went
into WMC Resources.
Alumina is a global producer of
alumina and also produces
aluminium and alumina-based
chemicals from its international
interests in bauxite mining and
alumina refining and it owns two
aluminium smelters in Australia
(Point Henry and Portland).
The US Alcoa Inc owns the other
60 per cent of AWAC and it has
been an expectation of the market
that it would move quickly to take
over Alumina Ltd.
Current details
Alcoa Inc reported
a very disappointing profit for the
last quarter of 2002 along with the
announcements of job cuts. The
American dollar has moved into a
long-term downtrend, which raises
the cost and lowers the capital
efficiency and profits for a takeover
from an American perspective.
Even before the Iraq war, US and
global economies were slowing and
the aluminium commodity price,
which is driven by demand, has
remained weak. For Alumina Ltd, the
full 2003 June year-end net-profit
expectations in a normal world are
now about $260 million to $270
million (versus the WMC demerger
Scheme Booklet forecast of $330
million). This places the company on
a P/E ratio of nearly 17 times
earnings. A forecast dividend (22
cents) places the company on a
dividend yield of 5.5 per cent.
Sector
The world aluminium industry
is producing more than economic
demand can use. Other producers
have been curtailing production.
AWAC is in a joint venture to build a
new alumina refinery at Pingguo
Xian in China. This will create two
problems for Alumina Ltd. It will need
to commit money for such an
investment, which will result in
increased capacity that will keep
aluminium prices down.
Worth buying?
Alumina Ltd’s
profits will suffer due to uncertainty
and deteriorating world demand.
Alcoa Inc will move later rather than
earlier to minimise its risk. The high
dividend is a trap with the likelihood
of a price below $2.80. Sell.
Geoffrey Hill is presenter of ABC
News Radio’s daily afternoon finance
report and is an independent private
client adviser. Email gh@ghill.com.au
