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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by and welcome to the Alumina Limited Full Year Results. All participants are in listen only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Mike Ferraro, Managing Director and CEO. Please go ahead.
Good morning, everyone. Welcome to Alumina Limited's results presentation for 2022. Before I proceed any further, please note the disclaimer.
Alumina Limited recorded a net profit after tax of $109 million for 2022 and declared total dividends for the year of $4.2 per share. Market disruptions, cost pressures and lower production at some refineries, my quote has been a challenging year for Alumina Limited. Alumina prices exceeded $500 per time in March 2022 in response to a number of supply disruptions, supporting AWAC results in the first half. But prices fell in March and April following the ban by the Australian government of alumina exports to Russia. This was compounded in the second half by higher input costs across the whole industry, particularly for energy in Europe, and persistently higher pricing for caustic soda.
Whilst we anticipate ongoing cost pressures in 2023, there has been some softening in energy prices in Europe. This combined with the strengthening alumina price in response to supply constraints will benefit AWAC in the near term. In the longer term, we remain confident that the demand for aluminum will continue to grow to support global decarbonization, which will result in greater demand for aluminum.
Before proceeding further, I'd like to say a few words about media reports on AWAC’s approvals processed in Western Australia. The media reported concerns within parts of government regarding AWAC's mining activities and possible impacts on the serpentine water dam, which supplies part of Perth's drinking water. These approval processes relate to mine planning and forest clearing activities of new areas of our mining leasehold, which are required before mining can be extended.
Consistent with a growing focus on biodiversity and environmental impacts, regulators are requesting and expecting greater assurance from mining operators on environmental impacts. Alcoa has a 60 year history of mining bauxite in the Southwest of WA, without having had any negative impact on public water supply. Alcoa has being working cooperatively with regulators undertaking rigorous testing, producing new data and proposing engineering solutions to support these approvals. This takes time and has extended the approvals process.
AWAC will be reducing the bauxite grade beginning this April. To extend the ore supply available under existing approvals and provide more time to work through the next set of approvals. This great change is isolated to the Huntly mine and does not impact the Willowdale mine. Galina will talk more about the financial impacts later.
I would like to say a few more words about sustainability. The joint venture has a commitment to sustainable, responsible and safe mining practices. AWAC also has a focus on biodiversity management ensuring that flora and fauna are reestablished. AWAC books of mines tend to be shallow as the ore body is below relatively thin topsoil and overburden layers. This means that once the ore is mined, we can progressively rehabilitate an area. Before an area is mined, pre mine surveys identify conservation values and management plans are implemented to mitigate these potential impacts.
Over the last 11 years in Western Australia, the joint venture has cleared 7,700 hectares and rehabilitated 6,370 hectares. In 2022, AWAC planted 570,000 native Jarrah forest plants at the Huntly and Willowdale mines. What makes this achievement even more unique and innovative is that many of the collected seeds require heat, smoked treatment, ore propagation using techniques pioneered by AWAC. At present, 4% of the AWAC mine lease area has been mined and it is estimated that no more than 8% will be mined for the entire life of our mining activities in WA.
Aluminum will be critical this decade as it plays a prominent role in the low carbon transition through light weighting electric vehicles and expanding electrical transmission networks to support renewable energy. All of AWAC’s refineries are first quartile on the refinery emissions intensity curve. Alumina Limited and Alcoa both have net zero emissions coupled with the unique and innovative decarbonization strategy. On the horizon is a consultation for the Australian government's safeguard legislation. We welcome legislation that encourages industry to decarbonize. However, it needs to acknowledge the timeline for development of technology solutions, availability of renewable energy, and existing commercial energy arrangements. Also, it needs to recognize that facilities such as AWAC’s WA refineries are already global leaders in terms of the emissions intensity.
I'll now hand over to Galina who will talk you through the finance section.
