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Alumina Ltd Value Stock - Dividend - Research Selection


ISIN: AU000000AWC3 , WKN: 164281

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Description of the company

Alumina Limited was incorporated in 1970. In 1979 it became the holding company of the WMC Group which commenced operations in 1933. The Company was previously called WMC Limited until it changed its name to Alumina Limited in December 2002 as part of the demerger of the WMC Group. The demerger was effected through an Australian court-approved scheme of arrangement and associated capital reduction and dividend distribution.


At December 31, 2013, Alumina Limited had total consolidated assets of $3.0 billion. Alumina’s profit from continuing operations was $0.5 million for the year ended December 31, 2013 ($55.6 million loss for the year ended December 31, 2012). The Company is listed on the ASX. On February 6, 2014, Alumina Limited announced its intention to delist from the NYSE and formerly delist from the NYSE prior to opening of trading on February 28, 2014. The Company immediately commenced trading on the OTC market under the ticket code: AWCMY.


Alumina Limited, incorporated under the laws of the Commonwealth of Australia, has its registered office and principal executive offices at Level 12, 60 City Road, Southbank, Victoria, 3006, Australia. Its telephone number is +61 3 8699 2600 and facsimile number is +61 3 8699 2699. Enquiries about Alumina Limited’s ADRs should be addressed to its depositary, The Bank of New York Mellon, telephone +1 (212) 815 2293 or facsimile +1 (212) 571 3050, located at 101 Barclay Street, New York, NY 10286.


Alumina Limited’s primary assets are its interests in AWAC with Alcoa Inc. AWAC has interests in bauxite mining, alumina refining and two operating aluminium smelters. Alcoa is the operator of AWAC and provides the Combined Financial Statements to Alumina Limited.


The Demerger


On December 11, 2002, Alumina Limited demerged its interest in AWAC from its nickel, copper/uranium and fertilizer businesses and exploration and development interests. The demerger was effected through an Australian court-approved scheme of arrangement and associated capital reduction and dividend distribution. As a result of the demerger, Alumina Limited held the interest in AWAC, and WMC Resources Ltd, which prior to the demerger was a wholly owned subsidiary of WMC Limited, held the nickel, copper/uranium and fertilizer businesses and exploration and development interests previously held within the WMC Limited group.


Change in Functional and Presentation Currency


An entity’s functional currency is the currency of the primary economic environment in which the entity operates. With the commissioning of production at the Juruti mine and the Alumar refinery in Brazil completed, Alumina Limited reached the end of the investment program in Brazil. Greater production and cash flows to shareholders was expected from those assets in the future. Most dividends are also received in US dollars. Consequently, Alumina Limited announced in February 2010 its Board’s decision to change Alumina Limited’s functional currency from Australian dollars to US dollars, effective January 1, 2010.


Following the change in functional currency, Alumina Limited elected to change its presentation currency from Australian dollars to US dollars from January 1, 2010. The change in presentation currency represents a voluntary change in accounting policy, which has been applied retrospectively.


To give effect to the change in functional and presentation currency, the assets, liabilities, contributed equity, reserves and retained earnings of entities with an Australian dollar functional currency as at December 31, 2009 were converted into US dollars at period end exchange rates of AUD/USD 0.8972. Revenue and expenses were converted at an average rate of AUD/USD 0.7123 for the six months ending June 30, 2009 and AUD/USD 0.8711 for the six months ending December 31, 2009 and AUD/USD 0.8519 for the 12 months ending December 31, 2008.


Capital and Investment Expenditures


Since January 1, 2011 the continuing operations of Alumina Limited made the following principal capital expenditures:


• During 2011, Alumina Limited contributed $166.6 million to fund AWAC’s expansion projects in Brazil and operations in Spain.

• During 2012, Alumina Limited contributed $171.0 million to fund AWAC’s expansion projects in Brazil, the joint venture in Saudi Arabia and AWAC working capital.

• During 2013, Alumina Limited contributed $12.0 million to fund the joint venture in Saudi Arabia.

• During the first quarter of 2014, Alumina Limited contributed a further $18.4 million to fund the joint venture in Saudi Arabia. Further contributions of $16.0 million are expected to be made during 2014, to fund the completion of this project.


Bauxite deposits: AWAC’s bauxite deposits have long term mining rights. Bauxite mining is planned on an incremental basis after detailed assessment of the deposits to achieve a uniform quality in the supply of blended feedstock to the relevant refinery.


Refineries: AWAC operates eight alumina refineries, six of which are located in proximity to bauxite deposits.


Smelters: AWAC produces primary aluminium in Australia, with alumina supplied by the Australian refineries.


Alumina Chemicals: AWAC produces chemical grade alumina from three refineries: Kwinana (Australia), Point Comfort (USA) and San Ciprian (Spain).


Shipping Operations: AWAC’s shipping operations use owned and chartered vessels to transport dry and liquid bulk cargoes, including bauxite, alumina, caustic soda, fuel oil, petroleum, coke and limestone.


