Q1 2023 Alcoa Corp Earnings Call
Good afternoon, and they'll come to the Alcoa Corporation first quarter 2023 earnings presentation and conference call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your phone to withdraw your question. Please press Star then two please note. This event is being recorded I would now like to turn the conference over to James Dwyer, Vice President orphan.
Mr Relations. Please go ahead.
Thank you and good day everyone.
I'm joined today by Roy Harvey Alcoa Corporation, President and Chief Executive Officer and.
Molly pyramid.
<unk>, Vice President and Chief Financial Officer.
We will take your questions after comments by Roy into Mali.
As a reminder, today's discussion will contain forward looking statements relating to future events and expectations that are subject to various assumptions and caveats factors.
Factors that may cause the company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings.
In addition, we have included some non-GAAP financial measures in this presentation.
Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation.
He referenced in our discussion today to EBITDA means adjusted EBITDA.
Finally, as previously announced the earnings release and slide presentation are available on our website.
With that here's Roy.
Thanks, Jim and thank you to everyone for joining our call.
Joined today by our new Executive Vice President and Chief Financial Officer, Molly Pyramid as you recall she was appointed as CFO in February of this year and though this is her first formal presentation of our quarterly financial results. She is no stranger to the process. She had been alcoa's principal accounting officer and controller since 2000.
16, and I'm pleased to have her as a member of my executive leadership team.
Also our former CFO Bill Oblander is now executive Vice President and Chief Operations Officer, where he is working with our production leaders to reinforce a safe and stable operating environment and to drive continued improvement across all of our assets together My executive leadership team is working with all cowens around the globe.
Help advance our company's purpose and vision.
Outlined on the left of this slide.
Alcoa, we all work together to turn raw potential into real progress the progress we make as a company matters. It matters for our investors customers employees and communities and it matters for society as the World will need more responsibly produced aluminum in the future.
Constantly remind ourselves a beat and importance of our actions whether on operations and our offices, whereas we make corporate decisions and.
Faced with a volatile market environment as well as continued challenges at some of our operations. We continue to focus on three strategic priorities first.
We work to reduce complexity, which means operating with a lean cost focused approach and actively managing our portfolio of assets to drive profitability through all phases of the commodity cycle.
Second we strive to drive returns through margin focused growth via purposefully allocated capital and differentiated value added products that means consistently working to improve our commercial capabilities to quality technical excellence and delivery performance.
And our third priority is to advance sustainably, which means more than just championing environmental social and governance processes. We also work to create value and maintain a strong balance sheet, while developing breakthrough technologies that have the potential to decarbonize the aluminum value chain.
In the first quarter, we saw sequential improvement across our key earnings metrics, notably we increased our adjusted EBITDA from the fourth quarter by more than $211 million posting a result of $240 million moly.
Not only will dive deeper into our financial results shortly but first I'd like to reiterate once again, our continuing commitment to our core values and particularly to safety.
No matter, where we operate we strive to ensure that our employees contractors and visitors remains safe at our locations in the first quarter. We did not have any fatal or serious injuries. However, we continue to have near misses or potential incidents, which we closely monitor and use as opportunities to accelerate.
Right our learning so we must and we will continue to work on identifying and eliminating operational risks that could result in injuries to our employees, we hold ourselves accountable to continuously improve the safety of our work environment and to ensure that everyone arrives home safely.
Next as you see on this slide in the first quarter, we made adjustments to operating levels of some of our locations will discuss more about that later in this call, including the agreement we successfully negotiated in Spain on the restart of our sensor beyond smelter and progressing the full restart of the Albemarle smelter in Brazil.
Finally, our commercial team recently introduced an expansion of our sustain a family of low carbon products. Our eco source low carbon aluminum brand now includes non metallurgical grade this complements our existing smelter grade product also marketed under the <unk> brand.
So with those introductory remarks, let's go to the financials Molly. Please go ahead.
Thank you Rong.
We saw broad improvement from the fourth quarter of 2022 to the first quarter of 2023.
Realized prices were higher about aluminum and alumina with aluminum up 7% and alumina up 8% sequentially.
Revenues remained flat at $2 7 billion on lower shipments.
Stable revenues and lower costs were reflected in an improved bottom line.
The net loss per share attributable to Alcoa improved by 94 to $1 30, and the adjusted loss per share improved 59 times moving from 82 cents to <unk> 23.
Adjusted EBITDA, excluding special items also improved considerably increasing from 29 million to $240 million.
Looking more closely at the key drivers of adjusted EBITA.
The $211 million increase in adjusted EBITDA was propelled by improvements across most of the bridge, while we saw unfavorable currency impacts due to a weaker dollar higher metal and alumina prices provided $148 million or 70% of the sequential quarterly improvement.
The remainder came from several items.
Lower energy costs in the first quarter 'twenty, three and the absence of C. O two costs realized in the fourth quarter 'twenty two primarily in Norway.
<unk> was favorable due to improve value add pricing in Europe , especially rod as well as higher third party bauxite prices.
And the other category was favorable due to the non recurrence of the LMR, a aro adjustment made last quarter and lower spending outside of the segments, especially in transformation.
Other than foreign currency, the only unfavorable performance was higher production cost due to location, the Albemarle refinery and the Portland smelter.
This is the first quarter, the bauxite and alumina segments had been combined into the aluminum segment.
To help with comparison, we have provided the previously reported 2022 quarterly segment adjusted EBITDA recast into the new alumina segment within the appendix.
Looking from fourth quarter 'twenty, two just first quarter 'twenty three on a comparable basis.
Luminous segment adjusted EBITDA more than doubled on stronger API pricing and product mix, partially offset by higher costs.
