Alcoa Struggling Under Debt Burden and Low Sales

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Alcoa, once the darling of the aluminum world is in trouble. The firm’s credit rating has been systematically reduced by the ratings agencies such that S&P and Moody’s have the firm on watch for a further downgrade if their fortunes do not improve. For the first time since 1983, the company is cutting it’s quarterly dividend from 17 cents to just 3 cents/share following a $1.19bn 4th quarter loss according to Reuters.

Not only is the company suffering from low primary ingot prices, down 56% from July last year, but they are also running many of their downstream operations making semi finished products at a loss. A smaller competitor, Aleris filed for Chapter 11 last month citing the same problems of falling demand and low prices impairing its ability to cover debt payments.

Alcoa has $10.58bn of debt and a market value of just $4.45bn. Shares are currently at $5.59/share, down from over $44/share in June of last year. Alcoa expanded aggressively during the decade, purchasing and then investing in plants in many markets including China and Russia.  In a controversial deal the firm purchased two struggling rolling and extruding plants in Russia from Rusal in 2005 for nearly $300m and many observers doubt they have made money on them since. With aluminum rolling mills under pressure due to low sales, closures in the industry cannot be ruled out if prices do not recover soon.

In hindsight Alcoa’s failure to win the battle with Rio Tinto for Alcan has probably been their savior. If that deal had gone ahead it would have saddled Alcoa with an additional $27bn in debt instead of Rio.

–Stuart Burns

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