How to Play the Aluminum Industry: A Comparative Analysis
(Continued from Prior Part)
Aluminum companies’ leverage ratios
Aluminum is a capital intensive industry. Companies have to borrow money to invest in plants and new mines. As a result, it’s important for investors in mining companies (XME) to know how these companies manage their leverage ratios. It’s important to know the company’s debt ratios when market conditions are challenging—like the current market conditions.
Total debt-to-assets
The above chart shows the total debt-to-asset ratios for different aluminum companies based on the financials in 2Q15. As you can see, Constellium’s (CSTM) debt-to-assets ratio is much higher compared to other companies. Its leverage ratios rose sharply last year after its Wise Metals acquisition. To make matters worse, its earnings fell steeply over the last couple of quarters. So, while the company’s obligations rose, its ability to make interest payments fell.
Century Aluminum (CENX) and Norsk Hydro have net debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratios of 12.81 and 7.05, respectively. This is much less than what other aluminum companies generally have.
Alcoa’s (AA) debt-to-assets ratio looks on the higher side. The company has been aggressively investing in growth projects. It also made major acquisitions including Firth Rixson and RTI Metals. The company had to borrow money to fund these acquisitions.
Alcoa’s leverage ratios rose after these acquisitions. However, Alcoa is making acquisitions in the fabrication space. This space has higher and stable profit margins. Over the long term, these acquisitions are expected to improve Alcoa’s earnings capacity.
You would expect companies with lower leverage ratios to outperform in challenging markets. However, both Century Aluminum and Norsk Hydro (NHYDY) have fallen steeply. This is possible because these companies don’t have downstream operations. As we discussed previously, downstream earnings are more immune to falling aluminum prices.
Century Aluminum’s power woes and lower profit margins have only made things worse for the company. Its share price fell more than 75% since the beginning of 2015.
In the next part, we’ll analyze how the market values aluminum companies differently.
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