Q2 2023 Alcoa Corp Earnings Call
[music].
Sure.
Good afternoon, and welcome to the Alcoa Corporation second quarter, 'twenty twenty-three earnings presentation and conference call.
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I would now like to turn the conference over to James Dwyer, Vice President of Investor 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 Behrman Executive Vice President and Chief Financial Officer, we.
We will take your questions after comments by Roy and Molly.
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 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.
For historical non-GAAP financial measures reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation.
With respect to our outlook, we have not presented quantitative reconciliations of certain forward looking non-GAAP financial measures to their most directly comparable GAAP financial measures because it is impractical to forecast certain special items without unreasonable efforts due to the variability in complexity associated.
But predicting the occurrence and financial impact of such special items as described in today's presentation.
Any reference 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.
Thank you, Jim and thanks to everyone for joining our call I'm happy to be here today with moly Bearman, our executive Vice President and Chief Financial Officer. She will soon provide a detailed review of the financial results, let's start first with safety.
We always strive to protect our employees contractors and visitors from injuries. This is the expectation in all of our daily activities and it is particularly important when we consider any modifications to our processes or win upset conditions occur.
Every quarter, we report during this call any serious incidents that we would classify as an S. S I E, which stands for fatal or serious injury actual.
This would involve injuries that are life altering or fatal.
I'm disappointed to report that an employee at our Icelandic smelter lost partial vision in one eye from an injury that happened when he was sampling molten metal we have investigated the incident and we are working to prevent it from occurring at any of our locations.
In the second quarter, our overall injury rates continued to decline. We also are seeing positive trends in leading indicators showing we're proactively identifying and correcting potential risks before they result in injuries. We are focused on continued improvement any injury is unacceptable.
And we expect our teams to be constantly learning and adapting.
Now, let me turn to our financial results, we generated slightly higher sequential revenue in the quarter of $2.68 billion, we increased shipments, which outweighed lower average realized pricing.
As you can see this quarter as challenging market conditions and operational disruptions led to an EBITDA outcome that demonstrates the need for continued improvement.
We did pay another quarterly cash dividend and we finished the quarter with $1 billion in cash. We also continued to strengthen the balance sheet by reducing risk from pension plans. This was accomplished via another annuity <unk>, our sixth such transaction.
This one was for certain retirees and beneficiaries in Canada, providing them the same benefits, while removing the liabilities and corresponding asset from our books.
No cash funding was required for this transaction.
Operationally in the second quarter. We were also pleased to reach a new labor agreement with the United Steelworkers that covers more than 800 employees at two of our smelters in the United States work in the state of Indiana, and Massena and the state of New York.
Also we were pleased to announce in May a major sales contract with Emirates global aluminium to supplies smelter grade alumina from Western Australia. This is an eight year deal beginning in 2024 and will represent a significant portion of our third party aluminum sales, we will be E. G H largest third.
[noise] supplier supplementing their own production at their refinery in Abu Dhabi. We appreciate the confidence that this customer places in us and many others we serve.
Before I hand, it over to Molly I'd like to outline our most critical steps to drive improved performance importantly, I am pleased to see improving stability across our operations, we have a united team focused on taking action on items most critical to our success, let me quickly highlight some areas.
[noise] of attention for us in the coming weeks.
First we are focused on securing our approvals for bauxite mining in Western Australia. This is a key priority in the meantime, we are currently using bauxite with lower grade and our global centers of excellence are working to optimize our refining system to process. These lower grades.
Second we are continuing to implement our plans to drive stability across our operations, our third quarter outlook to be covered in detail by Molly shows the operational stability drives financial improvements. Our leaders are focused on spending even more time on the shop floor setting clear stability criteria and moving.
Towards proactive maintenance to prevent emergency breakdowns, we ended the second quarter with good improvement and have seen a strong start to the third quarter.
Third we are watching the ongoing developments in our markets. So we can adapt our programs product portfolio and operations to today's conditions, but also to emerging demands from our customers.
Aluminum is a critical part of a decarbonize the world and our portfolio of low carbon customer centric value add products will help us to continue to be a supplier of choice.
And finally, we are continuously focused on ensuring that we are operating our facilities in an optimal fashion and making decisions that can drive short medium and long term profitability across our company and through the cycles. We continuously review all of our facilities to be sure. We are operating the right portfolio of assets for.
Current and expected conditions.
With that I'll turn it over to Molly to talk about the results a few key emerging trends and our outlook for the third quarter. Molly. Please go ahead.
Thank you Roy well, both alumina and aluminum third party realized prices declined slightly in the second quarter revenues increased 1% on higher shipments the net loss attributable to Alcoa improved $129 million to $102 million or 50.
<unk> per share primarily due to the non recurrence of charges taken in the first quarter, the $101 million and telco smelter closure charge and a $41 million utility settlement charge at Martin.
On an adjusted basis, the net loss was $62 million or 35 cents per share and adjusted EBITDA, Excluding special items declined 103 million to $137 million.
Let's look more closely at the key drivers of adjusted EBITA.
The three largest drivers of the $103 million sequential decline were higher production costs, lower metal prices and lower volume, which together totaled $167 million.
The alumina segment, what's the primary source of the increased production costs and lower volume with $45 million related to lower Australian bauxite grades better than expected as the full impact of lower grades was not realized in the quarter and with the remainder due to higher maintenance outages and real.
Ladies and costs at the LMR and wage off refineries.
Production costs in the aluminum segment, where favorable $14 million led by improvements at both Norway operations and adding Amar.
The remainder of the bridge factors not to a $64 million improvement highlights here include lower raw material costs in both segments as well as higher API, partially offset by unfavorable product mix, primarily in the alumina segment.
Outside of the segments, there was a sequential improvement of $41 million with inter segment eliminations, providing the lion's share a sequential benefit of $39 million and it's less profit was held from earnings when interest segment volumes declined and alumina production costs increased.
Transformation costs increased $9 million coming more in line with expected levels and other corporate spending improved $11 million.
Now, let's turn to other financial metrics and cash flow.
