Alumina Limited’s fundamental purpose is to generate long-term value for our approximate 50,000 shareholders through the 40 per cent ownership of the AWAC joint venture, which leads the global alumina and aluminium market.
The sustainable economic performance of AWAC is vital to our future success and this is predicated on its ongoing ability to secure access to land, natural resources, employees, community support, financial capital and future market demand.
As the alumina/aluminium industry is central to many other industries such as aerospace, automotive and construction, it is susceptible to fluctuations in global markets (such as the recent economic downturn), leading to spikes and dips in demand. The growing importance of aluminium to economic development combined with the need for lightweight, fuel efficient metals offers a long term future for AWAC.
2016 was a watershed year for Alumina Limited (Alumina). Alumina pursued and agreed fundamental and far reaching changes to the AWAC Joint Venture agreements (largely unchanged since inception), effectively strengthening its position in the Joint Venture in a number of significant respects. The changes to the agreements followed Alcoa Inc’s decision to separate its upstream and downstream assets, in effect replacing Alumina’s AWAC joint venture partner with a new one. They were agreed by Alcoa Inc and Alumina as key elements of Alumina’s acceptance of Alcoa Inc’s Separation. The changes:
- strengthen Alumina’s influence over its investment in AWAC
- increase Alumina’s strategic flexibility and autonomy as a corporate entity
- improve capital efficiency and cash distributions.
2016 also saw the substantial completion of the restructuring of the AWAC asset portfolio, largely concluding a fundamental re-casting of the portfolio initiated over the last three years. The Suralco, Pt Comfort and Jamalco refineries and Point Henry smelter are no longer active assets within AWAC. Decisions to sell, curtail or close assets are never easy but are necessary to ensure a strong business for the long term. However, the active restructuring maintains AWAC’s competitive portfolio of assets. Total shareholder returns over the past three years have been 95 per cent, putting Alumina in the top decile of performance against ASX100 and international aluminium peers. In 2016 Alumina Limited (Alumina) recorded a net loss after tax of $30.2 million compared to a net profit of $88.3 million in 2015. In context, the Company would have made a net profit of $84.7 million (2015: $258.2 million) excluding significant item. Dividends, which recommenced in 2014 to shareholders, have also increased from US1.6 cents per share to US6.0 cents per share over the three years.
AWAC’s world class assets continued to produce solid returns for shareholders in 2016. This was underpinned by recent restructuring of the asset portfolio and strong productivity improvements which enabled AWAC to withstand the low alumina prices prevailing through much of 2016. In the past 3 years the AWAC joint venture has improved its position on the alumina industry cost curve from the 25th percentile to the 17th percentile. This has enabled AWAC to generate average EBITDA alumina margins of $69 per tonne of alumina produced over that period. Alumina Limited’s full year net profit after tax was US$84.7 million, excluding significant items. The curtailment and closure of the Point Comfort and Suralco refineries resulted in restructuring charges of $69.9 million. Those charges, together with non-cash write-downs of $45.0 million reduced the Company’s result to a loss of $30.2 million. AWAC’s EBITDA margin for alumina production in 2016 was $63 per tonne, lower than the $91 margin for 2015. This reflected the 15.5 per cent decline in alumina spot prices for the year. Alumina prices traded in a range between $197 and $351 per tonne in 2016. AWAC responded quickly to the low pricing environment in 2016 – it achieved an excellent cost reduction in the alumina operations of $25 per tonne during 2016. Lower energy costs, a stronger US dollar and productivity initiatives in materials, maintenance and transport all contributed to the reduction. This has positioned AWAC well to deliver strong cash flows in 2017
Alumina’s net profit/loss principally comprises a return on our equity investment in the AWAC joint venture. Other revenues are limited to small amounts of interest income and occasional one-off revenue associated with hedging activities. This revenue is itemised separately on Alumina’s profit and loss statement.
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Investing in AWAC for Sustainable Growth
In 2016, the Ma’aden joint venture refinery produced 1.4 million tonnes of alumina. AWAC’s share of the 2016 production was 359,000 tonnes. The 2016 result included $42.6 million of equity losses compared to $46.2 in 2015.
The conversion from oil to natural gas as the energy source for the San Ciprian refinery in Spain was completed in February 2015. As a result of the conversion, San Ciprian’s production costs are expected to be $20 per tonne lower compared to historic levels
Broader Economic Contribution
Alumina Limited directly contributes economic value through dividends to shareholders as well as payments to employees, suppliers and service providers.
In 2016 we distributed $135.3 million (2015: $171.2 million) in dividend payments to approximately 53,000 shareholders. During 2016, Alumina Limited general and administrative expenses were $25.7 million compared to $11.9 million in 2015. The increase was due to $14.0 million of costs arising from the Company’s actions in relation to Alcoa’s corporate separation. Excluding the above costs, the remaining 2016 general and administrative expenses were consistent with 2015. Corporate costs have been progressively falling since 2012 when they amounted to $19 million and $17.2 million in 2013.
In 2016 combined payments to suppliers and employees was $27.9 million (2015: $12.1). Payments for suppliers and employees included $13.7 million arising from the Company’s actions in relation to Alcoa’s separation. Prior to the separation of Alcoa Inc and as announced by Alumina Limited on 2 September 2016, Alcoa Inc. and Alumina Limited agreed certain changes to the governance and financial policies of the joint venture. The changes align more closely the partners’ interests in AWAC, promote faster decision-making, provide for joint input on significant decisions, improve information sharing and streamline the dispute resolution process. The changes also simplified AWAC’s dividend and cash management policies. Each company in the AWAC joint venture will pay a minimum quarterly distribution of 50% of the prior quarter’s net profit, instead of the current payment of an annual dividend equal to 30% of after tax operating income (ATOI). In addition, any surplus cash (as defined in the Agreements) within certain AWAC companies will be distributed quarterly. The agreement also requires that AWAC raise a limited amount of debt to fund future mutually agreed growth projects.
In 2016 AWAC employed 5,146 people, contributing directly to the economy of the many communities and seven countries in which it operates. In the normal course of its operations, AWAC also supports regional economic growth through paying taxes and royalties. Local communities benefit from grants and financial assistance offered in community projects and infrastructure development.
Alumina Limited Dividends
Generally the Board intends, on an annual basis, to distribute cash from operations after debt servicing and corporate costs commitments have been met. The Board will also consider the capital structure of Alumina Limited, the capital requirements for the AWAC business and market conditions. Dividends paid will be fully franked for the foreseeable future.
A final fully franked dividend of US3.1 cents was declared by the Directors for 2016 (2015: US1.8 cents). The dividend was paid in March 2017. In August 2016, the Directors declared a 2016 first half fully franked dividend of US2.9 cents per share (2015: US1.6 cents).