Production and raw material.
Currency was unfavorable in both segments.
For the aluminum segment outside the currency impact higher metal prices, lower alumina costs and lower energy cost hits the bottom line.
While stronger value added pricing combined with lower raw material costs completely offset other unfavorable cost.
Now, let's turn to other financial metrics and cash flow.
Well sequentially higher adjusted EBITDA increased cash flow potential our typical first quarter working capital build offset those gains $216 million of increased working capital was the largest use of funds in the quarter and a key driver of negative $166 million free cash flow.
Net NCI distributions.
We expect to 56 days of working capital to reduce as the year progresses.
<unk> ended the period at $1 1 billion and proportional adjusted net debt rose to $1 4 billion.
We again paid our 10 cent per share dividend in the first quarter totaling $18 million.
For a little more granularity on working capital and cash flow, let's look at raw materials and inventory.
Given the significance of raw materials and the value of our inventory. They are a key driver of both profitability and cash flows three materials are dominant in our business caustic for alumina segment petroleum Coke and coal tar pitch for our aluminum segment.
Looking at market index prices for the past year, all three commodities are coming off their peaks were.
We are seeing considerable recent improvement in caustic prices as well as more gradual improvements and quoted prices for coke and pitch.
These price improvements flow into our inventory valuation and as we've previously shared it can take one or two quarters before the purchase price improvement starts to flow through Cogs and hit the income and cash flow statements.
That said shut these raw material price trends continue we expect to be rewarded with lower inventory valuation lower cogs related to raw materials and improved cash flow.
Now, let's turn to our expectations for the year and provide comments on the second quarter.
At this point, we are not making updates to our full year outlook for either the income statement or cash flow items.
Regarding sequential changes for the second quarter.
In the aluminum segment, we expect an approximately $55 million unfavorable impact from lower bauxite grades in Australia.
In addition, we expect a net unfavorable impact of $10 million as higher seasonal maintenance volume changes and impacts associated with the LMR conveyor system recovery are partially offset by improvements in raw materials and energy.
In the aluminum segment, we expect a net improvement of 30 million as favorable raw material volume and lower production costs are only partially offset by changes in value add premiums.
In addition, we expect five to 10 million and unfavorable impacts associated with the Portland partial curtailment.
Finally, we expect alumina costs in the aluminum segment to be unfavorable by $15 million.
Below the EBITDA line other expense is expected to be approximately 30 million favorable primarily due to the absence of a one time charge taken in the first quarter.
Based on recent pricing the company expects second quarter 'twenty three operational tax expense to approximate 30 to 40 million now I will turn it back to Roy.
Thanks Molly.
Like to start with what we're seeing in the global alumina and aluminum markets, then I'll highlight some potential implications and a few commercial developments specific to Alcoa.
At a macro level, the global alumina and aluminum markets both remain in balance in China. However, there are slight deficit for both products. Meanwhile, the regional markets in the rest of the world are in a slight surplus for both alumina and aluminum for.
For the long term, we continue to believe that aluminum demand will rise significantly driven by global Decarbonization strategies. The international Aluminum Institute for example is forecasting global aluminum demand to increase up to 80% by 2050 from a baseline of 2018 and that will require both new primary.
And secondary capacity.
This year global inventories of aluminum are expected to be at historic lows with such low inventories if demand normalizes in China or the rest of the world those suppliers will be insufficient.
Now moving to the right hand of this slide Youll see some recent aluminum supply changes in the first quarter of this year on the supply side, we saw more curtailment than restarts, while power costs have eased in some places outside of China. It was not enough to support significant restarts.
Meanwhile, in China, the supply situation could potentially move the world market into a deficit there have already been curtailments of approximately 1 million metric tons in two key regions and the restart of curtailed capacity in your non is heavily dependent on hydro electricity, which is seeing supply shortages.
The smelters operating in that province are producing below capacity and analysts have noted that they may be asked to further reduce output <unk> switch to coal generated power.
In key end markets for aluminum, we see automotive production continuing to strengthen which is supportive of the demand for flat rolled products. The market for construction products remains challenging given high interest rates foundry slab and rod markets remained strong while billet demand is soft in Europe and north.
America.
Next regarding the production and warehousing of Russian metal in February the U S government placed a 200% tariff on Russian metal imports. The U S has taken a strong first move with these tariffs that were implemented at the punitive measure for the country's invasion of Ukraine.
The government is also tracing Russian origin metal and various imported products. However, we believe there is more that can be done while many rest of world smelters remained curtailed Russian smelters continued to produce at full capacity. Thus, we continue to advocate with our government for full sanctions on.
Russian origin aluminum.
As many aluminum customers self sanctions against Russian metal unwanted Russian tons are being stockpiled in London metal exchange warehouses and are threatening to undermine the reliability of the <unk> is a global pricing reference for aluminum.
As you may recall, alcoa worn, but the <unk> aluminum contract was at risk of becoming dislocated from the physical market as let me warehouses would eventually receive a disproportionate amount of unwanted Russian stocks.
The data should prompt concern as of the end of March Russian stocks and now let me warehouses increased to 53% of the total inventories that compares to approximately 5% of the total prior to the invasion of Ukraine, We expect that further stockpiling of Russian material will occur.
Her throughout the year and into the future. If this trend continues the <unk> aluminum price reference will be relegated to a price for unwanted warehouse Russian aluminum, which much of the world refuses to purchase or consume.
Given these developments we continue to advocate with our host governments to apply full sanctions on Russian origin aluminum and we are strongly urging the LMA that Russian metal be delisted as a deliverable brand.
Now, let's turn to our own commercial development, we have already seen some increased volumes and new contracts with customers continue to look for alternatives to Russian supply of material.
