Apparently This Company's Aluminum Is Worth Junk

Tuesday, Jun 04, 2013
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Companies reliant on growth in manufacturing and consumer spending have had a tough time over the past few years. Aluminum, unfortunately for Alcoa and its peers, falls into this category. The combination of weakened demand and a bit of overkill on the capacity side has led to falling global prices since recent highs in 2011.


This fact was not lost upon Alcoa's management team, but, unfortunately for them, their actions to shore up the company's operations just weren't sufficient enough to overcome the industry's outlook for rating service Moody's. After slicing and dicing its operations to trim the fat of high-cost smelters while increasing production from its higher-performing product lines, the company believed that its investment-grade credit rating was safe. Because of these efforts, its balance sheet looks much healthier than it did in 2008, when it held its highest debt balance of the past five years.


For the past several quarters, management has been outwardly bullish on the business it expected from a variety of sectors, led by the automotive and aerospace manufacturing industries. Unfortunately, not even these expectations were enough to warrant producing aluminum at the pace it was in 2011. Dim hopes elsewhere prodded management to table 13% of capacity in 2012, with similar expectations for 2013.


Add all of this up, and one would have expected a safe haven for its credit rating, but Moody's obviously felt differently and made that publicly known last week. Investors shouldn't place all of the blame on Alcoa, though. The struggles being experienced are widespread. Just this year, Rio Tinto  issued a full-year loss, in part because of a $14 billion writedown of its aluminum and coal assets. A lengthy turnaround in prices could continue its negative impact to Rio Tinto, as 20% of its 2012 revenues stemmed from this segment.


Even though the downgrade stopped just one rung below investment grade and the outlook is stable, it's still tough to stomach, because management's decisions over the past year or so were aimed at maintaining its rating. Based on Moody's findings, there's still a lot of work to do regarding current debt levels if industry and company-specific forecasts don't improve. Only time will tell how things play out, but Alcoa investors probably haven't seen the last of management's strategic moves just yet. Let's hope they're made prudently, with the long term in mind, rather than with the goal of just reclaiming its previous credit rating.

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