Thank you, Mark, and good morning, all. I will start with the review of AWAC’s performance before addressing Alumina Limited’s result. AWAC recorded an EBITDA of $817 million and $301 million dollars of net profit after tax. Exceeding significant items, recorded EBITDA and profit after tax were $816 million and $315 million, respectively. AWAC generated $482 million of cash flow from operations. The main drivers for the decline in AWAC performance were high input material prices and lower volumes of bauxite and aluminum production. Higher production costs were partially offset by higher alumina and aluminum realized prices.
Let's go through AWAC's operating performance in more detail. Alumina production of 11.8 million tons was $0.7 million tons lower compared to 2021. This predominantly relates to reduced production run rate of Western Australian refineries, which through the year were affected by unplanned outages and maintenance. It further includes the impact of the San Ciprian refinery curtailment to approximately 50% of its production capacity in the second half of the year as a response to the high European gas prices. Production at Alumar refinery recovered from the weather affected first half of the year.
In 2022, lower bauxite quality, unplanned outages and higher level of employee turnover affected operational performance of WA refineries. Renewed focus on the system stability, including people, processes and equipment show some improvement towards the end of the year. However, to result stable operating performance at full system capacity will take more time. In 2023, production of Pinjarra and Kwinana refineries will be affected by the reduction in the available alumina grade at [Hankin] (ph) Mine. Therefore, we expect total WA production volume to be lower than the previous year.
AWAC cash cost of production averaged $304 per ton, an increase of $68 per ton compared to the previous year. Higher global energy and caustic prices accounted for more than three quarters of this cost increase. Most of the alumina refineries outside of China experienced the same input material price pressures resulting in similar increases in production cost. While caustic prices remain elevated, we have seen some softening in late 2022, early 2023. However, we will not see the benefits of this decrease until the second and third quarter of 2023 due to the inventory flow and pricing lag.
We also seeing lower gas prices in Europe. These, together with some commercial actions that were taken to increase prices for chemical alumina produced by San Ciprian will improve financial outcomes in 2023. However, these improvements will not fully offset the cost of operating at reduced capacity. And therefore, San Ciprian is expected to remain in a loss making position. Excluding San Ciprian, the cash cost of production averaged $269 per ton, an increase of $46 per ton compared to the previous year with half of the increase driven by higher caustic prices. An increase in energy cost mostly relates to Alumar refinery where AWAC is affected by movement in oil prices.
Reduced production level and higher maintenance cost at Western Australia refineries contributed to increased production cost per unit. A negative foreign currency movement in Brazilian real was offset by favorable movement in Australian dollar. AWAC full year margin before CapEx was $67 per tonne of alumina and $18 dollars per tonne lower than 2021. After CapEx, the margin was $44 per ton. Low alumina prices and increased CapEx spend reduced the margin to $10 per tonne of alumina in the second half of 2022. In 2023, elevated CapEx spend, high input material costs and reduced production level will continue to squeeze portfolio margin. Although, API movements may work to offset these pressures.
Turning our attention to AWAC capital project. The capital expenditure in 2022 was higher than 2021 by $33 million. The most significant project were residue storage and tailing expansions in Brazil, as well as [indiscernible]. Capital expenditure in 2023 is expected to be higher than 2022 as work continues at residue and tailings storage areas in Australia and Brazil. Growth projects include debottlenecking at Alumar refinery and preliminary stages of mechanical vapour recompression study.
Moving to our 2023 full year outlook. In 2023, we expect alumina production to range between 10.5 million tonnes and 10.7 million tonnes due to the partial curtailment of San Ciprian refinery and lower production rates at Western Australian refineries resulting from lower bauxite grade and its impact of the gas shortages. The lower bauxite grade in Western Australia refineries results in lower production volume, high usage of caustic and other input costs. Innovative gas prices in Europe and the cost of running the San Ciprian refinery at curtailed capacity continue to affect its production cost. Therefore, we expect the 2023 AWAC average cost of production to increase by a few percent compared to 2022.
