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Alcoa to Cut Capacity as Lower Aluminum Prices Hurt

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Alcoa (AA - Free Report) has taken a big step in its ongoing efforts to cope with the low aluminum pricing environment. The company said that it will cut uncompetitive aluminum smelting and alumina refining capacity to move down the cost curve and ensure sustained competitiveness in a challenging operating backdrop.

The aluminum giant will curtail aluminum smelting capacity by 503,000 metric tons and alumina refining capacity by 1.2 million metric tons. The curtailments will start in fourth-quarter 2015 with an expected completion by the end of first-quarter 2016.

The company will idle the Intalco & Wenatchee primary aluminum smelters in Washington State and the Massena West smelter in New York. Moreover, it will partly curtail alumina refining capacity at its Pt. Comfort, TX facility. Alcoa will also permanently close the New York Massena East aluminum smelter.

Alcoa sees total restructuring-related charges (post-tax) of $160-$180 million or 12-14 cents per share associated with these actions in fourth-quarter 2015, of which roughly 30% would be non-cash.

With the implementation of these actions, Alcoa will have reduced or closed 673,000 metric tons of uncompetitive smelting capacity and 2.5 million metric tons of uncompetitive refining capacity since its Mar 2015 announcement of the review of 500,000 metric tons of smelting capacity and 2.8 million metric tons of refining capacity for potential curtailment or divestiture.

The announced curtailments are expected to further improve the cost position of the company’s upstream business. With the completion of these actions, Alcoa will have closed, divested or curtailed 45% of total smelting operating capacity since 2007.

Alcoa delivered disappointing third-quarter results last month as lower aluminum prices continued to batter its legacy aluminum smelting business. Its profits for the quarter sank roughly 70% year over year, hurt by lower metal prices and decrease in premiums. Both revenues and earnings for the quarter fell short of expectations.

Alcoa’s outlook also indicated a slowdown across a number of markets in China. The company cut its production forecasts for the country’s automotive, heavy duty truck and trailer, and building and construction markets.

Alcoa is reeling under the effects of aluminum price slump. Prices of the metal remain under pressure due to supply glut. London Metal Exchange (LME) aluminum prices tumbled to a fresh six-year low in October on oversupply concerns. Weak aluminum prices have taken their toll on Alcoa's shares which are down roughly 41% so far this year.

The aluminum price rout has also triggered Alcoa’s move to separate its smelting and refining business from those that cater to rapidly growing aerospace and automotive markets. The transaction, which is subject to specific conditions including final approval by Alcoa’s board, is expected to close in second-half 2016.

Alcoa currently holds a Zacks Rank #3 (Hold).

Better-ranked companies in the mining space include NovaGold Resources Inc. (NG - Free Report) , Agnico Eagle Mines Ltd. (AEM - Free Report) and Solitario Exploration & Royalty Corp. . While NovaGold sports a Zacks Rank #1 (Strong Buy), both Agnico Eagle and Solitario Exploration retain a Zacks Rank #2 (Buy).

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