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