Alcoa Corporation ($AA)

Thanks for joining. I'm joined by Molly Beerman, the CFO of Alcoa. Today, we are being webcast. So Came face on. Anyway, I'm Timna Tanners metals and mining analyst and building materials analyst here at Wells Fargo. We are delighted to include Alcoa in our Industrials & Materials Conference this year.

And I'm going to kick off with a question about the quarter. So of course, we're entering in telco as an other quiet period and were finalized in the second quarter. So any updates on what you're seeing at this point would be great.

Thanks, Timna, and thanks, everyone, for joining us. So Alcoa is having a strong second quarter really focused on operating safely and stability so that we can deliver the metal tons and realize the high prices that we're seeing. Obviously, the Middle East conflict is top of mind, you see those supply constraints show in the high LME, high premiums and the competition that's going on in the regional premiums as they're competing for those scarce tons. We do have a couple of items to update on our second quarter performance specifically. I'd like to call out that in the Alumina segment, we are now expecting additional fuel costs of $15 million at our Sally refinery related to higher pricing caused by the conflict, higher purchase cost of $30 million at our Pinjarra refinery as production instability was further complicated by LNG supply disruption from Cyclone. We estimate that Pinjara's third-party shipments will be reduced by about 120,000 metric tons in the second quarter versus the first Alumina and the Aluminum segment are now expected to be favorable by $10 million. Additionally, in the presentation posted to our website this morning, -- we have updated business considerations covering the items just mentioned, and we've added a bullet in a footnote to our sensitivity slide related to the impacts of LME-linked power contracts and San Ciprian metal hedge volumes on our LME sensitivities for revenue. Our EBITDA sensitivities already include the impacts of these LME-linked contracts. However, the linkage impacts our revenue recognition as those contracts are hedged against our sales for accounting purposes. So you will see our annual revenue sensitivity is $40 million per $100 change in LME.

Okay. So trying to respond to any of that live. I wanted to say if alumina shipments are -- are they lost or deferred at Pinjarra on the alumina side.

I would say, primarily, we will try to make up the volumes for the rest of the year, and we'll have to update that at the end of the second quarter.

And in light of the not ideal alumina prices, the impact of those tons is probably more limited than people might fear. I think...

It is limited now, but I wanted to give the guidance for revenue purpose.

I completely appreciate that. I'm just trying to think about if that were alumina, I would be a little more worried, but alumina is not doing that great here. So -- are you overall profitable in alumina? I mean, is that still going to be a hit, but a small one? Or how do you think about that?

Our Alumina segment is very pressured right now. So the Alumina refinery is still profitable. It's running extremely well hitting record production, great cost absorption, cost control there. That refinery also has the benefit of the Atlantic premium, which is about $30 per metric ton. However, our refineries in Western Australia are really challenged. Remember, they're running the poor bauxite quality there. So under significant cost pressure at this low API. So the segment as a whole will be underwater.

Okay. So less production at losses, I guess, is something to factor Okay. Just wanted to call that out. All right. But then some of the other items are some cost pressures. The tariff costs we kind of already baked in, I think, so that's not necessarily incremental and then some -- so net-net, unfavorable total versus prior guidance.

$45 million.

$45 million. Okay. Perfect.

But think of that really as the 15 at the fuel oil at San Luis and then the $30 million at Pinjarra.

Got you. Okay. These are really helpful updates. I think we were expecting some cost pressure because costs have been on the rise. It seems kind of strange to start out talking about high cost when the much bigger picture is the very high prices of aluminum. So just maybe taking a step back to put that in context. But part of the reason for the higher price in aluminum and the higher cost is all related to the Strait of Hormuz. So maybe for people that are less familiar with the aluminum story and for Alcoa there's what 9% of suppliers come from the Middle East and about 7% is vulnerable and maybe more than half of that is actually disrupted. And feel free to correct me at all any of that.