Business Overview


Alumina Limited’s sole business undertaking is in the global alumina and aluminium industry, which it conducts primarily through bauxite mining and alumina refining, with some minor alumina based chemicals businesses, aluminium smelting and the marketing of those products. All of those business activities are conducted through its 40% investment in AWAC.


Alumina Limited’s net profit/(loss) is principally comprised of a return on its equity investment, and revenues are limited to small amounts of interest income and occasional one-off revenues. This revenue is itemised separately in the profit or loss. The breakdown of AWAC revenue by geographical segment for the last three financial years is available within the notes to the Combined Financial Statements for AWAC (Note B, page F-58).


AWAC was formed on January 1, 1995 by Alumina Limited and Alcoa combining their respective global bauxite, alumina and alumina-based chemicals businesses and investments and their respective aluminium smelting operations in Australia. AWAC is the world’s largest producer of alumina and mining of bauxite. Alumina Limited’s partner in AWAC is Alcoa, who owns the remaining 60% and manages the day-to-day operations.


This partnership provides investors with a direct investment in the alumina industry.


The Strategic Council is the principal forum for Alcoa and Alumina Limited to provide direction and counsel to the AWAC entities in respect of strategic and policy matters. The Alcoa and Alumina Limited representatives on the Boards of the AWAC entities are required, subject to their general fiduciary duties, to carry out the directions and the decisions of the Strategic Council. The Strategic Council has five members, three appointed by Alcoa (of which one is Chairman) and two by Alumina Limited (of which one is the Deputy Chairman). Decisions are made by majority vote except for matters which require a “super majority” vote, which is a vote of 80% of the members appointed to the Strategic Council.


The following decisions require a super majority vote:


• change of the scope of AWAC

• change in the minimum 30% dividend policy

• sale of all or a majority of the assets of AWAC

• equity calls on behalf of AWAC totaling, in any one year, in excess of $1 billion

• loans to Alcoa, Alumina Limited or their affiliates by AWAC entities (including loans between AWAC entities).


Under the general direction of the Strategic Council, Alcoa is the “industrial leader” and provides the operating management of AWAC and of all affiliated operating entities within AWAC.


Alumina Limited is entitled to representation in proportion to its ownership interest on the Board of each entity in the AWAC structure currently represented on AofA and Alcoa World Alumina Brasil Ltda (AWA Brasil). In addition to the Strategic Council meetings, Alumina Limited’s management and Board visit and review AWAC’s operations each year.


Subject to the provisions of the AWAC agreements, AWAC is the exclusive vehicle for the pursuit of Alumina Limited’s and Alcoa’s (and their related corporations as defined) interests in the bauxite, alumina and inorganic industrial chemicals businesses, and neither party can compete with AWAC so long as they maintain an ownership interest in AWAC. In addition, Alumina Limited may not compete with the businesses of the integrated operations of AWAC (being the primary aluminium smelting and fabricating facilities and certain ancillary facilities that exist at the formation of AWAC).


If either party acquires a new business which has as a secondary component a bauxite, alumina or inorganic industrial chemicals business, that business must be offered to AWAC for purchase at its acquisition cost or, if not separately valued, at a value based on an independent appraisal of the business. Smelting is not subject to these exclusivity provisions, although there are certain smelting assets in AWAC, being those in AofA, in which Alumina Limited already had an interest at the time AWAC was formed.


AWAC’s alumina production in 2013 was 15.8 million tonnes compared to 15.6 million tonnes in 2012. The Point Comfort refinery contributed most of this growth reflecting its improved stability. AWAC’s nameplate production capacity is 17.2 million tonnes per annum.


Alumina shipments were 16.1 million tonnes in 2013, 0.5 million tonnes higher than 2012, largely as a result of a catch up on delayed December 2012 shipments, increased production and a reduction of historical levels of inventory.


Approximately 54% of third party smelter grade alumina shipments were priced on spot or alumina indexed basis in 2013 compared to approximately 35% in 2012.


AWAC produces aluminium at two smelters in Australia. Production of approximately 354,000 tonnes in 2013 was lower compared to 2012, largely due to the Anglesea power station maintenance. The Anglesea power station (owned by AofA) provides approximately 40% of the electricity needs for the Point Henry smelter. Statutory maintenance of the power station is required every four years and occurred during 2013. On 18 February 2014, Alcoa Inc announced the permanent closure of the Point Henry aluminium smelter.


AWAC capital expenditure totalled $322.6 million, 14% lower than 2012. Approximately $293.1 million was associated with sustaining capital, with the majority of this in Australia. The Australian expenditure included the relocation of the crusher facilities at the Huntley mine. Growth capital expenditure mainly related to completion works of the Juruti mine infrastructure in Brazil. AWAC is also investing in green field growth with a view to ensuring that AWAC’s cost position remains globally competitive. The joint venture between AWAC and Ma’aden for the construction of a green field mine and a refinery at Ras Al Khair in Saudi Arabia (AWAC interest of 25.1%) is AWAC’s major growth project and is due to come on stream in 2014. As at December 2013, the refinery was approximately 77% complete and the mine was approximately 52% complete.

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