Fall in Alcoa’s Earnings Spurs Company Split
Profits for Alcoa, the world’s third largest producer of aluminum, fell in its third quarter as commodity prices continued their downward spiral.
Revenues fell 11 percent to $5.6 billion and its earnings plunged from $149 million to $44 million, a 70 percent decrease over the past year, due to the slowing global economy and unfavorable currency fluctuations.
The drop in earnings was well below analysts’ expectations of $0.13 per share, with earnings per share tumbling down to $0.07.
Perhaps in anticipation of the market’s reaction to its fall in earnings, Alcoa announced plans last week to split its business into two arms: the upstream division — which engages in the mining of bauxite, the raw ingredient for aluminum, and the downstream division — which processes metals into high-tech materials for planes and cars.
The overhaul would separate a highly profitable upstream business from its mining operations, which have dragged down its overall earnings and share price. Alcoa’s stock fell year-on-year from a high of $16.38 to $9.09 today.
Despite taking measures to cut costs and reduce its refining capacity over the past year, the commodities market downturn has battered Alcoa’s share price.
Aggressive moves to restructure its business have, nonetheless, pulled Alcoa back into profitability, a sharp contrast to 2013, when the company drew fire after it recorded hefty losses of $2.3 billion on write-downs.
Other commodities giants have made similar moves to streamline their operations in response to a diminishing demand for metals. Rio Tinto, the world’s largest mining firm, announced early in 2015 it would consolidate its copper and coal business, and lay off hundreds of workers all across the world.
A year ago, Glencore-Xtrata sold the Las Bambas copper mine in Peru to a consortium of Chinese state-owned enterprises for about $6 billion, to repair its debt-laden balance sheet.
Alcoa’s leadership expected market conditions to improve in the year ahead. “We believe the surplus in the aluminum market is tightening, and we expect a deficit in 2016,” said William Oplinger, the Chief Financial Officer of Alcoa.
With a new low-cost mine coming online in Saudi Arabia, the firm is well positioned to capitalize on future hikes to aluminum prices.
