Alcoa bets on operating cost cuts

The Business of Mining - thebusinessofmining.com | June 24, 2010 | 8:12 am

“…the company is spending $1.5 billion to create a new, low-cost bauxite mine. The aluminum maker hopes that by spending now it will be able to become a lower-cost producer once the economy finally stabilizes.”

The issue of when, where and how much company cash to spend is a puzzle for top metal and mining executives during the best of economic times. But adopting either a save or spend strategy is critical for a company like Alcoa in this tough economic environment, because for years it has lost ground to more nimble and efficient competitors Rio Tinto, UC Rusal and to small upstarts.

Source: Wall Street Journal, June 22 2010


Observations:

  • Alcoa has developed a new high-grade bauxite mine in the middle of the Amazon rain forest. The development cost approx. $1.5 bln.
  • Due to a 60% decrease in aluminium prices, net income of Alcoa has been negative for the past 2 fiscal years. However, the company has managed relatively well to bring operating costs down.

Implications:

  • Vale recently sold its Brazilian aluminum operations to Norsk Hydro because of the high risk associated with energy price volatility. Alcoa will have to prevent being hit by high energy prices or black-outs by executing the energy-intensive aluminum production process in other parts of the world.
  • Alcoa’s CEO Kleinfeld chooses to invest anti-cyclical, contrary to what many competitors are doing. If the balance sheet allows so, this is generally seen as a good strategy to capture market share. However, Alcoa has only some $1.5 bln in cash, which will make it hard for the company to continue the high level of investment.

©2010 – thebusinessofmining.com