Third party bauxite shipments are forecast to be around 8 million tons. This includes an expansion of bauxite contract in Brazil, and increased sales -- of sales of [CPG] (ph) tons due to the San Ciprian curtailment. Aluminum production is forecast to be 180,000 tonnes, an increase from the prior year as a result of the completed restart of idle capacity at Portland. AWAC's full year forecast for guest restructuring related items has increased slightly as AWAX continues to work through the remediation of bone culture and [indiscernible].
Now turning to Alumina Limited’s result. Alumina Limited recorded a net profit after tax of $104 million. Excluding significant items, net profit after tax was $109 million. Alumina Limited's total dividend for 2022 was $400.2 per share, an average dividend yield of 6.5% over the last five years, fully franked. 2022 presented a walk with a number of challenges. The main focus of 2023 is to improve system stability and operational performance to ensure that AWAC remain well positioned to benefit from the favorable aluminum and alumina trends.
Thank you. And I will now hand back to Mike to provide an overview of the market.
Thanks, Galina. Consistent with what we have seen over recent years, a number of global events, foremost being the Russian-Ukraine War, created an upward spike in the first half of 2022 in the alumina price. Prices were then negatively impacted by the Australian ban on alumina exports to Russia, creating a temporary excess in the Pacific. This situation has since been resolved by trade route changes as Russia procured new sources of alumina supply with flow on impacts on global markets. The average alumina price in 2022 was $362 dollars per ton, a 10% increase from 2021.
The global alumina market has experienced significant changes since China's emergence in the mid-2000s. Through plant closures and growth in primary aluminum capacity, not met by sufficient new alumina capacity the rest of the world market has evolved from 8 million tonnes surplus in 2006 to less than 1 million tonnes in 2022, which represents less than 1% of the global supply. Alumina prices have been responding to changes in market balance in recent years. There was limited new alumina capacity in the rest of the world in 2022. This is likely to continue, which should support alumina prices as demand for aluminum continues to grow.
In 2022, the smelter grade alumina market outside China was in a notional deficit after net exports. This is despite China exporting around 1 million tonnes of alumina filling the demand from Russia after the Australian ban in March 2022. Going into 2023, supply disruptions, restarts of primary revenue capacity, as well as demand growth from China are expected to see the rest of the world deficit widen compared to 2022. In China, 5 million tons of additional refining capacity is expected to come on stream in 2023. However, this new capacity is expected to largely replace existing high cost capacity and to be consumed only in China.
Elevated energy and bauxite costs threatened by the operations of high alumina producers in Europe and the restart of some idle capacity in Asia and the Americas. On the demand side, despite production cuts of many smelters, 2022 saw global primary aluminum smelting production grow by 2% year on year. The restart of smelting capacity in Europe, Americas and China is likely to further drive up metal production in 2023.
In the next three years, a number of primary aluminum capacity expansion projects outside China are expected to push up demand for alumina. At the same time, very limited additional alumina capacity is currently committed, resulting in a forecast shortage of alumina of around 4 million tons by 20 26. Our refining assets are set to benefit from this imbalance in growth. The global energy crunch caused by the Russian-Ukraine conflict significantly pushed up raw materials and energy prices in 2022. Average rest of world refining costs increased by 29%. Going into 2023 energy prices are expected to remain at high levels despite oil, natural gas and coal prices having seemingly past 2022 peaks. These elevated costs should provide some support to alumina prices.
Although China was less exposed to the energy crisis, higher bauxite and caustic prices inflated China's average alumina costs by 10%. Around 60% of Chinese alumina is based on imported bauxite and concerns now looming over Indonesian bauxite export bans in 2023. This is likely to create more uncertainty in the bauxite market. In addition, freight costs are now falling back to prepandemic levels, which further support Chinese imports of the rest of the world alumina. The current China import parity price is around $350 per tonne.
In the longer term, aluminum is an essential part of the solution for global energy transition. The properties of aluminum deliver significant benefits to a decarbonized world. Substantial growth in aluminum demand is forecast in the coming decade. Of the 29 million tons of additional demand by [2032] (ph), 60% will come from transport, construction and electrical sectors.