Within Europe , several large customers require guarantees that no Russian aluminum exist within their suppliers materials as it could result in substantial tariffs should their products be exported to the United States.
Finally, I want to highlight the news about our sustain a family of low carbon products comprised of eco source, illumina, <unk> aluminum and eco dura aluminum with recycled content.
Last year, we saw nearly a five fold increase in sales volumes for equaled him, which is manufactured within the emissions intensity that is three times better than the industry average we offer it in a range of products, including billets foundry slab wire Rod unalloyed high purity and commodity grade <unk> 'twenty, while these annual volumes are.
Still a small portion of our overall sales volume we're building on last year's good growth with an expected additional 30% and increased sales this year, particularly in Europe . We expect this trend to continue with more customers committing to aggressive de carbonization targets.
And as I mentioned at the top of our call. We also expanded our eco source product wanting to now include non metallurgical alumina or MMA as well as the smelter grade product we launched in 2020.
These eco source products are unique across our industry and our unmatched by our competitors.
The expansion of our eco source brand helps leverage our advantages as a producer of SGA and MMA with a low carbon dioxide intensity are equal source product has its greenhouse gas calculations verified by a third party and we can deliver from a global refinery portfolio that has an average emissions intensity that is half.
The industry average.
Now I'd like to turn our attention to our operations.
We made several reductions of capacity in the quarter as we ramped up production and others. Our Canadian facilities include three smelters that we operate in Quebec de Shambo Becker core and Beckham home all are powered by Hydroelectricity and together. They are currently operating at near peak levels.
In the United States, we have improved operational stability at our work smelter for the two operating pot lines also in the United States. We made the strategic decision in March to permanently close the intelco smelter after evaluating various options for the asset including a potential sale.
It had been fully idle since 2020 and the land at that site has now transferred to a new owner, who was working on economic development opportunities.
Our transformation group, which manages curtailed and closed sites has done a good job to position. This site for new productive uses.
In Brazil, we are continuing with the restart of Albemarle smelter, which is now producing at approximately 60% of capacity and continues to accelerate production.
<unk> also includes a co located alumina refinery on March 25th our ship to shore conveyance system collapsed temporarily halting the flow of bauxite to the refinery.
While investigating this failure to root cause our teams safely executed critical repairs to restore the flow thus, enabling the refinery to continue to operate.
These repairs were important and time sensitive activities and the teams did a great job completing them safely and swiftly.
Now that bauxite is again being delivered to the refinery we are building back the onsite inventory and gradually ramping up production our expectation is to reach full production levels by the end of this month, we have continued to make all customer shipments of alumina from the refinery through this period.
Now moving to Europe , and our <unk> complex, which includes our refinery and the fully curtailed smelter.
At the refinery, we reduced the production rate last year to help mitigate the high cost of natural gas in Spain. We are now operating at approximately 50% of the refineries one 6 million tons of annual capacity and continue to analyze the most advantageous run rate given market conditions.
For the <unk> smelter in February we successfully reached an agreement with the Workers' Representatives to commence the restart process in phases. Beginning in January 2024. We currently have two long term wind sourced power purchase agreements that can support a portion of the smelters needs pending permitting development and construction of the <unk>.
<unk> farms.
As part of our agreement with the workforce. We are also moving forward with capital projects that will help support this restart and the future competitiveness of that facility.
In Norway, we continue to operate two of the three pot lines at the least a smelter you will recall one line was curtailed last year due to exorbitant spot energy prices.
We have now fixed our energy costs for listed two pot lines through 2023, which provides short term stability during highly volatile energy markets. Meanwhile, our other Norwegian smelter motion is operating stably and near full pot compliment as is our <unk> facility in Iceland.
Finally on this slide lets discuss Australia in March the Portland aluminum joint venture reduced its production to approximately 75% of its total annual capacity alcoa's share of the capacity is 197000 metric tons per year, we have restored stability at this site, which had experienced challenges.
<unk> to the production of rotted anodes.
At our <unk> refinery, we made the decision to keep one of five Digesters curtailed. It was first curtailed due to a statewide shortage of natural gas given an extended process for our main approvals in Western Australia, we have decided to keep this digester curtailed.
Delays in our bauxite mine approvals process in Western Australia has also prompted us to extend mining and previously approved areas by extracting lower grade bauxite beginning in the second quarter of this year as we commented during last quarter's earnings presentation.
Next I'd like to talk a little more about our approach to responsible mining globally, and particularly about our bauxite mining operations in Western Australia, a region, where we have operated for 60 years.
First I want to stress that we appreciate and understand the increasing expectation that stakeholders have for mining operations sustainability has been core to our focus at Alcoa and it's one overriding priority that helps differentiate our company in fact, it's why we have the strategic priority to advance sustainably.
We believe that delivering on our stakeholders expectations is a key to our success moving forward, we strive to maintain our commitment to safe and responsible operations, including proactive engagement with our communities before during and after bauxite mining. We also know the world is evolving and we are committed to continually improving our.
Mrs and meeting modernized expectations.
As we work to address evolving challenges facing the mining industry, we cannot lose sight of how important aluminum is now and will be in the future is the fact that aluminum is critical to a more sustainable future because it's used in electric vehicles renewable energy and numerous other aluminum intensive products that can help the world meet ambitious the car.
<unk> goals.
Producing the aluminum that the world needs now and for the future will require bauxite mining, but mining must be done the right way.
We intend to mine in a responsible way that protects the environment and creates value for our host communities and we are focused on delivering on those expectations and implementing improvements whenever they are needed.
Currently we have two significant areas of attention for our Western Australian mines currently in Willow Dale.
