Alcoa, which ranks itself as the world's leading producer of primary aluminum, fabricated aluminum and alumina facilities, is taking emergency liquidity actions as announced on Tuesday, including a $1.1bn capital raising, comprising issuing of fresh equity and convertible notes. Alcoa is also to slash its dividend, aiming to save more than $400m annually, among other moves to conserve cash, cut costs and reduce capital expenditure.Alcoa's slow reversal of fortunes is industrial in nature. The group ranked No. 1 in value among global mining stocks as recently as 2005, but today does not make it into the top 20. Alcoa, which was holding net debt of $10.6bn at end-2008, joins unlisted United Company Rusal, which ranks itself as the world's biggest miner of alumina and also the biggest aluminium producer, in taking emergency measures to protect dangerous illiquidity in and around the global aluminium sector.Rusal recently announced a standstill on $7.4bn debt owing to foreign banks, comprising just over half of Rusal's total debt of $14bn. The ongoing crisis in aluminium highlights the stricken state of the global aluminium sector, one of the worst hit of industrial metals, and indeed, of all commodities. During the so-called commodities supercycle from 2002 through 2008, where other industrial metal prices such as for copper tripled or more (before crashing again), aluminium only managed to roughly double to around $1.50/lb, in mid-2008. Prices then halved and have perked up a little in the past few weeks, to around $0.60/lb, but analysts remain deeply sceptical over the reaction of the aluminium sector to the crisis it faces.In a recent major paper on commodity pricing, analysts at RBC Capital Markets said that the aluminium and nickel industries remain under the most pressure with spot prices sitting at the 25th and 65th percentiles of our estimated 2009 cash cost curves, respectively. The position of current aluminium and nickel prices relative to the cost curves is not sustainable. The copper price, by contrast, was yet to drop below the 95th percentile, meaning that all but the very highest cost copper miners were still making cash profits.For aluminium, the analysts said that either additional production cuts will be made to balance the markets resulting in a rebound in price, or industry costs will continue to fall shifting the curves downwards and ultimately lowering price support levels. The zinc industry had also come under significant pressure and significant cuts have been made, though the recent rally has taken zinc prices back up to about the 90th percentile of the cash cost curve.China remains not only the world's biggest producer of aluminium, by a good margin, and also the biggest wild card in the metal. Aluminium smelting capacity in China started exploding during the mid-1990s, driven by low capital costs and strong domestic demand. While Chinese alumina is relatively expensive by world standards, smelting output can adjust rapidly to available market pricing.Aluminium is also a massive headache for mining major Rio Tinto, which currently holds claim to the title of world champion in mining debt levels. The group's net debt decreased during 2008 by $6.5bn, to $38.70bn by 2008 year-end. On 12 February, Rio Tinto announced its intention to sell convertibles of $7.2bn to smaller rival Chinalco, a Chinese aluminium maker, and equity stakes in some of its most prized assets for $12.3bn, also to Chinalco. Since then, Rio Tinto has been under increasing siege from a number of disgruntled shareholders, and certain politicians, not least some in Australia.Rio Tinto's huge debt levels are largely the legacy of Rio Tinto's acquisition in 2007 of Alcan, for a massive $38bn in hard cash, after Rio Tinto CEO Tom Albanese succeeded in crushing Alcoa's initial offer for Alcan. Today, Alcoa's stock price is 88% off its highs and Rio Tito's entire market capitalisation, or value, is $40bn. Of Rio Tinto's total post tax impairment charge of $8.4bn for 2008, $7.9bn relates to the group's aluminium businesses. Alcoa's entire market value is currently a mere $4.5bn, after a fresh bout of selling triggered by Tuesday's news.While Rio Tinto planned to dispose of certain downstream assets in the Alcan stable, buyers at the right price are yet to emerge. So far in 2009, Rio Tinto has sold assets, separately to the proposed Chinalco deal, in the form of Jacobs Ranch (coal) for $761m; potash assets for $850m, and certain iron ore assets for $750m. Under certain circumstances, Rio Tinto may have to pay a break fee of $195m to Chinalco.BHP Billiton, the world's biggest diversified miner, ranks as a serious producer of aluminum, but has restrained its growth in the area during the past few years. Its aluminium smelters at Hillside, Richards Bay (South Africa) and Mozal, Maputo (Mozambique) rank not only among the world's lowest cost, but also benefit from costs that are linked to the LME aluminum price.BHP Billiton's Alumar smelter in the mouths of the Amazon also ranks among the lowest cost in the world, benefiting from hydro electricity available in an area with relatively low population density. Similarly, BHP Billiton's alumina mine at Worsley in Australia ranks as exceptionally low cost; its interests in the Alumar and Paranam mines and refineries in Brazil are within the 50th percentile.Even so, BHP Billiton's underlying earnings before interest and tax (EBIT) margin in its aluminium division was 31% during 2008, compared to 62% in the rest of its base metals divisions, mainly copper. According to recent presentations by Rio Tinto, the group is at, or looking to move to, 30th percentile in the cost of alumina produced, and 50th percentile in terms of cost of aluminium produced.SELECTED MINING NET DEBT: MARKET VALUE RATIOS
Note: most debt numbers are as at 31 December 2008
(1) 30 June 2008
(2) Unlisted; market value is an estimate
Source: market & company data; analysis by Barry Sergeant.