Officially announced about 2.5 million metric tons, but we do believe it's probably higher than that. We serve customers in the region we ship about 4 million metric tons of alumina into the region. We are assisting our customers now with redirecting some of those tons outside of the Middle East, primarily into China. All of those contracts are on API, so there's really no impact to us. For customers in the region, they have long-term supply agreements with us. They're interested in retaining those contracts. So they're continuing to accept the vessels. We obviously want to have a very strong relationship continuing with them. So we're helping them to adjust schedules, size of the vessels, destinations but the alumina is still flowing from our perspective, even though it's not going into the Middle East right now.

Okay. So Alcoa is an aluminum producer, but its net long alumina and even longer bauxite. And so we're going to start bad news, good news maybe. But like on the alumina side, we've expressed concern and talk to you about this on the side that the alumina to the Middle East, which is Remind us how much of that if you're illuminating.

$4 million of our 12 shipments is going into the Middle East.

So we've been kind of surprised to see that, that price of alumina has been fairly resilient and it's been on the customers to figure out what to do with those shipments. Is that fair?

Yes, that's fair. And what you're seeing now is the alumina -- well, I should say the smelters in the Middle East are being creative about how to get alumina in. So they're bringing -- someone that are bringing it in through the port in Oman. They're having it bagged and then on truck or rail up to the smelters. We understand that Ma'aden is providing some supply -- so they are getting alumina. We think that is supporting the price not to go below the $300 per ton, but that seems to be the situation that we're in now. As we look at alumina, obviously, the market is oversupplied. We have not seen that much capacity come offline recently, maybe about 4 million metric tons, primarily in China. At this level of API, we expect that 45% to 50% of the global refiners outside of China are underwater.

I think that's been the case now for a while. If I remember your charts on your slides, like half the alumina supply has been underwater, but the cost of production of alumina has gone up. So even though the price is up, they're still the same amount under water. I think you've been clear that Alcoa doesn't intend to shed any of its alumina capacity. But are there other suppliers that you would expect that are higher costs that may need to shut.

I don't necessarily want to speak for the others. As look at ours, as I mentioned, is still profitable. Pinjara and Wagerup or Western Australia, they had traditionally been first quartile assets. We are not looking at curtailing them now during the short term. You don't want to give up your staffing, you don't want to give up your routines. Obviously, if the market changes dramatically, we could revisit that, but we fully expect those refineries are going to return to first quartile when they get the mine approvals and we're returning to the high bauxite quality. So we're not going to plan to curtail at this point.

And then in Spain, you can't, but you could exit Spain hypothetically at the end of 2027. Is that...

So in Spain, we're honoring the viability agreement that we have with the workers, which required us to restart the smelter -- we completed that in April. It's running extremely well. We've got a great team there. They really know how to operate the asset -- on the refinery, we don't have the same commitment, but we do need the supply of alumina into the smelter. So we have to run through 2027 and after '27, we expect to have more options on both sides of the facility there, we're really working on productivity and cost savings. We have a goal to reach a cash neutrality by the end of '27. That means that any cash generated by the smelter is fully covering the refinery's operating losses as well as the CapEx projects that we have going on there. We do have a residue storage area that needs CapEx, whether we run or close. So that work is underway. But again, beyond '27 we think we're going to have much more optionality, and we will -- no decisions are made at this point, but we'll be working on the cost until that.

These aluminum prices probably make the combined Spain package look a bit more attractive, I would imagine as well.

Yes. I mean the smelter is really doing well. And if you look at -- so in '26, the production that we're recording now will also get a CO2 compensation payment at the end of '27 for that, and that looks to be about $75 million. So the smelter is going to generate some cash. But again, the refinery is really incurring significant.

So finishing up on the alumina discussion. Recently, Guinea has been kind of taking a different stance towards its bauxite reserves and trying to constrain them, I think, to the benefit of bauxite producers and potentially driving up the alumina price for those who don't have bauxite could maybe push them over the edge, I suppose. How do you see that dynamic? Or how could it impact Alcoa?