To summarize, market disruptions and escalating energy and raw material costs saw the alumina price up 10% year on year in 2022, but this did not fully reflect cost increases. With demand recovery, and continued supply disruptions, the aluminum market outside China is expected to be tighter in 2023. In our own business, actions are being taken to address WA operations, regulatory approvals and production costs in Spain. Even though 2022 was a challenging year, I do want to point out the fundamentals of the alumina market, which are increasingly positive for AWAC.
First, the alumina market outside China is now in deficit and the outlook for this year is for the deficit to widen. We have already seen this in a higher API this year, currently at $370 dollars a ton. Second, new refinery volumes outside China are not keeping pace with new smelting. While the pace of refinery construction slowed everywhere, smelting restarts and construction are continuing. Finally, aluminum is fundamental to the low carbon transition. As the world decarbonizes, demand for aluminum is set to grow substantially, especially through EVs and power transmission. We're also investing in the future. Our ambition is to reduce our already industry leading carbon intensity further through MVR and electric transformation. AWAC is ready to play its part.
That now concludes our formal remarks, and I'll hand back to the moderator for questions.
Thank you. [Operator Instructions] Our first question is from [Chen Zhang] (ph) with Bank of America. Please go ahead.
Good morning. Just two questions for your outlook please. On the alumina production, guidance in FY 2023 is much lower than FY 2022 actuals. I'm just wondering when are we going to expect the recovery of the bauxite grade? Are we expecting to see AWAC’s alumina production back to above 30 million ton post FY 2023 after San Ciprian back to production and after -- with increased -- with improved bauxite grade? Thanks.
So there are a number of reasons for the production to be done. And as you are highlighting them very well, it's -- first one is San Ciprian and with San Ciprian even though the prices -- gas prices are lower than last year and they're almost to pre-war level, they still much higher than early 2021 when refinery was making profit. So until the gas prices are down substantially and sustainably and the API is in a good spot. I think we will remain to review San Ciprian operations and we expect them to stay at where they are.
Now with Western Australia, again, there are two elements to the volume decreases, one being outages and maintenance. And that's what happened last year mostly. And the second is the bauxite grade. So with regards to the system stability, as I've mentioned, we have done some improvements towards the end of the last year. And we expect this work to continue. So some of the tonnage will come back. With regards to the bauxite quality, Michael, do you want to comment?
Well, that's part and parcel of the approval process that's being worked through at the moment and the bauxite quality is being impacted by the fact that the current mining area in [Mayara] (ph) that we're mining from is in the process of running down. And the next phase is to move into the Mayara North part of the lease. And that's when you would expect both the grade and the quantum of production to improve once again.
Thanks, Mike, and Galina. Maybe another question for your third party bauxite guidance for FY 2023, a big jump to 8 million ton. I don't think you have done 8 million ton of third party sales in the last few years. Is that a one-off or how should we think of your long term third party sales? Thank you.
So there are a couple, again, there are a number of things there. First one is, whilst San Ciprian remains curtailed at 50% capacity, we do sell the tonnage that would have been used by San Ciprian to the third party market. So that's one reason for increase. And that, obviously, will continue for as long as San Ciprian remain curtailed. The second reason for increase is, one of our -- if you recall earlier this year, we have sold our interest in MRN, but we did remain the agreement that we will be fulfill in our runoff contracts. And one of the contracts has an optionality to increase the volume and so the customers choose this optionality for this year. So I suppose we'll have a look as to how it's going further.
Thanks, Galina. A last question from me, please. What's your net debt cash position looks like today? And how should we think of your dividend policy in FY 2023? Thank you.