<unk> is the protection of public drinking water and the second is the restoration of the forest and its biodiversity.
And our long history of operations, we have never negatively impaired the supply of drinking water in Western Australia, and we do not intend to compromise that record. That's why we are currently working through a detailed environmental technical and economic assessment on additional protection measures that can be included in our mining plans.
We also are committed to protecting the biodiversity of the northern Jarrah Forest, we have long taken pride in our rehabilitation efforts among our many successes was to be the first mining company in Australia to officially hand back a significant area of rehabilitated land and we are one of the few mining companies in Western Australia to have ever done this.
Today about 75% of all areas, we have cleared for mining have been rehabilitated and there are different growth stages from early plantings to developed forest, but again, we intend to continue to evolve and improve including accelerating rehabilitation and open areas.
Protecting water supplies and restoration, our focal point as we cooperatively work with government regulators on modernizing our approvals framework for our Huntly and Willow Dale mines. We are also considering how we can reduce potential social impacts through this process.
Now, let me spend a few minutes explaining our current situation with mine permitting the Huntly and <unk> mines are currently subject to a bespoke approvals process that is conducted annually on a five year rolling basis. As we said last quarter. This process is taking longer than in prior iterations due to increased expectations towards a modernized approvals.
<unk>.
In response to these delays we are extending mining in areas already permitted under existing approvals that means mining bauxite with a lower quality ore grade using more caustic and producing less alumina.
Also during the first quarter of this year, a third party referred our current and future mine plans for Huntly and will adapt to the Western Australia Environmental Protection Authority for assessment.
The third party referral will likely result in further delays with bauxite great impact is expected to continue until at least the first quarter of 2024 remember that it requires considerable planning and development to reach new bauxite areas, which we have included in this projection of future bauxite grades.
It's important to note here that prior to these referrals, we had proactively initiated our own EPA assessment process for the extension of our operations to the future My IRA North and wholly oak regions of the Huntly mines there.
This process is commonly known in the state of Western Australia, as an EPA part floor assessment as we transition to this process for future regions. We believe the current statutory process for Huntly and Willabelle can be adapted to provide enhanced environmental protections and be successfully applied to our current mining operations.
As noted we continue to work with relevant government bodies to support these annual approvals processes. We are also responding to request for information from the state EPA to support the authorities consideration of whether the third party referrals are valid and require assessment.
This is a complex and evolving situation and we are fully committed to reaching a collaborative agreement with the western Australia government to protect the environment meet stakeholder expectations and maintain the vital economic benefits that our operations provide.
In closing I want to quickly summarize three key elements from our presentation today.
First we saw improvement in our key earnings metrics during the first quarter. We grew our appetite of $240 million and we also maintained a strong balance sheet with $1 $1 billion in cash and low proportional adjusted net debt.
We continue to drive for improvement in our financials and our operations.
While we have challenges that we need to solve we are laser focused on operational stability and consistent improvement and we are seeing progress from a leadership perspective, we help set the priorities and the direction, but our teams on the ground turn it into reality they make it work by what they do every minute every shift and every day.
I'm proud of the more than 13000 employees, we have across the globe and their commitment to continuously improve I look forward to continuing to report on these improvements as the year progresses.
Finally, the long term fundamentals of our industry remains strong demand for our metal is expected to grow in the future as customers seek lower carbon raw materials across the supply chain aluminum is lightweight strong highly conductive and recyclable, making it ideally suited for a wide range of applications, including electric vehicles.
Renewable energy infrastructure.
We are working to deliver more sustainable solutions to technologies, we have under development to Decarbonize aluminum production and advance recycling technologies in support of our vision to reinvent the aluminum industry for a sustainable future.
And with that Mollie and I are ready to accept your questions operator.
Do we have in the lawn for our first question today.
Okay.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your phone if you're using a speaker phone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two when called upon please limit yourself.
Two two questions, we will pause momentarily to assemble our roster.
And our first question.
Comes from.
Michael Dudas with vertical research. Please go ahead.
Good morning, gentlemen, Molly.
Hey, Mike.
Right.
First question is.
Your observations on rest of world capacity, and a lack of restarts, even though LNG power prices have corrected downward somewhat.
As the demand outlook in the energy outlook and uncertainty given geopolitics.
Even if prices stay low we would still make it more difficult for Japan.
Capacity restarts in the market in your view.
Yeah.
Yes, Michael Let me, let me handle that one so.
First and foremost what I'd say is that we have seen pricing come down and particularly in Europe . So it is significantly better but still significantly higher priced than it was prior to the invasion of Ukraine, and so we're seeing relief, but it still isn't in my perspective enough for.
<unk> really to drive a fundamental shift in the in the ability to smelt aluminum in Europe on.
The second side of it on the demand side.
Realistically speaking I think the demand is still there and particularly as you look at a number of companies essentially putting in their own set of sanctions against Russian metal. It means that you. We've got more interest in our volumes coming out of Europe , and so there's demand available. It's just at the.
These are pretty tight so when you take the fact that across the aluminum industry margins are tight because costs are still high they are coming down. So when we look out. These next quarters, we're going to continue to see raw materials relief margins are still staying so when energy prices are high and the average margins are thin from around the world. It's just not justifying our or in <unk>.
<unk> significant restarts.
Yes.
All observation and my follow up would be it.
And given your prepared remarks showcase to China of having definitely.
Slight that she put alumina and aluminum.
She felt some of the dynamics in the alumina market is actually in both markets. We're in.
<unk> for one to be a little bit more closer to balance are oversupplied or vice versa, given some of the power challenges or some of the demand.
Charges, you're seeing on the promo.