So the Guinea Minister of Mines has communicated that he would like to have export restrictions. What this actually means they haven't formally introduced the mechanics to monitor that. but it's really reminding producers to operate within your approved quota. So we do, if you look at the data, it appears that at least 2 of the miners there have exceeded their quotas probably about 20 million to 30 million metric tons a year. Now we participate in Guinea through our joint venture, CBG. We are operating at quota. So we don't believe this will impact us -- but clearly, the government wants to control the exports and try to keep the bauxite price at a healthy level.

Okay. I think we've talked about some of the challenges enough, and I want to talk about the aluminum price because this is a very unique situation, and we heard from Century yesterday in a very confident manner about tariffs. So we'd love to get your perspective. The last week in Chicago, Harbor Aluminum told us it's going to 4,500. I want to put you on the spot with the forecast, of course. But maybe how do you see the stickiness of some of these factors, like the perfect storm of the Iran not to celebrate the nor, of course, but the constrained supply and the higher cost of production and what you're well aware of in the market now.

Well, I won't make any predictions on the price. As you look at -- when we came into 2026, the alumina market was already tight I mean we saw that. We operate primarily in North America and Europe. And both of those deficit markets, we have a very strong order book for the year already. But then when the conflict struck and we saw that over 2.5 million metric tons of capacity come offline. You see the response in the LME. You see the regional premiums, not only the Midwest, but you see now the competition for tons and all of the regional premiums are up, reflecting that scarcity. Inventories at record low levels globally even though there seems to be some supply in China, that's not making its way out because of the export tariffs and taxes there that are disincenting that. So yes, we are in a tight market -- as we're talking to our customers in North America, they're really trying to cure supply for the rest of the year and some of them even talking into '27 because they're worried about the Middle East supply coming back online. In Europe, the order book is also strong, although the European they contract every quarter, so they don't have quite the same level of urgency, but strong, strong books. And for us, we've been able to convert more of our sales from P1020 commodity grade where you're not getting the product premium into value-add product. And so we're seeing an uplift there that gives us an extra premium helping earnings.

My 15 years of covering you, I've never seen anything net like this. I don't know if your history in aluminum gives us any context of what happens in a market where you have a level of shortage or how do you think about how this plays out?

I wish I had a crystal ball to see. Again, I leave in the long-term dynamics of aluminum. And I think we're going to have strong markets into the future. I do hope that Middle East gets resolved, the conflict gets resolved for the sake of everyone there. But I don't think that really impacts the long-term view of aluminum. I think we're going to continue the stronger for longer and the tightness. We just don't see the smelting capacity coming online with any kind of mass. It's very controlled. And what we see coming online in Indonesia isn't going to be enough to fulfill the demand. So we're going to be probably in a deficit for a while.

It might be interesting to get your explanation of why aluminum smelters don't restart quickly. I don't know about how to think about the missile hit. But even before that when it was at Catalon was going to be down just because of the LNG supply when we talked last -- it was helpful to get some context of why aluminum smelters don't restart the switch. Maybe you can explain that a bit?

So if you are curtailed and in what we call an uncontrolled fashion, like you lost your power, the pot line was struck. You didn't have a chance then to drain the pot. So to take all the metal out, remove your anodes, really prepare the pot for an efficient restart. So EGA's Mall smelter went down. We don't know the exact circumstances of the hit there, but it wasn't uncontrolled. That's 1.6 million metric tons. That will take them at least a year to restart. So all of those pots have to be dug out. They have to be relined. It's a really expensive and time-consuming process. Now Catalum and Alba, they curtailed in a old way, which means they had the opportunity to slow production, drain the pots, remove the and nodes. That will still take them 3 to 6 months -- it's not a flip the switch. You've got to turn us on slowly. You can only add so many per day, per week until you get your full pot line running and stable. So that's why it takes so much longer and very expensive to restart a smelter. Unlike a refinery, which is -- I don't want to minimize the effort there, but it is more like flip a switch than what you're going to get on a smelter.