So as you know, our debt position was $106 million as of the end of December. It will be fair to say that the squeeze in margin and sort of [indiscernible] Alumina price early in the year had required us to contribute additional capital to our [indiscernible]. And so at the moment, we are above to what we were at year end. And in terms of dividend policy, we maintain the policy of paying through the cash that we receive. Mike, would you like to –
Yes. And just to expand on the dividend point for this year. I think a number of factors play into that question. Input costs such as caustic and energy and the level of production and most importantly, the API. They're difficult things to fully forecast out for the year. This year, as I've mentioned, the API has moved from 330 to 370, which reflects a tightening of global supply for Alumina. So we'll have to see how those input costs and the API price play out in determining where we end up on a dividend.
All tight. Thanks, Mike and Galina. I'll pass it on. Thank you.
Thank you.
Thank you.
The next question is from [John Tumazos] (ph) with John Tumazos Very Independent Research. Please go ahead.
Thank you. I'm looking at your Slide 16 where AWAC needs $535 million for CapEx restructuring in last year's taxes. Based on second half 2022 margins, how much money would AWAC need from the partners to settle that $535 million? Is it about $250 million or more.
Sorry, can you repeat your numbers? I'm a little bit [indiscernible].
Your numbers for Slide 16, where AWAC needs $535 million. And I'm wondering how much of that has to come from the partners because the margin is too low. And if Mike could answer the question, it would help me navigate Galina accent. I couldn't understand everything you said in response to the previous speaker?
So let me try first and then if something is not clear, Mike, can clarify that for you, if that's okay. So sustaining and gross CapEx are normally fully funded by AWAC entities. Now how much capital injections would be required from the partners would largely depend on what API will do this year, because, obviously, margins were squeezed as we reported, but it was at the alumina price, which was $330 per tonne and we're now looking at $370.
Was that clear, John?
That was clear. Normally, the CapEx would be funded by the entity, but the margin was only $10 dollars a ton above CapEx at the end of last year. So we're running since then. In terms of the dispute with the regulators concerning Perth drinking water, what is the chemical that is supposedly being discharged from Huntly to impact the water supply?
There's no chemical being discharged from Huntly. The concern is really around the potential risk of sediment runoff, which could impact the quality of Perth's drinking water for some of the proposed mining activities. But Alcoa has done rigorous testing, data results and engineering solutions, which they believe can address these concerns. And you may be aware that in 60 years of mining in WA, there's never been any impact on the water quality of the serpentine dam.
Now John, you...
In America, there's a word used opacity, where sometimes the regulators will look at the opacity of a smoke stack or the clarity of a water discharge. Is there any discoloration or effect on the clarity of the water, that settlement be filtered out?
As I said, there's been no impact on the quality of the water dam. I'm not familiar with that American terminology. But certainly, there's been no impact in all those years of production and any runoffs have been contained before they get to the dam. So I'm not sure how best I could answer that questions beyond that.
You're doing quite well, Mike. Finally, in your prepared remarks you made reference to new smelter constructions around the world. I might have missed some. What are they?
It's in one of our slides, which I'm just going to pull up at this point.
I was seeing that slide in earlier years presentation. I didn't see it in this deck.
It's there, just bear with me. Yes. What we've got is, we've got about 2.8 million tonnes forecast of committed capacity coming on stream in Indonesia, 500,000 tonnes, India just over 400,000 tonnes. Small amount in Canada from Rio, 27,000 tonnes, Vietnam, 300,000, Indonesia, another project in Indonesia, [Dario] (ph) 500,000 and Nanshan in Indonesia at 500,000 and Colombia 540,000. And that would be offset by the real committed project outside of China for alumina at [indiscernible] in India of 1.5 million tonnes.
Which slide is that?
That's from my notes actually. So that -- we don't have that [Multiple Speakers]
Thank you very much, Mike. You're very helpful.
Thank you.
The next question is from Matt Greene with Credit Suisse. Please go ahead.
Good morning Mike and Galina. Hope you are will. Galina, a question for you from me. I just want to make sure I heard you correctly when you're talking through the guidance. Did I hear you that you said it's a 6% increase in unit cost of 2023 relative to 2022 level?