Well year to date return on equity is negative 4%, we again paid or 10 cents per share in dividend in the second quarter totaling $18 million.
Year to date free cash flow less net NCI distributions was negative $274 million of which negative 108 million was in the second quarter, a $58 million sequential improvement.
Cash ended the period at $1 billion in proportional adjusted net debt rose to $1 $5 billion.
Year to date, the three largest uses of cash were income taxes capital expenditures and working capital.
We expect cash taxes to be a smaller use of cash in the second half of the year. The $246 million included $173 million a prior period taxes and $73 million of current year taxes, we expect working capital to continue to improve as well day's work.
<unk> capital decreased one day to 55 days, while working capital wasn't $216 million use of cash in the first quarter. It was a modest $32 million source in the second quarter and we expect it to be a larger source of cash in the second half of the year.
Let's take a deeper look at this quarter's cash flow and working capital.
Well or to the year to date cash flow chart. The sequential quarter chart shows that cash income taxes and capital expenditures were two large uses of cash in the quarter tax payments are expected to decline in the third quarter of the $155 million of cash taxes $115 million or if our pri.
Year periods with current period taxes, only $40 million and we expect little or no payments for prior period taxes in the second half of the year.
Conversely, we expect capital expenditures to remain a significant use of cash increasing from $115 million in the second quarter to approximately $155 million in the third quarter.
As we noted earlier working capital change shifted from a use of cash in the first quarter to a source of cash in the second quarter payables have stabilized as capital expenditures picked up and offset continued price declines and purchased raw materials.
Counts receivable declined slightly in the second quarter and lowered overall working capital.
While raw material inventory values declined notably in the quarter on lower cost quantities of in process and finished goods were up at quarter end, but we do expect improvements as we move through the year CAD.
Cash flow again was helped by a nuts noncontrolling interest contribution of $20 million.
Looking up inventories in purchase cost.
Continue to see purchase prices for key raw materials decline and as noted on the EBIT bridge, we're starting to see improvements flow through to the income statement.
The three key raw materials, our caustic soda for our alumina segment, and calcined petroleum Coke and coal tar pitch for our aluminum segment.
Looking at quarterly average market index prices, all three commodities declined again in the second quarter.
Year over year, we are seeing approximately 44% improvement in caustic prices approximately 30% improvement in quoted prices for coke and even pitches down, albeit very slightly from year ago levels.
We also saw lower spot prices at quarter end and expect to see further purchase price improvement.
These purchase price improvements into our inventory valuation and can take one to two quarters before the improvement starts to flow through Cogs and hit the income and cash flow statements that said should these raw material price trends continue we expect to be rewarded with lower inventory valuation as well.
Our cogs related to raw materials and improved cash flow.
Now, let's turn to our expectations for the year in the third quarter.
Our only change in our full year outlook is to decrease capital expenditures by a total of $60 million and some project timelines are extending.
Return seeking capital spending is expected to be approximately $90 million for the year and sustaining capital of approximately $450 million.
Regarding sequential changes for the third quarter in the alumina segment, we expect an improvement of approximately $65 million due to lower raw material prices and better production costs and higher volumes and elevated maintenance during the second quarter concludes.
In addition, we expect a $10 million unfavorable impact from lower bauxite grades in Australia with impacts now expected to continue through at least mid 2024.
We expect to face the full impact at the lower grade as higher quality bauxite inventories have now been depleted that means an increase from our $45 million impact in the second quarter to $55 million in the third quarter before identified cost savings initiatives take effect and reduce that number in future.
Corners.
In the aluminum segment, we expect a net improvement of approximately $25 million unfavorable raw materials and lower production costs, partially offset by unfavorable price mix, primarily due to softer pellet demand.
Finally, we expect alumina costs in the aluminum segment to be favorable by $5 million below.
Below the EBITDA line other expense in the second quarter included an unusually large favorable foreign currency impact of $40 million due to recent changes in the value of the U S. Dollar this gain may not recur.
Based on recent pricing the company expects third quarter operational tax expense to approximate $10 million to $20 million.
Now I will turn it back to Roy.
Thanks Molly.
Next I'd like to provide some updates from our operations across the globe beginning with Western Australia.
As I said last quarter, we're continuing to work with a host of government agencies on the approvals process for our annual mine plan, our mine management programs or Mlps are normally approved annually on a five year basis separately, the western Australia, and environmental protection authority or EPA is considering whether to conduct.
Additional environmental review on these mlps.
The resolution of our mine approvals does not have a fixed timetable, but we are working to constructively address stakeholder needs and expectations in a timely fashion. This is a key priority for our company and we're focused on doing what is necessary to secure approvals, we are increasing controls to protect drinking water sources further stepping up.
Mine site rehabilitation and enhancing the management of social impacts.
This requires discussion and action with various government agencies. So to get this complex regulatory process appropriate time, we are now mining lower grade bauxite in previously approved areas.
As Mollie just pointed out using lower grade bauxite has a cost it means using more raw materials and producing less alumina per ton of bauxite in the second quarter. This unfavorably impacted alumina segment adjusted EBITDA by $45 million. This is better than we originally expected due to slightly higher bauxite grade.
And good operational practices.
As we look to future quarters bauxite grades will continue to vary we expect that it could take nine to 12 months to transition to new mine areas once approved and improve the bauxite quality sand to our refineries.
The expected impact of these lower bauxite grades will stretch into at least mid 2024.
Next let me provide some more detail on what we're awaiting from the EPA. The authority has indicated it could decide by the end of this month whether to proceed to the next stage in its consideration process, which would be a public comment period. If that occurs the EPA would then decide whether to conduct additional environmental reviews.
On all or part of our Mlps and if so at what level.
We support the authorities process for future major mine extensions, but we believe the current statutory process for our Mmp's provides appropriate environmental and social protections in existing mine regions as part of a transition period as.
As an example, we've already proactively initiated assessment by the EPA for two future regions Miara North and Holyoke.
Finally on this issue I want to stress that I am very proud of how our team has been operating through different and difficult conditions. We have some of the world's most highly skilled people and we have strong operating processes. We are working together to operate safely stably and efficiently and we are pooling our collective knowledge to secure our.
