Alcoa Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Unless noted otherwise, financial amounts are in USD millions. Alcoa produces bauxite, alumina, and aluminum; beginning in 2023, it reports two segments: Alumina and Aluminum.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $2,602 | $2,851 | $7,956 | $9,788 |
| Net income (loss) attributable to Alcoa | $(168) | $(746) | $(501) | $272 |
| Diluted EPS | $(0.94) | $(4.17) | $(2.81) | $1.47 |
| Segment Adjusted EBITDA | $132 | $230 | $562 | $2,199 |
- Q3 operating loss before taxes was $228; income tax benefit was $35. A $58 noncash tax benefit came from reversing Iceland subsidiary deferred-tax valuation allowances.
- Nine-month operating cash flow was negative $107, versus positive $704 in 2022. Capital expenditures were $343; investing cash outflow was $388. Cash and cash equivalents were $926 at quarter-end, down from $1,363 at December 31, 2022. Including restricted cash, the balance was $1,030.
- At September 30, current assets were $4,365 and current liabilities $2,624. Debt comprised $1,809 long-term debt, $1 due within one year, and $42 short-term borrowings from inventory repurchase agreements. The $1,250 revolving credit facility and $250 yen-denominated facility were undrawn; the company reported covenant compliance and no significant debt maturities until 2027.
- Q3 segment Adjusted EBITDA: Alumina $53, down from $78; Aluminum $79, down from $152. Nine-month amounts were $189 and $373, respectively, versus $738 and $1,461 in 2022.
Changes versus comparable periods
- Q3 sales decreased 9% year over year; nine-month sales fell 19%. Lower realized aluminum and alumina prices were the principal factor, alongside lower shipments and trading activity in the year-to-date period.
- Average realized aluminum price was $2,647 per metric ton in Q3, versus $3,646 a year earlier; alumina was $354 versus $397. Nine-month realized prices were $2,880 and $362, respectively, also below 2022.
- Alcoa’s Q3 net loss narrowed from $746 to $168, primarily because 2022 included $652 of restructuring charges, notably a $626 pension settlement charge. However, Q3 2023 earnings were lower than Q2 2023’s $102 loss, reflecting lower realized prices and unfavorable currency revaluation, partly offset by lower costs and the Iceland tax benefit.
- Nine-month results swung from $272 income to a $501 loss. Lower prices, higher production and raw-material costs, lower equity earnings, and the absence of prior-year favorable derivative mark-to-market results contributed. 2023 restructuring charges were $195 versus $702 in 2022.
Outlook, commentary, risks, and unusual items
- Management maintained 2023 shipment outlook: alumina 12.7–12.9 million metric tons and Aluminum 2.5–2.6 million metric tons. For Q4, Alumina expected lower raw-material prices, lower production costs, and higher volumes to be partly offset by higher energy costs; Aluminum expected lower raw-material costs to be offset by lower value-added sales and higher production costs.
- Lower-grade bauxite at Australian mines is increasing caustic, energy, and bauxite use and reducing alumina output. Alcoa was seeking Western Australian mine-plan approvals, with a decision expected in Q4 2023; the WA EPA was also considering whether to formally assess current and future mine plans. Higher-grade new mining areas were not expected before 2027. Natural-gas constraints kept one Kwinana digester offline.
- The company initiated Kwinana productivity measures, including severance for about 90 employees, and anticipated approximately $10 in annual cash savings ($6 Alcoa share). It recorded $6 of related charges in Q3.
- Alumar was operating at about 65% of its Alcoa-share capacity after restart; Portland remained at about 75%. San Ciprián’s phased smelter restart was planned to begin in January 2024, with all pots targeted by October 2025, subject to market conditions. Intalco was permanently closed; related 2024–2025 cash outlays were expected to be about $85.
- A proposed Norwegian carbon-compensation change, subject to government approval, was expected to require an approximately $18 Q4 reversal of 2023 accrued credits through September and an approximately $24 full-year impact.
- Unusual charges and commitments included $101 for Intalco closure, $47 for San Ciprián employee obligations, and $21 for a Canadian pension settlement. Alcoa paid $75 under the Spanish facilities’ global settlement in Q3 and expected about $3 more in Q4.
- Power-contract derivative liabilities totaled $1,115 at quarter-end, largely Level 3 valuations; assuming market rates remained constant, $196 of related loss was expected to be recognized in sales over the next 12 months. Results remain exposed to aluminum and alumina prices, energy and raw-material costs, foreign exchange, operational disruptions, and approval and permitting outcomes.
- Tax contingency: the Australian Taxation Office assessed approximately $137 in tax, $452 in compounded interest, and proposed $82 in penalties concerning historic alumina sales. Alcoa disputes the assessment and says it expects to prevail; it has paid about $74 and recorded no tax expense for the matter. The dispute is ongoing, and the company said it cannot predict a potential loss or range of loss. Brazilian VAT matters also remain disputed; the disclosed reasonably possible loss range was $0–$47.
- Management stated that cash, expected operating cash flows, and available liquidity were adequate for at least 12 months and the foreseeable future, while noting that financing access, commodity markets, macroeconomic conditions, and covenant compliance could affect liquidity. Disclosure controls were reported effective, with no material Q3 change in internal control over financial reporting.
Important facts for investors to verify
- Whether Australian mine-plan approvals are obtained on time and whether lower-grade bauxite continues to affect alumina output and costs.
- Progress and economics of Alumar and San Ciprián restarts, and the cost and timing of Intalco closure and other restructuring cash outlays.
- Price, premium, shipment, and cost trends underlying segment EBITDA and management’s 2023 shipment outlook.
- Cash-flow trajectory, working-capital needs, undrawn credit availability, and the treatment and maturity of inventory repurchase borrowings.
- Developments in the Australian tax litigation, the Norwegian carbon-compensation proposal, environmental reserves, and the large power-contract derivative liability.