I said it's a few percent increase.
A few percent. Okay. Thanks. That's great. And I guess in terms of your assumptions to get that, are you assuming current input costs and power prices at current levels to get that number? Or have you assumed some easing into the back end of the year?
So we assumed -- as I've mentioned, we assume that caustic will be coming through end of the Q2 and Q3. So that will be an ease in the price. So if you want to think about the profile of the cash comp, you're going up in Q1 because of the destruction that we had in WA with gas supply. It will then be a big step up in Q2 because we're going to move to the lower bauxite grade. And then as the caustic will come through, caustic relief comes through, you'll start recovering in Q3 and sort of towards the end of the year.
Got it. That's helpful. Thank you. And just on San Ciprian, you curtail to 50% to 60%, I think that number was driven in some part by your contractual obligations. I'm going to say a lot of them was -- a lot of that had rolled off at the end of 2022. I think you had been reviewing potentially concerning more volumes, assuming it doesn't impact stability. What's the current thinking at San Ciprian? I mean, just given where energy prices in Europe have moved, are you quite comfortable with current levels? And should we assume that and as we step into calendar year 2024 when the smelter restarts that we could see volumes pick up at San Ciprian. I just wonder if you can just give us a bit of color as to how you and Alcoa was thinking about the volumes at San Ciprian?
So San Ciprian will probably operate for the rest of 2023 at the volume that it is now, unless something gives on the gas prices or on alumina price. So that's the way to think about it. In terms of customer contracts, you're absolutely right. Most of them had rolled over in 2022. But we've done some negotiations and we remain mostly chemicals. And with those customers, there is some work done to improve the price of the product and some of them are longer, some of them are shorter. So it's a touch and go. We negotiate in as we go.
In terms of 2024, I think it's a bit premature to make any expectation because really what happens with gas price, that's all about the gas price.
Okay, understood. Thank you. And just on the CapEx guidance, the Alumar debottlenecking. If I recall, I think you said it was around 30 million previously spread over two years and we should see about a 60,000 ton of additional capacity. Is that still the case? Or has that changed at all?
Absolutely. Yes.
That's good. And just lastly, if I may, Kwinana, how are you thinking about the curtailment volumes? I mean, is this really a gas supply issue? Or is it more a case of just, obviously, the bauxite -- bringing forward those bauxite challenges? How are you thinking about that curtailment volumes at Kwinana?
Well, certainly the gas supply issue, as you know, brought about a suspension of one digester at Kwinana. And no decision has yet been made as to what will happen going forward. The real focus has been on ensuring stability of gas supply.
Okay. That's helpful. Thank you guys very much.
And just I want to clarify, if John I assume [indiscernible] is still on the call. John, if you have a look at Slide 23, that sets out the breakdown of the various aluminum projects in the pipeline.
[Operator Instructions] The next question is from Jim Xu with Barrenjoey. Please go ahead.
Hi, Mike and Galina. Just one question for me today. So clearly, AWAC is working very closely with the regulators on approving the new mine plan. What would happen if the permit is not approved? What would that mean for mining? Is there any alternative areas you can access and what would be the impact of bauxite quality?
Jim, as we have mentioned, the bauxite quality will be down this year from April. Take into account the delays associated with the mining approvals. But really based on, as I said, on 60 years of mining in WA, we're confident that our works develop the solutions, which can be worked through and what is being proposed, provides a good base for reaching agreement with the government to ensure that the water supply remains safe. But I think really we -- to go beyond that and not getting those approvals as hypothetical at this stage.
Okay. Thank you.
There are no further questions at this time. I'd like to hand the call back over to Mr. Ferraro for any closing remarks.
Thank you, everyone for listening today. I know it's a very busy day with reporting season and let you get back to your work. And I'm sure that some of you will have follow-up meetings during the course of the day. Thank you and appreciate your time today.
That does conclude the conference call for today. Thank you for participating. You may disconnect your lines.