Alcoa Corp quarterly report, Q2 FY2023

Alcoa Corporation — Q2 2023 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2023. Figures are in U.S. dollars; dollar amounts are in millions unless noted. Beginning in 2023, Alcoa combined its bauxite and alumina activities into one Alumina segment and recast prior-period segment data.

Financial performance and liquidity

Metric	Q2 2023	Q2 2022	Six months 2023	Six months 2022
Sales	$2,684	$3,644	$5,354	$6,937
Net income (loss) attributable to Alcoa	$(102)	$549	$(333)	$1,018
Diluted earnings (loss) per share	$(0.57)	$2.95	$(1.87)	$5.44
Segment Adjusted EBITDA	$143	$954	$430	$1,969

Q2 gross profit was $169, or approximately 6.3% of sales, based on sales less cost of goods sold. Q2 cost of goods sold was $2,515. The filing attributes the sharp year-over-year earnings decline principally to lower realized aluminum and alumina prices, higher production and raw-material costs, lower equity earnings, and less favorable derivative results. Q2 sales were about 26% lower year over year; segment Adjusted EBITDA fell about 85%.

Segments, Q2: Alumina Adjusted EBITDA was $33, down from $358; Aluminum was $110, down from $596. Six-month 2023 segment Adjusted EBITDA was $136 for Alumina and $294 for Aluminum.
Cash flow: Cash used for operations was $176 in the first six months, versus $570 provided in the comparable 2022 period. Capital expenditures were $198; cash used for investing activities was $222.
Cash and liquidity: At June 30, cash and cash equivalents were $990, with a further $107 of restricted cash. Current assets were $4,670 and current liabilities $2,596. Cash and cash equivalents had fallen from $1,363 at year-end 2022.
Debt: Long-term debt, including $1 due within one year, was approximately $1,809. The company also reported $10 of short-term borrowings. The $1,250 revolving credit facility and a new $250 Japanese-yen facility were undrawn; Alcoa said it could access their full commitments and was in compliance with covenants. Management reported no significant debt maturities until 2027.
Returns: Alcoa paid a $0.10-per-share quarterly dividend, totaling $18. No shares were repurchased during Q2; the existing repurchase authorization was $500.

Material changes and operating developments

Average realized aluminum price was $2,924 per metric ton in Q2, compared with $3,863 in Q2 2022; alumina realized price was $363 per metric ton, compared with $410. Q2 shipments were 623 kmt of aluminum and 2,136 kmt of third-party alumina.
Alumina production was 2,559 kmt in Q2, down 7% sequentially, with lower output linked to Alumar maintenance and lower-grade Australian bauxite. Six-month production was 5,314 kmt versus 6,435 kmt in 2022.
Aluminum production was 523 kmt in Q2. The Alumar refinery returned to normal production in early July after repairs to a ship-to-shore conveyance system. The Alumar smelter restart continued at about 60% of Alcoa’s share of site capacity during Q2.
Alcoa permanently closed the previously curtailed Intalco smelter. Six-month charges included $101 for impairment and closure-related reserves, plus $16 of inventory write-down in cost of goods sold. Expected closure cash outlays are about $85 over three years, including about $25 in 2023.
San Ciprián’s phased smelter restart is planned to begin in January 2024 and reach all pots by October 2025. The company recorded $47 in charges for employee obligations under the updated agreement and committed an additional $78 to capital improvements.
Australian mine-plan approvals were taking longer than historically. Alcoa began mining lower-grade permitted bauxite, which increases caustic, energy, and bauxite use and reduces alumina output. The Kwinana refinery kept one of five digesters offline amid gas-supply and mine-approval constraints.

Outlook, risks and unusual items

2023 shipment outlook: Alcoa maintained its forecast of 12.7–12.9 million metric tons of total alumina shipments and 2.5–2.6 million metric tons of Aluminum segment shipments.
Near-term commentary: For Q3 versus Q2, Alumina expected lower raw-material prices and lower production costs as elevated maintenance concluded to more than offset unfavorable usage and energy effects. Aluminum expected lower raw-material and production costs to be partly offset by softer billet demand and lower value-added product sales.
Power and permitting: Denied permits for some wind farms mean renewable power purchase agreements are expected to cover up to 50% of San Ciprián’s future power needs at full capacity; remaining supply depends on further permitting, development, and other supplier negotiations.
Restructuring and other items: Six-month restructuring charges were $173, including Intalco closure costs, San Ciprián obligations, and a $21 pension settlement loss. Q2 2022 included a $75 net restructuring benefit, including reversal of a Brazil VAT valuation allowance, making comparisons less representative.
Tax contingency: Alcoa’s Australian subsidiary disputes tax assessments concerning historic alumina sales. The filing cites approximately $141 of assessed tax, $467 of compounded interest, and proposed penalties of approximately $85; the company has paid about $74 of tax and records a $70 prepaid-tax asset at June 30. Alcoa says it believes its position will be sustained but cannot predict the potential loss or range; further interest may accrue.
Other contingencies: Environmental remediation reserves totaled $278. A Brazilian VAT dispute has a reasonably possible loss range of $0–$49. The Spanish Supreme Court ratified a settlement related to divested facilities in July 2023; Alcoa expected substantially all related payments in Q3. Management said other pending matters could affect liquidity or results in a particular period, though it did not expect them to materially adversely affect financial position based on information then available.
Key broader risks include aluminum and alumina price volatility, energy and raw-material availability and costs, mine permits and approvals, operating interruptions, climate-related requirements, foreign exchange, legal and tax outcomes, and geopolitical and macroeconomic conditions. Management stated that market-risk exposure had not materially changed since year-end 2022.

Investor facts to verify

How commodity prices, premiums, input costs, and production levels affect segment margins and cash generation.
Progress and timing of Australian mine approvals, lower-grade bauxite impacts, and Kwinana operating constraints.
Execution, costs, and power availability for the Alumar and San Ciprián restarts, and the expected cash costs of Intalco closure.
Developments in the Australian tax dispute, including potential interest, penalties, and the treatment of amounts already paid.
Cash-flow performance, use of receivables sales and restricted cash, and continued access to undrawn credit facilities.