Yeah, Michael I think the.
It's a really good question and I think the answers answers gotta be that both markets are art thinly balanced on and could move in either direction right. You look at aluminum for example in China.
Really good strong demand increase but on the supply side, there's just not enough power in the southwestern provinces and so we're seeing the likelihood for more further curtailments, which means it drives them into an even bigger deficit, which then then ended up with a deficit in the whole world as an example on on the alumina side, it's not necessarily a different perspective right.
The in Europe , it's with natural gas prices again, they're better than they were but they're still significantly increase from where they were natural gas and all the different other sources of energy that are available. So it means that refining in Europe and we see this in our sensor pretty on refinery. It's why we're running at 50% is it's really difficult.
Is either extremely thin margins or more likely a lossmaker. So so both markets appoint as both markets really are finally balanced.
And so when we look at the short term, it's just hard to call, which way they're going to go now somehow that's going to bridge to a longer term and I am convinced and enthusiastic about the long term because we're seeing real real expectations on where new demand sources are going to come in when you look at electric vehicles, you look at the.
Renewable energy and the need for aluminum as part of the infrastructure and.
And there just isn't enough new capacity coming online in order to be able to answer that aluminum demand or realistically to be able to answer that alumina demand either and so all that comes together to say, we're in a balanced and finally sort of very finely balanced market today.
At some point that is going to get to this medium to long term, where we have a much more positive future.
Well I appreciate your thoughts thank you thanks, Mike.
Yes.
The next question comes from Lucas pipes with B Riley Securities. Please go ahead. Thank.
Thank you very much operator, good afternoon, everyone right.
I also have a higher level question to kick things off and there are a lot of commentators out there calling for eight 912, even 20 plus dollar.
Copper prices per pound and in that sort of world, where we're in the market and what sort of applications would you see aluminum substitution and is there enough discipline. I think you just kind of answered that question, India aluminum industry today.
This would also pull up aluminum prices would really appreciate your perspective on that thank you.
Yeah, Lucas I can I can give you an answer I'm not sure if it will cover all the bases, but at least to get you started.
We look at we look at history and it tells US that there is a real arbitrage that people play when it comes to copper and aluminum and in fact, two prices tend to tend to be pretty closely connected through time, although you do see some variations in that.
As as copper prices start to Jackups I think we're also seeing some positives in the aluminum price as well I was happily watching it over the course of today and that certainly has a big it makes a big difference to us.
I think they'll tend to be connected but the more of the copper price runs the more substitution youre going to see back into aluminum because the fact is that aluminum aluminum.
Aluminum tends to be very versatile it is infinitely recyclable and it's available right. The fact is that we have available available inventories and we have the ability to ramp up production.
At the same time I think your other point is very is really really quite clear.
Quite key to understanding the future Theres just not a lot of new production that is going to come online you've got some smelters that we can restart you've got the potential for <unk>.
Some growth happening in southeast Asia, and the Middle East for example, but outside of that there's just not a lot of projects.
And so as that demand grows as some of that substitution happens theres, just not a clear a clear place where that new demand is going to come in.
Part of the solution will be recycling and I think that's an area. We've got a breakthrough technology that we're working on with recycling to be able to better manage post consumer scrap and so that is going to be supportive, but theres also just not enough metal youre going to need primary metal and it's going to have to come from somewhere.
And so that's all stuff that needs to be designed and figure it out on how we're going to be able to address that but that's what leads me to my very positive view on the medium to long term in our industry.
Really appreciate that color.
As a second question switching topics.
I appreciate the update on and reminder, on the sensor Permian restart plans on the smelter side.
I'm just wondering is there.
Kind of a minimum utilization that we should think of for 2024.
Thank you very much for your color on that.
Yeah, you know what.
We've tried to do it.
Is matched the progress of the restart with the new contracts that we've signed the new energy capacity.
Lastly, coming online.
And because it takes time to actually permit and then construct those new wind farms and it means a lot of that capacity is going to be pointed more towards 2025, rather than 2024. So we have a commitment to get started in 2024 by January 1st.
And if I remember right, it's 5% of the total the total output. So it's a relatively small piece of it that gets US started if we get new wind capacity coming in we can start to ramp that up because it's very low priced energy and we'd be glad to be smelting aluminum at those levels.
But really we need to be up and fully operational by October of 2025.
That's a firm commitment that we have on our end I think it matches, what we have been able to build on the energy side.
To be quite honest, we're putting a lot of effort into making the sensor purion smelter b a competitive smelter for the long term.
That is very helpful. Really appreciate your color on to you and the team best of luck. Thanks Lucas.
The next question comes from Timna Tanners with Wolfe Research. Please go ahead.
Yeah, Hey, good afternoon guys.
Wanted to kick off if I could talking about that guidance on the unchanged guidance on.
Shipments for aluminum and alumina that we just thought it was a little surprising given some of the disruption. So I just wanted to make sure I understood. It seems like perhaps at AMR was brief and doesn't matter maybe the other refineries small impacts, but I just wanted to make sure I understand fully that maybe they were smaller or maybe you.
We're expecting some some improvement as the year.
Is to keep the volumes.
Hi, Timna I'll take this one so in regard to the alumina guidance. All we had a good outlook on the WAM bauxite situations. So that was built into the.
And to the guidance for the year the al <unk> refinery. The interruption is slight we do expect to catch up and be on target for the year and in aluminum, we're still tracking well to the guidance.
Okay, Great I have so many more questions should have added that.
We haven't made decisions yet on the Portland.
Restart so again not a huge volume there with 25% down, but that's one while provision on on the aluminum.
Got you and that's so much small so I can see how that might not many at all.
