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November 6, 2009 Dear Friend,
We updated Alcoa and Alumina
Ltd. based on $0.90 estimated 2010-11 and $1.00 per lb estimated
2012-15 LME aluminum prices. We based our aluminum price
projections on the crude oil price, other nonferrous metals
prices including zinc recently trading 15% above aluminum, the
weak US dollar, continued low U.S. and interest rates.
Despite relatively optimistic
14% estimated 2010 and 6% 2011-15 CAGR of global demand, we
expect aluminum oversupply through 2015 in terms of global
operating rates < 90% and inventories within 10% of recent
peaks. We do not expect aluminum shortages, but "investment"
demand of sorts.
We estimate Alcoa generates
substantial cash, and repays over half of its net debt by 2013.
It benefits from few major capital projects and stringent cost
controls implemented at the beginning of this year. We raised
our price target to $16 from $10, and our rating to Neutral. We
could raise it to Overweight if Alcoa's shares sold down a
couple dollars.
Alumina Ltd. issued $1.55
billion in equity in 2008 and 2009 already, leaving it with a
survivable balance sheet at the aluminum market bottom. It
suffers from the strong A$, but also turns profitable in 2010.
We raised our investment rating to Neutral from Underweight and
our price target to $5 from $3.50 per ADS.
We believe that both Alcoa
and Century Aluminum benefit more than Alumina Ltd. owing to the
strong A$ penalties to almost 60% of Alumina Ltd.'s volumes.
John C. Tumazos
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Copyright © 2008 John Tumazos Very Independent Research,
LLC
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