Approvals and we will strive to reduce the impact of the lower grade box right in the coming quarters.
Now, let's turn to some key operational items across our two segments.
First in alumina some may recall that we had a failure in the first quarter on a ship to shore conveyance system that unloads bauxite for the al <unk> refinery in Brazil.
Our teams worked to successfully make repairs and restore bauxite flows I was impressed by how our team quickly and safely recovered.
Then in June we proactively began a project to replace a large bearing on the alumina ship loader at the same location. This four meter bearing supported the 820 metric tons structure with much planning and coordination the teams safely executed this major repair and eight days working with a specialized contract.
This well coordinated effort enabled the loading of alumina ships to quickly resume we didn't miss any customer shipments because of this work and it demonstrates our push to move to proactive rather than reactive measures to keep our facilities at peak capacity.
Meanwhile, in Spain, we continue to work to find the optimum production levels at the sensor prion refinery considering market conditions. It is currently operating at about 50% of its capacity in the second quarter, a modest increase in production at this facility, partially offset some reduced production at <unk> and in Western Australia.
Where our banana refinery is operating four of its five digesters and where we finished a major maintenance project at <unk>.
In our aluminum segment six of our smelters are operating at full capacity with high production levels. Meanwhile, the smelters that have reduced production volume due to partial curtailment Lister in Norway, Portland in Eastern Australia and work in the United States are all running stably at those levels.
Meanwhile, the ongoing restarted the Albemarle smelter is progressing with an intentional and deliberate process to ensure that every part that restart is stable and operating well, we now have greater than 60% of that site's total capacity operating and we're also continuing to invest per our agreements to support the phased.
Restarted the sensor pretty honest smelter beginning next year.
As I said earlier, we are enabling our operational leaders to spend more time in the field. This will bring an increased focus on safety more fruitful dialogue and interactions with our employees and a renewed drive to find productivity and efficiency improvements.
Now let me provide our current view of the overall market for aluminum and discuss alcoa's position as a producer of choice both today and in the future.
The global aluminum market is currently showing some mixed signals with limited supply growth and divergent to demand trends depending on specific end markets in China. Some previously curtailed capacity is restarting in Yunnan province, but there are questions about hydro electric power availability and stability for both union and Sichuan provinces, where chime.
This low carbon aluminum supply is concentrated.
In the rest of the world conditions are still not favorable for restarts and there is very little new capacity ramping up.
On the demand side, China is expected to see growth this year for aluminum used in electrical grid investments and vehicle production the country's weaker real estate market. However has slowed demand for aluminum in the construction sector.
In the rest of the world, we see strong year on year growth in the automotive market, particularly in Europe , and North America. The same is true for electrical applications, although construction and packaging have slowed this year as a knock on impact from higher interest rates inflation and destocking trends.
The long term outlook remains positive as the world will need more aluminum from both primary and recycled sources for existing users as well as global decarbonization efforts, including the transition to renewable energy more electric vehicles and recyclable packaging recovery is expected in the construction market long term is developing markets.
Interest rates stabilize with continued urbanization trends.
While more aluminum will be needed China is still expected to continue to enforce its 45 million metric ton per year capacity cap, which it will approach in the next year or two also China's existing low carbon capacity is likely to face ongoing challenges related to hydro electric power reliability.
Yeah.
And the rest of the World. We also see limited supply growth, especially in the production of aluminum made with lower carbon emissions the announced projects in the pipeline are not expected to be enough to meet demand of our critical metal.
Market conditions are expected to be favorable for aluminum in the future and Alcoa will also remain well positioned to the low carbon primary aluminum producer of choice in key regions. We are a domestic producer in North America, and Europe , which are both deficit regions, where customers prefer domestically and responsibly produced metal.
Now I'd like to return to an issue that we discussed in prior quarterly earnings calls the continued risk for the London metal exchange or enemy related to Russian origin aluminum.
In the past two years, we've seen customers move away from Russian metal, particularly in Europe , and North America also in Asia. Many banks that traders used are not financing Russian metal. Many of these customers. In this region are served by these small local traders the dynamic regarding Russian origin aluminum should raise a.
Alarm as we've previously stressed on our last earnings call in April the situation has since worsened Russian stocks and I'll. Let me warehouses recently reached an all time high concentration representing 80% of total LMA aluminum stocks as of the end of June .
The physical stocks and let me warehouses are the basis of the published <unk> aluminum price, which is widely used as a price referenced in global aluminum contracts because those stocks are now predominantly Russian origin metal, which is unwanted by much of the world. It is difficult to have confidence that the <unk> exchange price matches the true physical.
For non Russian aluminum that customers largely require.
We have continued to reiterate our position to the LMA that I should take immediate action to delist Russian origin model. There is a real risk here that a bit.
Delays acting stockpile of metal that is under extremely punitive tariffs and our self sanctioned we will continue to build up that.
It would then caused this unwanted metal and appropriately influenced the global benchmark on pricing damaging the integrity and relevance of the <unk> aluminum contract.
Returning to Alcoa, we continue to see growing sales in our sustain our product portfolio as customers seek metal made with lower carbon emissions to reach their own sustainability goals. This year, we expect to see our sales of our <unk> brand to reach 40% of our total European production, which would be at 60%.
Annual increase we also offer a wide range of value add aluminum products that serve a diverse end market and we have seen the same demand trends that I discussed earlier play out in our order book.
Our participation in a variety of end markets allows us to benefit from diverging trends as we can flex our value add production to adapt to different market conditions across the various end markets.
Now, let me discuss opportunities for our business. While we are currently working through challenging market conditions, we look forward to recovery and the expectation of growth in long term aluminum demand and as we look towards this future I'd like to stress not only the value of our current products such as our sustainer offerings in alumina and aluminum, but the value that.
It is embedded in Alcoa as a pure play innovations focused aluminum company.
We are well positioned as the world moves to Decarbonize the economy, the future requires more aluminum, which is a material of choice due to its lightweight recyclability durability and strength and with customers increasingly focused on the need for responsible production Alcoa is the company to delivered due to our environmental social and governance.