I guess I wanted to ask I, if I could sneak in on the bauxite situation I just want to clarify you're expecting that our extended unfavorable mining circumstances to continue through the first quarter, but what's embedded in your assumptions is it that you'll expect to be able to move to your expected mine plan beyond that in and what speed.
In there and then if I could sneak in another one on the energy exposure side getting a lot of questions about benefits to lower prices, but I believe you're pretty well secured for the year. So just sneaking that one and that's why if you could comment on how much exposure you might have through the end of the year to power prices.
Let me answer Western Australia, and then I'll, let Paul answer the energy question.
I think.
The key here on Western Australia is that we're still in the midst of discussions with our with the Western Australian government and so we're not yet at an endpoint as I've said in my comments on I'm confident that we are working collaboratively to reach that solution.
What we've built into that assumption around going into first quarter of 2024 is that it typically takes nine to 12 months to develop the plan and then to deploy on the plans to be able to change too.
Essentially to be able to change to new mining areas.
And so that sort of helps you build your understanding of when we think we're going to be moving.
Moving our way through that permitting process and then how long it takes us to be able to adapt and have the surety of where we're going to be mining and when we're going to be mining. It takes about one quarter to do the detailed planning to move from one grade to the next so so the quicker that we can finalize the discussions that we're having in western Australia and government.
The quicker we can be very clear about the extra measures that we need to take and what bauxite areas that we will be we'll be moving to next and that like I said, it's a it's an ongoing discussion with the government. The quicker we can get that done the quicker, we'll have surety of where it will be the amount of ore that we'll have available and how quick how much effort in infrastructure it takes to be able to.
Reached that or and then we can start counting backwards on when we can can do that one quarter away from changing the bulks high grades. So I realize that that's a lot of a lot of sort of calculations that sit inside of that but as we look at it today, we think 1% through 2024 is our best estimate for when we can see that the last of those impacts.
But we'll keep you updated as as we progress.
And Marty I'll turn it back to you for honors Timna on your energy exposure. Our question you're right. We do have everything secured now except one small piece and in Norway, I do want to call out, but the list of smelter in Norway. We had highlighted a couple of quarters ago back in the third quarter of 'twenty, two that site actually lost $45 million for the quarter and we're.
To say that that is now running at near breakeven and with further premium improvements, we could get smart profitability out of that site. So great turnaround for lists our rate secured the power through the end of the year.
Thanks for the detail.
Thanks Timna.
The next question comes from John Tumazos Tumazos very independent research. Please go ahead.
Thank you.
Trying to put together the different bits and pieces.
Should we expect something like a $10 a ton COO.
Cost to increase in the alumina segment in the June quarter.
And something like a three or five cent fall and Oh.
Aluminum metal segment, which were I guess benefit more from.
Pitch Char and energy.
John we didn't work it out to the ton level. We can certainly do that I don't have that handy for you right now.
Yeah.
Thank you.
Thanks, John .
The next question comes from Carlos de Alba with Morgan Stanley . Please go ahead.
Yes. Thank you very much. Good afternoon. So first question is coming back to the bauxite situation in Western Australia. So the guidance. He said for sequential guidance for 55 million unfavorable impact on lower grade bauxite in the country.
Given that the situation extends until the first quarter of 284.
How should we look at cost going forward. If this 51 million basically taking us to the level, where you were going to be.
Throughout the first quarter or two until the first quarter of 'twenty, 'twenty, four or there could be potentially higher than that.
The impact on on this situation in alumina and aluminum segment.
That'll be my first question.
And my second question is if you could maybe comment.
While it would be more detailed on the value added premiums that youre getting and if there is any differentiation between.
Europe and the U S.
Important for us.
The account.
Okay. Carlos first on the 55 guidance on that is applying to the.
Second quarter, we do see opportunities to work on cost to reduce SaaS. It will give you updates going forward, but for right now the 55 is applying.
For our future lock and that includes about $10 million impact of volume and about $45 million for caustic bauxite and energy usages unfavorable at this bauxite grade.
And Carlos just a just a tie on to Molly's comments there too.
As we look forward to the next quarters, where we're essentially running the western Australian refineries, but lower grades than we have before and so there's a certain amount of of learning that we're going to be doing as we go and so like Molly said the expectation is that we can learn and we can approve upon the operating efficiencies.
Every quarter, but we don't want to make promises and guarantees on that until we can be certain that we can show that so we hope to report some good news for you coming coming into this next quarter as we look towards the future quarters.
And value added premiums you know when we look at it.
Year on year, we continue to see strength you know the fact is we came into a what was a pretty pretty crazy year, where the first half with nothing but blue skies in the second half a bit more cloudy.
Coming into this year, we're continuing to see strength.
We're seeing more strength honestly in Europe part of that is the self sanctioning part of it is also because the energy situation is a lot better than was expected so coming into the year I think I think we're seeing better better strengthen the volumes and in the end the volumes that impact of premiums that we that we negotiate on a quarterly basis.
In North America, you know I think there was a bunch of uncertainty it's because of the banking situation. I know there were a lot of questions about what that might do to demand, which seemed to be successfully passed out at least for now.
We're certainly seeing better premiums than we were last year, but we're also seeing a little bit of weakness on the on the billet side, particularly that's really coming in from from building and construction, which just isn't moving as quickly as what we've seen in some other times. So so it's sort of a mixed picture I think were seeing year over year improvements, we're sort of seeing a continued.
Don't have uncertainty when we look out at the next quarter.
And hope that with some of the improvements that we're seeing in demand in China, particularly.
Some of the resolution around what energy prices are going to look at look like and some of the more.