Got it. And then I've heard also that the Iranian smelters, we don't have a lot of information on those could be off-line, who knows controlled or uncontrolled, to your point, in that there may not be enough workers in the region that are have the expertise to do some of this work. So I've heard actually some at least 12 months on some of those projects. So -- if we think about the new capacity, and you pointed to Indonesia, I think Slovalco might restart now. That's 175,000 tonnes. I've heard MAX-7, -- maybe we'll see 100-something thousand tons, but it is it's kind of a small number. So I think we could be in a shortage situation now for a bit of time. We haven't heard that much substitution. We heard a bit initial phases, but it does seem like Ford to stick in with aluminum. It seems like the switching is a little more modest. I don't know if you have any updates there.

No, we really don't. I mean, previously was the copper to aluminum. And we think all that easy stuff has been done. There's probably not too much, maybe another 800,000 tons of substitution there. But when you look at aluminum now relative to steel, we saw a little bit of substitution, again, in the parts that weren't highly engineered and those that weren't part of the 5- to 7-year auto design, but not too much.

Okay. So any other areas where you could see volume come back or anything to kind of address this market tightness for the next 12 months that we might be missing? It's China able to do more volume. I've heard not that much, but certainly appreciate your thoughts.

So our view is that the Chinese smelters are running at full capacity now, and they may even be over producing. They're staying under their license in terms of they're not adding new capacity. But we can run over our nameplate capacity if we're pushing amperage. So we do think that they're running at full tilt there. But again, there's difficulty in getting the prime metal out of China with the export. You saw a little bit come out a little bit more come out, I should say, in April, but not huge, huge volumes. On -- maybe 1 insight on Indonesia, we had a team in Indonesia about 2 weeks ago visiting all of the smelters and refineries. And what they're seeing there is constrained. So certainly, the builds are happening and most of the projects have what they call the Phase I and the Phase II. So they're working through Phase I. But what they're finding is the builds in Indonesia are more difficult even though they're using the Chinese technology, they don't have the same power access, they don't have the same infrastructure, even the rules of development in country are changing. So I think there's more skepticism about Phase II or beyond happening, but certainly the Phase 1 modest, maybe in the deliver 700,000 metric tons of capacity this year. But -- we think those won't happen, but it will be slower probably than maybe we had been projecting.

Okay. Helpful. And then to take it down to an Alcoa level, you had talked on the last earnings call about ability to produce a bit more across your footprint. Can you remind us of those values and any upside there?

So if you look at the second quarter, we finished the restart in San SIP brand. Alumar in Brazil is actually running better now. We've added some additional pots here. We had small restarts at list in Norway as well as our Portland smelter in Australia. All of those combined is adding about 20,000 metric tons to the second quarter. Yes. So that's all baked into our annual guidance that we've given you. We had planned to do those, but I just wanted to call that out. It's important progress and the fact that we got all of that capacity to a then we have the higher metal prices, bringing in additional earnings and cash.

So that gets Alcoa effectively to full capacity at the lines that you're running? Or is there a bit more to do? I know Warwick isn't that fourth potline we always talk about isn't running. But or running your effectively full out?

Except at Portland. We have a little bit more there. We could look at restarting a couple of other hurdles, but there'll be a little bit left at Portland that will still be curtailed.And then the 50,000 tons.

All right. Let's talk about those. It seems like -- I think Bill had said 100 million tons over 2 years. Why? I know that that's been cannibalized. I know that it's not that easy, but that seems like a lot if you could rebuild a missile hit smelter in a year, why does it take 2 years at work?

Yes. So when you look at Work, we have already guided million for start, it would take us about 2 years. There are long lead items that as we look at placing those orders now, I wouldn't even have them for a full year, and then you start the restart, which could take another 9 months is. So that's why we're saying 2 years. If you look at Warwick and you just run the numbers in a spreadsheet, you'd say, absolutely, yes, go do it. However, Work is a site. It's old technology, not much automation. We have problem staffing 3 lines. Think of it work in the summer. It's 100 degrees, you're standing over a not automated pot that 1,700 degrees. It is difficult to maintain full staffing. We're really conscious of safety there. So we're considering that. If we believe that work -- if we wanted to make that investment, we'd also want to look to invest and work for the long term. That would be additional investment, additional technology needs. We need much more improvement to the cast lines there. And then lastly, we run a coal-fired power plant there for the smelter. If we were running all 4 lines, the power plant would be running at full tilt. So any time the power plant needs maintenance then you've got to make sure you can get power access from the grid. We're attached to the grid because we sell excess power into it, but needing to get power to cover and it can't be interrupted power for us. So there's a lot of complexities to work that make it not just a spreadsheet exercise.