Practices, we know all metal is not created equally and our focus on sustainability is what will differentiate us from other global competitors.
Why we're working so diligently to adapt to increased expectations in western Australia, which will allow us to optimize our bauxite mines and returned to higher grade ore as soon as possible and this focus on community engagement and responsible practices can also be applied globally across our mines refineries smelters and cast houses developing these.
Systems, not only helps us to surmount these immediate challenges, but it will also provide the roadmap to operating responsibly long into the future.
Meanwhile, we're focused on finishing some key projects, including returning to al <unk> refinery to normal production after the repair and maintenance projects I discussed earlier and our focus on driving simple yet effective and proactive maintenance programs will ensure we are operating stably across our portfolio. We are also continuing to increase production.
By our operational improvements that allow us to keep our capacity and we're investing in next generation cast house technology to grow our value added product capabilities and capacity. Two recent examples of this include a new casting line addition boat cost smaller ingots that will allow the smelter produced alloys from Alcoa's Award winning EZ cast family.
And at our back on course smelter in Canada, we're working to install technology that will improve the surface quality of slabs, helping customers improve their recovery of finished products. It will also help us attract new customers specifically in the packaging and automotive markets.
For our production levels I noted earlier that we're progressing with the <unk> restart and we're investing for the phased restart of our sons of prion smelter in Europe , and its 228000 metric tons of aluminum capacity. Currently idled. We also have some other curtailed capacity both in refining and smelting and we have options that will continue.
To evaluate should market factors and overall economics improve.
Finally, we continue to work on next generation technologies that have the potential to further differentiate our products from our competitors. These three projects Alex is a refinery of the future initiative and the Australia scrap purification process are all part of our technology roadmap. These remain under development and will help us on our journey to <unk>.
Carbonize and achieve our net zero 2050 ambition.
As you recall <unk> is a partnership company based on process innovation that Alcoa first developed at the Alcoa Technical center outside of Pittsburgh.
The process eliminates all direct greenhouse gas emissions, replacing those with pure oxygen emphasis is currently working to ramp up this technology to commercial scale, including the development of largest smelting cells that would operate at 450 kilo and pairs at the end of an existing potline in Quebec also unlike some competing.
<unk>. The <unk> process has already produced commercial grade aluminum at research scale and has been used in and products from such brands as Audi and Apple.
We also know that the final carbon footprint of aluminum is not only determined by the electrolysis process itself, but also by the energy source and the alumina that is used to feed those smelting pots. That's why we're also working on the refinery of the future, which will help to improve our refineries carbon footprint reduce water usage and reduce <unk>.
Bauxite residue.
This includes electric calcination mechanical vapor recompression and other developing technologies.
Meanwhile, we're also continuing our R&D work on our Australia technology, a proprietary scrap purification process that can economically separate aluminum from other nonferrous metals and impurities it could provide metal or a purity level that would far exceed the quality of what most commercial smelters can produce.
In closing, we continue to work to optimize our portfolio. So we can succeed regardless of market cycles. We are focused on continued improvement and we have a strong balance sheet with $1 billion of cash, allowing us to drive improvements during a challenging market and to focus on the operational excellence our priorities are clear securing our mine approval.
In Western Australia, driving stability across our operations adapting to a volatile aluminum market and ensuring we operate the right portfolio for today.
And tomorrow.
Also we remain a supplier of choice and we're proud that customers come to us for solutions, including our recently announced contract with Emirates Global all dominium, we not only sell low carbon metal to our sustained on line, but we are the only producer in the aluminum industry that also market themselves or low carbon aluminum brand. These products which include equally.
<unk> and eco source can help producers' lowering their carbon footprint by switching to our material equaled.
Column is our low carbon aluminum eco dura contains recycled content and eco source is our low carbon aluminum.
We are encouraged to see demand and sales growth in this brand family, albeit still a small percentage of our overall sales still the growth demonstrates the rising demand for low carbon technologies. This shows strong potential and value in the work we're doing to bring forward, our research and development programs and reinvent the Indy.
Street, we created.
Molly and I are now ready to take your questions operator, who.
Who do we have on the line with our first question today.
Before we take the first question as a reminder to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
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When called upon please limit yourself to two questions.
The first question is from Alex hacking with Citi. Please go ahead.
Yeah evening, everyone and thank you for the call I have a couple of questions, but I guess the first question would be.
On the environmental permitting and double Yue.
Maybe I'm misinterpreting your comments, but it seems like you're a bit more conservative now than on the last call and.
Anticipating that this process might be a bit more onerous than you previously anticipated.
I mean is that is my interpretation fair or is this is the process going kind of as you expected.
Yeah, Alex I think I wouldn't interpret it as more onerous or or really all that different from what we talked about the last time, we were we went through earnings.
I think it's we certainly had hoped it would be solved this last quarter and so it is taking longer than the time line and we reiterate that the timeline is uncertain. However, I would continue to say that we're working collaboratively with the Australian regulators we.
We do have a we did have the western Australia and the environmental Protection Agency EPA. So that by the end of this month, they believe that they'll give a decision about what.
The referral is valid so we are progressing we're not there yet, but we're certainly progressing on.
On the other side of that Alex I would also say that I think we were I was pleased with particularly how our <unk> refinery, which is our largest refinery in the system in Western Australia was able to perform with bauxite grades as they were coming through.
So that's that's something where we can actively work as we go through this period of uncertainty and as we start to work towards improved grades in the future the better and more efficiently that we can operate that that facility and kirana as well, which has the same bauxite source.
The less impact, but we have both financially and operationally. So so really it's a it's a very similar situation to what we found ourself last quarter. It wasn't meant to look more conservative on but rather to say hey. This is three months further delayed than what we had seen the last time, we talked.
Okay. Thanks, that's clear and I appreciate the clarification and then I guess.
On the second question.
You know the smelters, where you're operating kind of at reduced production levels in our list Warwick Portland.
I know Warwick has its own power source, but for list or in Portland.
Are you involved in negotiations for power cost next year is there any flexibility there.