More surety about what how much natural gas Europe is going to have going forward I think that starts to build a little bit more resilience back into that market, which then has knock on impacts in our in our value added products.
Alright, Thanks Raj so.
Should we interpret your comments on construction that we still haven't seen any meaningful impact.
From the social BLA approved last year in the U S.
Carlos we've seen a bunch of announcements and expectations, that's not transferred through into orders yet.
But I would say, it's probably still a little bit early for that money to be dispersed for people to start turning turning the ideas and concepts into actual on the ground orders.
Again, I'm pretty we've had a lot of a lot of interaction with government around around the IRI and obviously in ways that we can be able to use that to help promote our breakthrough technologies.
And some of the meetings that I've had theres a lot of there tends to be when you have a group you've got a lot of people around the table that are very enthusiastic about investing in the U S and building up capacity and so I have to say I'm very bullish, but it's probably still a little early to see that translate into specific quarters for us.
Alright, Thank you very much thanks Carlos.
The next question comes from Emily Chang with Goldman Sachs. Please go ahead.
Thanks for taking the questions.
My first is just around the alima smelter I had thought that this is going to be a nine month process and wrapping the smelter back to full capacity. So curious what's driving the delay there or is it operational is there some intentional throttling of volume is that given the pricing environment.
Yeah, I'll take that one.
It's more I guess logistical and operational in nature.
Logistical from the fact that when we were first getting started restarting our EMR and I know the plant while I used to work there.
Was just harder to get the quality of raw materials that we needed to have a kind of restart that we had expected.
So that was a bit of a bit of a disadvantage. When we were getting started I think we've been able to iron out those issues and now we have the qualities that we needed to be honest because we have a good portion of the smelter already operating it means that you have the raw materials on hand, and you're able to generate some of the some of the Bath and hot metal that you need in order to restart that next set of parts. The other was surprise we had in OE.
<unk> is that it.
As we got started with those parts that a lot of them had been had been relying others had not been reliant we simply.
As we started them, we just didn't get the ability to keep them operating for as long as we had expected and said another way we had more failures and we expect it to have during the restart process I think that comes down to the fact that was it was idled for a good portion of time a number of years.
So we've now got that sort of back on the road, where we're essentially where we expect it to be on the restart when the last time, we reported at the end of Q4.
We have the right management and the right operators and the right people working on this and I think we're making real steady progress.
I'm Super enthusiastic about that team and about that facility for the long term because of the great power contract that we have and the strength of operations.
Understood that makes a lot of sense and maybe shifting gears to censor prion I don't wanted to talk about the refinery that.
I believe the gas environment for Santee prion, Oh, gosh contracts are rather set price at spot.
What point, given where gas prices are today is there any consideration to bring back from our final capacity there.
So I'll take that one and Molly can jump in if she has some quantitative comments as well, we're essentially running at 50% capacity and I can promise you that running a refinery or 50% is never the ideal point.
And really what we've been targeting is to try and focus as much on an on.
On non metallurgical grade alumina, because those tend to be higher priced contracts and for more specialized operations, but we're also selling some some smelter grade alumina as well.
We we analyze almost continuously to see at what point have natural gas prices come down and then when you look at the price of SGA and the market does that create a business case for restart and more of that capacity.
I'll put in a short advertisement we have a great workforce and sensor.
Really run that refinery really well, they're running it at levels, they've not for very long time, and I'm very pleased with what they've done.
And we're on top of things to see when we can make that natural grass priced connect with.
The market environment, so that we can bring that capacity back online again.
Staff that we did see about a $20 million sequential improvement there for that site this quarter so great progress.
Fantastic. Thank you.
Mike.
Yes.
The next question comes from Alex Hacking with Citi. Please go ahead.
Yeah. Thank you I just have a quick follow up on double Yue.
Like when will the state EPA.
Make a decision about whether or not to accept the third party referral.
And if they do it.
<unk> to accept that referral.
What is the practical implication of that sort of what happens next does that constrain your ability to operate in any way.
And develop mine plan. Thank you very much.
Yeah, Alex I'll take that one so so we're in the midst of sort of the data collection phase where the EPA is considering really two things number. One is the is the is the referral valid which means is it about it doesn't fulfill all the requirements for actually having referral and then.
Assuming that it's valid than going into deciding whether in fact.
It should be assessed I E should should there be another process determine what are the environmental what are the.
Current and then medium and long term environmental impacts of that specific project.
So that process will take some time.
We don't have a specific estimate because it's also that that timeline is really reset every time they have another data request.
So it's going to take a little bit of time and the reason that we we essentially.
<unk> structured what we've said about our bauxite, great impact bar and extending it really into the first quarter of 2024.
Should give you a pretty good feel for what we think that this is going to add to the process.
Assuming assuming if it plays out the way that we should.
I can't really jumping to into hypothetical situations about what that process is going to come out and what does it mean.
Fact is it's it's.
There's not a clear standard for what happens next.
I think I would go back to say the.
The state EPA and the referral process.
As well as the current discussions around the operating permits is really all managed at the at the Western Australian level. So the work that we're doing in order to try and solve all of these problems is to make sure that we have the mitigation in place that we're protecting the watersheds and ensuring that we have the best quality not impacting the quality of.
The great quality of water that Western Australia have and also making sure that we can accelerate our biodiversity and rehabilitation efforts.
So when you think about what what happens next the answer is we need to come to an agreement with the Western Australian government on what we're doing in order to protect both of those things.
Then indicates where we can mind. The next set of tons, which then means we can have or can you can have this next round of permits that the advisors to certain to be able to come back to normal bauxite grades again.
