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Alcoa Inc (AA), BHP Billiton Limited (ADR) (BHP): This Aluminum Producer Is Worth Considering

Alcoa has reduced its costs considerably. During the first quarter, in aluminum, its cost of production was within top forty-seven percentile among aluminum producers, improving from fifty-first percentile in 2010. Management is chasing a target of bringing this down to the forty-firstpercentile by 2015.

Likewise, in alumina, the company has improved from the 2010-2012 level of 30th percentile and has moved into the twenty-third percentile in the first quarter.

Downstream businesses are strong

Through its Engineered Products and Solutions segment, the company serves industries like aerospace, automobiles, building construction, packaging, etc. The outlook is bright for a lot of these sectors, especially aerospace, which are expected to grow at 11.6% CAGR (2012-2015). Aerospace companies are currently carrying more than eight years of order backlog and Alcoa is well placed to leverage this.

The company has done well to grow its aerospace business. In 2011, it acquired the aerospace fastener business of TransDigm Group, a leading global producer of aircraft components. It currently derives 28% of its value added revenue from aerospace. More than 90% of the aluminum aerospace alloys are developed by Alcoa.

The company also stands to gain from the improvements in North American automobile and construction industries.

Other players

World’s largest miner, Australian company BHP Billiton Limited (ADR) (NYSE:BHP), is slowly selling off aluminum assets or stalling projects. It produces aluminum along with other metals like iron ore and coal. Post the 2008 recession, the latter two commodities have performed relatively better than aluminum.

However, currently BHP’s woes do end with aluminum alone. The weakness in prices of iron ore, which is the company’s largest line of business, is causing its sales to plummet. During the first half of fiscal 2013, the company reported a 14% drop in revenue to $32.2 billion and 58% fall in net profits to $4.24 billion.

Meanwhile, Chalco or Aluminum Corp. of China Limited (ADR) (NYSE:ACH) is also facing the consequences of over capacity, high cost of production, and weak prices. Despite government subsidies, the company had lost RMB 8.2 billion in 2012. The loss trajectory has continued in the first quarter as well, marking six consecutive quarterly losses. The company needs to go through significant restructuring which, among other things, should include more integration of alumina and aluminum operations.

Concluding thought

Despite the current challenges, Alcoa is doing a good job as evidenced by its quarterly results. The ongoing capacity rationalizations and improving outlook of the downstream businesses makes me optimistic about the company. Alcoa has seen numerous ups and downs through its last 125 years of operations, and it should overcome the current challenges.

The article This Aluminum Producer Is Worth Considering originally appeared on

Eshna De has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Eshna is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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