And if there isn't flexibility is there potential that.
Production that could be further reduced if aluminium prices don't improve thank you.
Thanks, Alex and I think the answer is gonna be it varies and it depends as is always the case in each each facility is a different situation.
So take take list as an example, we decided to bring leased it down simply because spot energy prices have climbed so high and we were able to find a power contract that covered part of that facility and that was able to allow us to drive it back into profitability, which which is not an easy and.
Not an easy thing to do in Europe , right, now given where energy prices stand and so we have the option of course to further curtail it as we go into this next round of power contracts or are we also will have the opportunity to bring them back up again, the European market of course is slower than it has been but it continues to have strong premiums.
And we continue to see a lot of customer demand, particularly for green and low carbon aluminum, which is something that at least it certainly does and also have a very highly value added cast house.
Take Portland sort about the other side of that you know Portland.
Portland, we really had to bring back down because of some instability happening in the production of anodes. So that's one where we have the power available we can scale that back up again, but we're not going to do that until we are certain that we have stability and then of course, we will make the decision about whether that's financially viable whether we continue to what do we consume that.
Energy or we sell it into the open market.
Works works, a little bit different of course, because we do have our own power source.
That's one where we're really trying to work through what what are the strategic plans for that facility. What do we want to do as far as long term power source and how do we make sure that we're operating that smartly and efficiently.
So that's one really that we have full control, whether we start back up some of the sum of the parts that are idled or what we choose to do that going forward. I'd also remind you. We've got the sensor pretty honest about where that will start to come back at the beginning of 2024 now that will be relatively modest production capacity at the beginning but we do.
A commitment by October of 2025 to have that fully restarted and it's about 228000 tons and I would remind you that is our lowest cost facility outside of electric electricity costs. So we are working very hard to find a way to get those costs down as low as we can including the including the.
Renewable power contracts that we've signed starting really as we progress over these next couple of years.
Okay.
Okay. Thank you very much.
Thanks, Alex.
The next question is from Carlos de Alba with Morgan Stanley . Please go ahead.
Yeah, Hello, good afternoon.
Thank you for taking the questions.
So I'm wondering if you could perhaps molly quantify them.
The cost savings that you expect to reach in alumina from the initiatives that you have identified to sort of offset or reduce the impact of the lower bauxite that you will be mining and in terms of the timing as to when those may may <unk> is that something that you see for the fourth.
Or or most are mostly in the first or second quarter of next year.
So Carlos we've already started to implement some of the savings initiatives they didn't amount to a significant amount.
And in the third quarter. So that's why we've kept the 55 guide, but you will start to see changes related to changes in our labor changes in our maintenance routine as well as we're looking at some modest capex to improve operating efficiency. So those will start to pick up some speed in the fourth quarter and then we'll continue because.
We are continuing to identify additional opportunities to take it that savings into 'twenty four.
Alright, Okay, Thanks, Mike and.
Maybe maybe on them.
On the products that the.
Really on the low carbon products that the company offers a Cologne for instance, I know there's a you mentioned that the clients are asking for it and he will represent.
60% of your aluminum volumes.
In Europe .
Being able to monetize these lower carbon products are you getting a premium.
Is there is no way you can give us a range of how much of these premium represents.
Yeah. So let me let me take a stab at that because it's sort of break it into two pieces. The first is around volumes and continued demand.
I have to say and this really starts in Europe , and we're about 40% of our value added now is going into these low carbon products, we're seeing more and more pool and you can see this for example, with some of the automotive customers, where they've set some pretty aggressive targets to be able to drive to net net zero carbon but we also see it in.
In for example, electric cables and in a number of different places.
So I have to say is as we progress and I'm probably been asked US. This question in every single quarter for the last couple of years, I'm, becoming more and more optimistic that those volumes are going to continue to improve and.
And we're seeing that really take root in Europe , and starting to see that in North America as well and of course, there's a lot of connections between which we and our customers in North America and Europe . So the attendance spillover. So so certainly seeing good volume improvements.
And particularly going to continue to see those volume improvements because we've got a lot of a lot of ongoing conversations with customers.
On the on the realizable value. So the important thing here for US is that because we've for the most part turned to renewable energy a lot of these sales right now are our cost free right. It's a matter of making sure that we have the right power source of course, there is all the work that goes into being a responsible producer and making sure that we can.
Lineup to the aluminum stewardship initiative, so that we can prove prove our credentials, but most importantly. These this is essentially a driving towards the scarcity or the fact that there is a differentiated product with less carbon content inside of our our products and so its cost free on the on the premium side.
And you can see some of the published some of the published indices, which I think are pretty representative of the kind of premiums that were getting.
Tends to range between 25, and $50 now, which is a beginning and it is certainly not where we see this continuing to go and I would also argue you look at our low carbon sales equaled them as a very good example of that which is our low carbon aluminum look at this as sort of the first step to making sure that our market is prepare.
<unk> four zero carbon aluminum down down the road for our L. A is this metal.
Want it to be very clear the unique properties of the unique characteristics and the fact that this will be truly a differentiated product and so really this is sowing the seeds that does create value for us in the short term, but more importantly, it will be the seeds that will be significantly greater value down the road.
All right excellent. Thank you very much good luck. Thank you Carlos.
The next question is from Timna Tanners with Wolfe Research. Please go ahead.
Hey, good evening.
I wanted to follow up a little bit on that timeline for the upstream bauxite inefficiencies that you've laid out so on the factsheet that you've provided on your website or the Australia website on environmental assessment, there's a timeline that says the finalization of the E. R D.
And I'll be your document is Q2 Q3 is that what youre talking about that has to get finalized to kick off that nine to 12 month lag before you get to kind of the optimization of the bauxite mining these are anticipated timna.
Timna to two different sets of issues and I can see how it's pretty confusing. So so that particular timeline refers to this next mine face essentially what we call micro north and wholly up which is the next sort of that big conveyor move that then get to this next large field bauxite.
That is a completely separate process to what we've been talking about as far as the short term set of approvals that have been running on a on a five year rolling basis, and so that runs through this full look at it as an environmental impact assessment, that's run through the EPA that.