Again in sort of like what the question that I had that earlier theres a lot of what ifs and a lot of questions that sit in there. It is a process that is playing out right now and we will keep you updated as soon as we hear as soon as we continued to hear what's happening next I appreciate the question Alex.
Thanks, and it's a very helpful answer and I do appreciate that it's it's a dynamic situation and complex. So thank you for the color.
Okay.
The next question comes from Lawson Winder with Bank of America Securities. Please go ahead.
Hi, Good evening, Roy and Mali team.
Questions for me.
First would be in terms of your expectations for the Capex ramp for 2023, which quarter do you expect would be the heaviest level and where do you expect.
Q2, 'twenty three to be Directionally versus Q1.
So loss in our fourth quarter is always the heaviest capex period, and we're still looking at 485 million for sustaining and $115 million for.
For our return seeking.
I don't have the number handy between between the quarters before.
Fourth.
Would it be a gradual ramp up like it has been in the past so yes.
I'll follow the past gradual ramp.
And then.
I'm not sure I heard you mentioned, it but who is the third party that referred.
The case, the EPA and what are their key concerns.
The so we didn't specifically mention a third party, but it's it's a local NGO.
The concerns that they have are really I did mention what the concerns words to protecting the protecting the water quality.
Cause we are mining in areas that are within the watershed for Perth.
We need to make sure that we are controlling erosion that we're applying all of these mitigating measures to always protect water first and foremost which is how we've always approached this.
But I think we need to make sure that we can provide even more risk reduction in order to satisfy our regulators. The other piece of course, if they ask about is around biodiversity and how we are rehabilitating in the in the Jarrah Forest.
The Jarrah Forest is one of the most beautiful places on the planet. It is an immense privilege for us to be able to mine. There I look back at our 60 years of operating in Western Australia, and I'm very proud of what we've been able to accomplish and thats on the science side as well as on the practical and pragmatic side are actually seeing that restoration because it's been.
So long life to see to see our our restore habitat and.
All the way from relatively new plantations, all the way to what is advanced and developed.
Develop new forests.
As you can imagine our practices have improved year. After year, we have some super Super Cool technologies that we've been able to start using really over this last decade, particularly in.
We're very focused on making sure that not not only are we.
Not only are we developing for us, but we're making sure that we preserve all the biodiversity was that was there.
After we finish rehabilitation, so we sort of measure the number of species and things along those lines.
And in fact, we were the one of the few western Australian companies that in fact has returned and reserved received a certificate of completion for rehabilitation that has been completed and then hand it back over to the state so great legacy of stuff that we've been able to do.
That's good but we need to do better and we need to accelerate we need to make sure that we're also rehabilitated very quickly, particularly in sensitive areas that that obviously are these these places where we need to always be rehabilitating as quickly as we possibly can.
So all that to say, it's a those are really the two issues that the that they've really made questions about they happen to be aligned with the same things that we're discussing with our regulators. So again I think the the answer here is that we need to need.
You need to make sure that we're delivering on what we have been requested which I'm very confident that we're doing we just need to make sure that we have those those consensual discussions and the collaboration between government and Alcoa.
Excellent. Thank you very much.
Thank you Austin.
And our last question is a follow up from Lucas pipes with B Riley Securities. Please go ahead.
Thanks, very much for taking the follow up and lots of great detail throughout this call. So thank you for that.
Follow up is on the <unk> situation why that you mentioned earlier.
Do you have a kind of time line in mind for potential breaking point.
Given the inflows of Russian metal in London. Thank you very much for your perspective.
Yes.
And it's always good to get these questions.
It's hard to predict exactly.
And I hate to think into linear fashion, but when we started out this time last year. There was about 5% of inventories that were Russian and we're now at 53%.
I can't tell you when the market starts to get more and more distorted but at some point. The only thing left now let me warehouses will be metal that is only consumed by a small group of of non western producers, we're seeing more and more of our customers that are extremely sensitive to any Russian content because it's their.
And then go to the U S that could have very significant tariffs placed on them.
The way that these tariffs were fashioned and.
So to me I'm, 53% like like I tried to be very clear in my remarks is already a point of significant warning that that very quickly we're going to get to a point, where there is there the aluminum metal price element thats based off these inventories is going to be based off metal that nobody wants that's just not a place that we want to be.
It's just.
It's just not sensible that we are seeing curtailments through the rest of the world While Russia continues to operate at full capacity. It just it just has no sense to me, which is why we believe the sanctions are the best answer number one and number two we think the elements should delist Russian metal immediately.
I appreciate your color again best of luck. Thank you. Thanks Lucas.
This concludes our question and answer session I would like to turn the conference over to Roy Harvey for closing remarks.
Thank you <unk> and thanks, once again for everyone, who joined our call today I have appreciated the questions and continued interest in Alcoa and I also want to thank Molly joining me for her first earnings call I know she'll be relieved that it's over.
But it's also just a privilege and a pleasure to have her here at my side.
As we outlined in our presentation today, we're making progress every day and in accordance with our purpose vision and values. We aim for continued improvement in everything we do and I truly have confidence in our teams and their abilities. We know how to solve problems. That's been part of the aluminum industry for the 25 years that I've been here.
This includes the challenges that we face today, while continuing to work on our long term strategies on resolving Western Australia is a great example.
We know the future will bring even more importance to our products across the aluminum value chain as the world works to Decarbonize. That's why we've been so focused on building, an even stronger company and not sacrificing the work that we're doing on our breakthrough technologies and we intend to remain resilient and ready and running forward I look forward to talk to you again in July .
When we will share our second quarter results in the meantime, please be safe and once again. Thanks for your time today Good night everyone.
The conference has now concluded. Thank you for attending today's presentation you may all now disconnect.
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