Alcoa Corporation's shares experienced a decline of more than 8% after the company provided an updated, more negative outlook for its second-quarter adjusted earnings before interest, taxes, depreciation, and amortization. This downward revision was primarily driven by expected challenges within its alumina segment.
The alumina segment is projected to incur an unfavorable impact of approximately $60 million. This hit is attributed to several factors: $30 million in higher production costs at the Pinjarra refinery in Western Australia due to ongoing instability from Cyclone Narelle; an additional $20 million in higher energy prices linked to the Middle East conflict, inflating input costs; and $10 million from lower bauxite offtake pricing and volumes, reflecting a softening raw material market amidst operational disruptions. These issues are expected to reduce third-party alumina shipments by 120,000 metric tons in Q2.
The total unfavorable impact in the second quarter was noted to be more than $45 million higher than the prior outlook. While the aluminum segment is expected to show a favorable swing of approximately $55 million, driven by inventory repositioning, higher shipments, and lower production costs from the San Ciprian smelter restart, this positive development could not offset the significant issues in the alumina business. Alcoa also expects operational tax expenses to increase by $15 million from prior estimates, now projected at $125 million to $135 million, and Section 232 tariff costs on U.S. aluminum imports from Canada to increase by about $35 million.
Management has been candid about its alumina business, stating that Western Australia refineries are significantly challenged and that the segment could be "underwater." This sentiment was echoed by CFO Molly Beerman, who warned in June that the alumina unit would be unprofitable in the current quarter due to energy disruptions and geopolitical impacts. The problems at the Pinjarra refinery, exacerbated by Cyclone Narelle's disruption of LNG supply, represent a material hit to Alcoa's Q2 shipments and a meaningful increase in costs.