That represents sort of the end state of where we're going and what we're trying to build this transition phase and so that that is a process that has a clearly set out timeline, but that timeline can tend to change if they have additional asks as they change consultation periods et cetera, so that that timeline pertains to that next mindset.
And so and that will take that will take considerable time to be able to develop that so that's not a nine to 12 months that will take a few years in order to prepare for the conveyor move et cetera on the other side of that our short term approvals is how do you. How do you take what is this sort of this.
This customized approvals process that we run today that was a five year rolling process that we submitted every year. How do we then incorporate a lot of the same types of environmental protections community consultations how do we incorporate that into this this current process and get to these short term approvals that have been allows us.
The Arctic that allows us to go into new mine sites that are part of the existing mine area.
So that does that answer your question Timna.
Yeah, I mean, it sounds like it's a bit apples and oranges or at least two somewhat separate instances and you did warn that it's a complicated regulatory process have probably not great to spell it all out on the call, but I appreciate that there are a bit distinct Devon, and we'll wait to get an update on that that or more immediate issues. So shifting gears. If we could I did want to also add.
Ask you a little bit more color on this the forecast you have for global aluminum and alumina I know in last quarter's presentation. You had said that the markets were balanced this time, you're saying, it's a mixed bag and and we have seen premiums fall. So I know the the medium and longer term is positive, but just a bit more color on what you're seeing in the near term would be helpful.
Yeah, certainly timna nits.
Mixed bag is probably the right word for it so to go back to your first point I.
Don't see supply demand balances being all that different than last quarter to be quite honest.
We're essentially on a on a nice surge in it and it can shift towards a very small surplus shift towards the very small deficit.
So in the end, we're really quite balanced both in alumina and aluminum.
And that's you know that's that's sort of where we expect it to be the what we are seeing however, though is that our markets and particularly when we look at it a lot of our sales are happening in North America and Europe , we're seeing some additional weakness than we did before and seeing some strength in things like electrical and transportation and.
And we see that particularly outside of China, but also inside of China transportation continues to be very strong.
And from a weakness standpoint, really billet, which goes into construction.
And then slab, which goes into packaging and so you look at it you've got some some areas of strength you got some areas, where where it really hasn't lived up to the strengthened and where we're not seeing those increases year over year and that sort of combined then with some of the supply issues that have happened I know, we have some some facilities coming back up in <unk>.
And in China that is not a surprise I think we all knew some of that was going to come back up again, it doesn't take away some of the uncertainties around the around how much hydro electrical power, they're going to be able to generate its not easy to do.
Shutter, but or bring back those facilities.
But in the end it all sort of comes through this this.
Big Big calculation to get down to essentially a roughly balanced market.
And that balanced market of course is waiting for what happens on an inflation and therefore monetary policy that connects back with what's going to happen with the broader economy, whether there'll be Chinese stimulus stimulus and so I would sort of get back to say, hey, it's a mixed bag, where sort of more or less where we were at the end of last quarter, probably a little weaker.
Demand, but also a little bit weaker supply as well.
Okay I appreciate the color. Thanks again, thanks Timna.
The next question is from Lucas pipes with B Riley Securities. Please go ahead.
Thank you very much operator, good afternoon, everyone.
First wanted to ask on the cost side, you called out the $65 million in alumina $25 million in aluminum.
With continued raw material savings.
With flags.
Caustic soda, but then also kind of Pos working their way through through through inventory.
Is that an order of magnitude, we could expect delta for Q4, or maybe even greater than what you've outlined for Q3. Thank you very much.
Lucas, we're actually seeing very notable improvements in the third quarter. So within that 65 for alumina and the 20 fives for aluminum, we've got $20 million related to the caustic improvement and then within aluminum $30 million related to coke and pitch as well.
Given early look to the fourth corner.
Are seeing notable savings.
And is continuing so we do see a nice step down heading into this fourth quarter.
Hey, Lucas I'm going to add one very subjective comment, but we've been we've been waiting for this this cost relief to come through for awhile, and it's particularly frustrating on the caustic side because it takes so long to work its way through our processes, but now to finally start to see those raw materials come through in Q3 and beyond is it.
Certainly welcome relief and its very relevant for Q3.
Very helpful. Thank you then taking a step back from this and zooming out a bit.
What do you think you sit today on the on the global cost curve and would you expect.
Maybe a supply response from high cost producers you touched on it here and there throughout the call but would appreciate maybe.
Honing in on too on this point thank you.
Yeah, Lucas you know I'm not going to be able to give you a particularly educated view on cost curve, just because we tend to do that analysis on an annual basis and we do it next quarter. So your one quarter early I can give you some qualitative comments without giving you a quantitative number.
I think through this part of the cycle the what we've been suffering on suffering from both on the alumina and aluminum cost curves is the fact that we had our short energy position sitting inside Europe and so when you look at.
Fortunately, we have the sense of beyond the smelter down so that one didn't impact us so much in this downturn, but the sensor and refinery has really suffered from natural gas prices and so they have drifted their way up the cost curve now we'll find a resolution to that it's a market resolution for the most part we've also been managing the B b.
Essentially how much we're choosing to operate that plant and I have to tell you that our operators and our managers. There is uncertainty on our masters of making the plant work really well no matter, what what capacity they are running out on the.
The other side of it is places like list on Norway. They they their costs jumped up because we used to have some of the least expensive spot energy on the planet for a little while it was some of the most expensive and we've been able to find a good middle ground, but certainly that that's pushing us up the cost curve. When we look at that and so what we'll try and do when we come to.
Our cost curve analysis.
Is to talk a little bit about what the positioning will be but also what are some of the some of them sort of the significant events that might be causing that cost curve to defer from what should be a longer term view on on where we where we believe that we set and more normal conditions. Now. Your next question is when do normal conditions come back that's a.
Really good question and I'd love to hear someone answered that for me too we look out and our job is to make sure that we're managing the system in our portfolio as smartly as we possibly can.
You see that in how we manage the uncertainty on in the refinery you see that in the way that we try to look across all of our facilities to make sure that they're creating value in this quarter and then for the next for the next 10 12 quarters right. So.