So that is really helpful context because we all sit there behind our screens and do the math, I think this makes perfect sense. So that's helpful. But I guess it does beg to how do you make these capital allocation decisions? Do you plug in like $3,500 aluminum or $4,500, if you will, and just say, like, you should just upgrade and re- I don't know if the right word but to all your smelters in the U.S. to produce more at lower cost at that level. I mean it just seems like a challenging exercise. I'm curious about how the thought process is on those decisions.

It is both a science and an art. If you look at masthena, we were just Zomacinais in upstate New York. We were just able to extend our power agreement there. Great economical price -- we got a 10-year extension plus 2, 5-year renewals. So we're making investments there. We're upgrading certain of the equipment. We're looking at other projects not yet announced, but we think Masina, it has long-term power. So for us in the U.S., where it's really about power, Timna, where can we get power at rates? And to be economical through all cycles for us, that's like $35 per megawatt hour or competing with data centers that are paying over 100 per megawatt hour. So that's the decision process from a U.S. smelting investment.

Century says that it's worthwhile to build a $6 billion smelter in Oklahoma. And I can imagine it's challenging, and they have a different set of assumptions and risk tolerance perhaps. But no, I do wonder, it's kind of refreshing to hear Alcoa talking about growth over the years. It's been shrinking to grow, we would say. So maybe that's a great pivot to capital allocation because although we've talked about a lot of challenges, every $100 move in LME is $200 million and so these recent even with a little pullback are enormous in terms of contribution. So high-quality problem for you. I'd love to hear about how you're thinking about the options and again, risk tolerance you have.

So at current pricing, we absolutely will be generating lots of cash for the rest of the year, both second quarter as well as through the end of the year. As we are looking at capital allocation -- we're looking at growth projects. I'll give you 1 example. We recently announced just a $65 million investment, but it is 1 example. In our Motion smelter and cast house. We're adding some foundry recycled content. That is in direct response to our auto customers in Europe. They have targets for higher recycled content. -- in the autos by 2030. So we're helping them meet that need. For us, it's the sweet spot of increasing our capabilities to meet a customer need and also get a great return for shareholders. So we have other projects like that. We're looking at in growth. There's M&A opportunities that we would look at. I will tell you that -- we're going to stay in aluminum. We're not looking to get into copper or lithium or anything else. We're going to stay in the aluminum value chain. So bauxite through alumina and aluminum. We also recognize that we're going to focus where we have the expertise -- and we're looking for assets where we can deliver synergies that the shareholders can't get on their own. So we're being very disciplined about this. We were actually asked to look at to other transactions that just happened. And we said, no, those don't meet our criteria. The returns aren't high enough. And so we talked to are being disciplined about the growth opportunities. We're also looking at options for shareholder returns. So we've got a $500 million authorization on our share buyback program. Today, we have a very modest quarterly dividend that we believe is payable across all market cycles. We can look at that. And then we also have options for special dividends. I will add that when we think about share buybacks, we do not target a share price. We simply look at the excess cash on our balance sheet and return it to shareholders when we don't have a way to deploy it at a higher value.

Okay. That's helpful. It'd be refreshing. I think people are eager to see some of those returns definitely been coming. I guess before we delve into that a little bit more, I wanted to back up and talk about Canada because I'd be remiss to ignore you have a really strong Canadian presence. Senator Manton yesterday said that he -- that the Canadians, of course, were offered to be the 51st state and did not like that. So it doesn't seem like these tariffs are coming off anytime soon. I don't know if you disagree, but -- the Canadian assets are still very attractive for you. Just curious about any insights you've heard on any progress, if I'm missing something.