So we're working working on that we have a lot of opportunities to drive the next class of power contract were working in the midst of with the Spanish government to try and find relief on natural gas costs. We're also looking for different ways to bring in other suppliers. So there's a lot that we can do we are not helpless.
But we will give a lot more insight into cost curves and where we find ourselves in the next quarter. So more to come on that one Lucas.
Well I really appreciate all the all the detail.
Again and best of luck.
So Lucas.
The next question is from Christopher <unk> with Jefferies. Please go ahead.
Hey, Thanks for taking my question, so I'm just trying to.
Basically frame the range of possibilities. So you did it.
$37 million of EBITDA in the quarter.
And you have the benefit now if raw material prices that are going to start falling flowing through the P&L.
Some higher volumes as you're restarting some capacity eventually assuming you get the mining licenses in Australia in your mining high grade blocks that again.
Those costs come down.
If we had if we ignore the impact of changes in alumina and aluminum prices and all this stuff goes right few operationally what is that quarterly EBITDA number go to or does it go from $1 37 to 200 does it go to 300 can you give me some sort of ballpark as to where you can be ignoring any change in alumina and aluminum prices.
Chris that's hard to do it.
With the market impacts I'll I'll take you back to our guidance again, we're focused on the downward trend for raw materials, we are improving production costs with our improvements in stability and getting the higher volumes out is also helping us with our cost absorption. So.
So we will stay focused on what we can control.
Okay. Thank you.
Yeah.
The next question is from Michael Dudas with vertical research. Please go ahead.
Good evening, Molly Roy Jim.
Hey, Michael.
Yeah, I'm not sure when normalization is coming back in in the near future voice I assure you.
Oh I'll.
Further discuss on the Russian metal pallets, you need.
Thank you.
Current market is being restricted from a mechanism on where pricing is today world pressure should be either better because of what's going on and is there a real risk of that happening in the next several weeks to months given.
The distortions and Illumina aluminum.
And where do you where do you get a sense of where those stockpiles, maybe and how it's going to flow through given all the things that you discussed an awesome.
Yeah, Michael So what I would say is that I don't necessarily see pricing broken right now and you can you can essentially chart that back and say, how how is how our aluminum prices and factset and it's the exchange of warrants on the enemy and that exchange of warrants essentially.
<unk> represents people that are holding that material and then choosing to either continue to hold it or to sell it and so that changes over on a on a daily basis and that changeover from buyers to sellers is what sets the basis for the entire aluminum market.
Now as you compare that with what's happening with headlines what's happening with supply demand et cetera.
We continue to see what appears to be an orderly market.
Lemme metal is meant to be the the metal of last resort. So if if I'm selling metal am I only sell it to the <unk> because I can't find another buyer. So great example is a lot of us Russian metal that came on warrant that came into the Ela me because they couldnt find another buyer because nobody wanted to buy a Russian metal that's how the market that's how that.
Market of last resort works on.
On the buyer side, when somebody's book going out to look for metal. It's also the market of last resort someone would prefer to buy from a producer. Because then you are given those tons, where you choose to buy them from a particular plant from a particular producer and you can understand what the logistics are gonna be whereas when youre going when you're sifting through warrants when you buy.
<unk> from the <unk> warehouses, you get it where you get it you get a commodity grade metal that's located someplace, where <unk> has warehouses. So it truly is a last ton of last resort.
Right now you've got 80% of that metal, which represents Russian metal and so theres still 20% of metal for the most part it's Indian.
That if I wanted to buy metal of last resort I could buy enough tons. So that I could actually get some of that Indian metal coming out and I can leave the Russian metal sitting inside the warehouse.
And remember that whoever is holding those warrants will always give you. The warrant that has the least value they'll give you the Russian metal first so let's say, there's 200000 tons of Russian metal I need to buy 220000 tons. So I can get 20000 tons out again always representing the purchase of last resort.
So right now you can still put up enough capital to be able to buy those warrants to be able to get down to those non Russian tons.
But as we watch this sort of almost the this constant marched up a higher percentage of aluminum from Russia sitting in inventory and the potential that even more tons could come into the <unk> because the customers for the most part are not buying these tons and thats not universal that is it.
<unk>, particularly for North American and European consumers as you watch that percentage increase and as those tons that that make up that percentage also increases it means to be able to use that market to actually by non Russian tons will require more and more and more capital. So I'd say right now we're not seeing distortions.
But the higher that percentage goes the more tons are sitting on inventory the more likely that you could start to see distortions and effectively you'll have a bunch of metal that nobody wants sitting inside the inside the <unk> warehouses.
And so who is going to be buying and exchanging those warrants if that's not metal that anybody wants to actually take take delivery up now.
Now I remember the other mechanism in and I'm not going to get any further than that the other mechanism that people are buying and selling those warrants because they're essentially establishing the spot price versus the future contango or the future backwardation. So the reason there is another impetus beyond just trying to buy metal, which is also if I buy it for 2500.
Today, its worth 2520 in three days.
As an example, and so I'm willing to do that because I can then establish a trade. So so that that sort of the nuts and bolts of what's happening in the warehouse.
But as you have less and less people willing to take Russian metal as you start to see banks that are not willing to finance that Madeline traders that have said, they're not going to be dealing with Russian metal.
It increases the risk of a non functioning market.
That was a very long answer to a very short question does that does that help to clarify a little bit.
It did it did ROI, yes, that's very helpful. Thanks, so much and good luck with that.
Thank you Mike.
The next question is from Katja <unk> with BMO capital markets. Please go ahead.
Hi, Thank you for taking my question, maybe going back to the more near term pricing has softened and if this soft environment persists.
Al you mentioned that you're focusing on what you can control.
Why do I E.
Cost or what is the magnitude.
Cost savings you could actually generate if this.
Softer pricing environment persists and outside the raw material.
Prices declining.
Concho, let me start with we've spent the last several years really improving the portfolio strengthening our balance sheet right. Now we have a lot of liquidity excellence 1 billion in cash we have a revolver undrawn at 125 billion no long term debt.