Yes. On the U.S. and Canadian administration, last fall, when we thought we were close to a deal. We were very engaged in those conversations. We are providing information and data to both sides as they were negotiating. -- that all fell through, they couldn't reach a good agreement. But this next time around, we're really not as engaged in the middle of it. I don't have that many insights to offer -- we are glad that they're speaking. They did have a U.S. trade sponsored meeting of aluminum companies in Mexico City, the left maybe 2 weeks ago, we participated in that. but more general discussions about how to protect the industry, how to facilitate trade within North America, not specific to tariff rates or lowering tariffs or any kinds of quotas. So that was not a part of the discussion.

And it's not a given that you're going to ship Canadian tons to the U.S. You follow the most attractive price reflected by whatever the regional premiums are.

Yes. So we run [Audio Gap]

Would probably stay more upstream -- in the past, you've talked about a variety of technological innovations that I think were on the back burner. But having this additional cash, does that make those more attractive? Or is it more a question of the technologies themselves. Could you address that?

So we continue to be involved in our breakthrough technologies, particularly Elysis. LSS at the end of last year had a great achievement. The first commercial scale cell was started and run at Rio's Alma smelter. That was a successful test of the first commercial. We're also supporting a demonstration plant. So this is happening at Rio's our Vita site, and that's going to be multiple 100 K cells. So Rio is primarily the sponsor there. They've just recently gotten Canadian government support Alcoa is producing the electrodes for both of the facilities though, and we're participating in all of the technical knowledge and know-how. So for us, we have a pragmatic investment into the Elysis partnership. It's about 50 million to 60 million a year. That is giving us access to all of the technology and the IP related to it, but we're not fitting the big bill for that. We will not do any less deployments this decade. We'll look at that in text. But for right now, the technology is working. -- but it's not yet economical. So there's still some work to do on getting the economics there to support it. But we're pleased with how Elysis is going. We're pleased with the partnership. It's working well, and we'll continue to fund into the partnership for now.

Check and make sure that we don't have any questions from the audience. We have a few more minutes.

Yes, go ahead. I didn't understand why you're on so just because it's not as sensitive because a lot of price in our profitability is strong or staying out of -- or is there some other reason? So to the question just for the webcast. The question is why aren't we involved in the U.S. and Canada administrations negotiations now. Honestly, I don't think it has anything to do with with us per se, we were asked to participate last fall. I don't know now if they've already said on aluminum, maybe they're working on dairy and lumber and other topics, we honestly don't know. We just know we're not getting the same pool that we got last fall. So a question to Matt. Just on the rice -- so the question is on our outlook for Pinjara going into next quarter. Thank you for asking this because I should have said this. So Pinjara is already running better today. We e had the instability. It is impacting the second quarter. But as of currently, they're back on track and we would expect them to perform well during the third quarter.

[indiscernible] refinery issue result in fewer tons but also higher costs the combination then. And so reversing that would be more tonnes, but lower costs.

Yes, you can look at it that way, yes. We absolutely had cost impact this quarter because of the low production, so very poor cost absorption.

I'll ask another 1 on scrap. I'm fascinated about the secondary market opportunity. I feel like if we really wanted to address national security of aluminum, we could recycle more and pitch for cans next year. And when we have this concern

I'm not drinking.

Yes. You're just by cutting it all together. I've been to your headquarters. I know -- but anyway, -- now just curious if secondary is something that you could look at as a growth opportunity.

As we think about secondary, I'm going to go back to that motion example, we had an opportunity to deliver recycled content specific to a customer need with good returns. I do not see us announcing any big shift into recycling. I think we recognize recycling is a completely different business. you need volume and mass. We're not collectors. We're not sorters. We remelt. So for us to go into recycling in a big way would be outside of our knowledge zone. Now we'll continue to look at opportunities like Motion, where we can add recycled content, but I don't see us moving into recycling in a big way and we don't honestly fear recycling either because when you recycle, you still need the prime content to get to the right quality levels. So we think the growth in recycling is still positive for primary aluminum.

A lot of applications can't use recycled material.

Yes. Right. Okay.

I think that wraps it up. Thanks, everyone, for joining, and thanks so much to Alcoa for participating today.

Thank you.