Sure. He's until 2027, we do have high working capital now.
That will generally convert to cash be a source in declining market. So we will stay focused on operation, we will adjust our spending and our operating levels as needed.
Really the safeguard our assets and protect the long term value for the shareholders.
Joe I'll add one one comment on tamales as well because she she is exactly right.
As if prices continue to soften it drives it drives a review of the portfolio that we're operating.
And so we.
Sort of in the aluminum business, we're always doing portfolio reviews. It seems to be just part and parcel to what our business looks like.
But in the end, we need to make sure that we're running the portfolio and a set of facilities that can create value in the part of the cycle that we're in but also in the future parts of the cycle.
We've for the most part walked away from savings.
Our good today and bad Tomorrow, a lot of times maintenance you can save money today, and then you end up having failures six months from now.
So we don't spend a lot of time on short term savings programs, but we do make sure that we can operate our plants to their best.
So that when we look at where our facilities said, we have a lot of levers that we can we can pull in order to make sure that they are working well we have a lot of times support from national and local governments.
But in the end as as conditions continue to move forward and we really need to think about how do we how do we make sure that we have the right portfolio and continue to have the right portfolio.
Seen this in the decisions that we've made over since we've been a stand alone company and really over the last few years.
And hopefully we've built we've built up we've built the analytical models. So that we can understand that we have a good understanding not just of today's markets, but where those markets. We expect them to go and so we tend to make those decisions not just for the next three months, but for the next 18 months.
Thank you.
Got you.
The next question is from Bill Peterson with Jpmorgan. Please go ahead.
Yeah, Hi, good afternoon, and thanks for sneaking me in my first question is on Capex, you discussed the difference in growth and sustaining capex can.
Can you provide a little bit more color or detail on what type of projects or regions, you're you're deferring. This capex.
So this really applies to the whole portfolio of capital projects.
Typically as we are running the projects through the year, if we if we has.
Projects that is may be naturally slowed we might fill the queue. We're just not doing that we're going to keep the project that we had in the plan on the timeline and so we'll just allow the project to run a bit longer. So there's nothing really being just burn just the open projects that we have are extending.
Okay. Thanks for that and maybe I guess another one on capital allocation. So there are no no buybacks in the quarter I guess, how should we think about.
Capital returns and buybacks in the coming quarters or are you looking for improved pricing in the marketplace.
More clarity on operational improvements working capital from its just trying to get a sense of how you're thinking about the.
Returns from here.
Yeah, So bill or our capital allocation framework remains the same.
Positioned for growth, we manage our portfolio and then we do returns to shareholders and all of those depend on us having excess cash so right now in the operating environment, we're going to stay with our dividend that's appropriate for this market cycle.
And so we continue to review this actively with our board, but right now we have nothing to announce there.
Okay. Thanks look forward to following the progress.
Thanks Bill.
The next question is from John Tumazos with John Tumazos Independent Research. Please go ahead.
Thank you.
I wouldn't expect that you would draw down the revolver increased to 1 billion eight of debt increased to 3 billion of other liabilities to fund the tough market or the losses.
But we have much comfort from $990 million of cash balances.
Maybe we improve on the $63 million a month cash draw down in the first half.
But a year from now the cash.
And these conditions would be less.
Should we expect.
A year from now to look for assets sales inventory reductions stock offerings.
Closures or how comfortable are you drawing down the cash.
To get through.
Each successive tough months.
And John just as you said, we're not going to lever up in the near term. We do believe that we're in a very strong position now with our cash where it stands and again, we have a lot of liquidity options should they be needed I'm going to take you back to 2020, when we faced in the Pan.
And we did put in a very active cash management program. I mean, there we were able to cut capex reduce working capital we had a very robust program and.
So if the market turns and goes further down we would be looking at those types of programs to reinstitute them.
What's the lowest level of cash balances that you're comfortable with given the needs too.
Manage raw materials between plants all around the world.
Yeah, John we've really not shared our cash levels because they differ depending on the market cycle, what we're comfortable less than what we're not that we don't kind of set.
An external target for cash.
Thank you.
Thanks, John .
The next question is a follow up from Lucas pipes with B Riley Securities. Please go ahead.
Thank you very much for all the time and really helpful discussion I wanted to follow up on Michael <unk> question on the <unk>.
<unk> situation and Roy if I understood you correctly in your prepared remarks, you called on <unk> to act and I wondered.
Do you Act in your commercial agreements do you consider something else. Besides <unk> basis I appreciate your thoughts on that thank you.
Yeah Lucas it's it's a good question I think today there is no good alternatives to the London metal exchange and so what we truly hope is that we can influence number one the L. O me because we think there's just no reason that they can't make a decision to immediately to no longer list Russia is.
Deliverable metal.
And also number two to.
To work to work with our host governments, and particularly the European Union and the United States to try and make sure that Russian metal is sanctioned which then makes it very easy for the LMA to no longer have that as a listed commodity. So there's a few routes to get there we're not yet at the point, where we say hey pricing has fundamentally.
And down and we need to find a different pricing mechanism.
Just because theres just not a lot of really great alternatives that sit out there.
And so the market continues to function, we will continue to look at that.
What we're trying to do is to prevent the need to try and find a different pricing mechanism, which then could be more volatile could require just a bunch of different changes. So I think we've got some routes to not have to do that.
I appreciate it thanks, again and again best of luck.
Thanks Lucas.
That being our final question. This concludes our question and answer session I would like to turn the conference back over to Roy Harvey for closing remarks.
Thanks, Gary and thanks to everyone for joining our call today and also very much for your continued interest in Alcoa.
We're focused very clearly on driving improvements for the future.
And we're focused on a future where aluminum will continue to be an important metal an important metal for de carbonization and important metal for across all the applications as our economies continued to improve we've got a lot of advantages built into Alcoa, We're a pure play aluminum company and we have tried to demonstrate that we take actions.
So that we can make this company better each and every day I look forward to talking to you again in October where we'll report our third quarter results and in the meantime, please all be safe Goodnight everyone.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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