Alumina Limited (ASX: AWC) invests in bauxite mining, alumina refining and aluminium smelting operations through its 40% ownership of Alcoa World Alumina and Chemicals (AWAC). AWAC is the world's largest alumina producer and bauxite miner.
Over the last 12 months, the company's share price has gone up by 52%, providing shareholders with a 58% total return when you factor in dividends.
London Metals Exchange aluminium prices which have gone up from US$1,658 at the beginning of October 2016 to US$2,110 at the end of September 2017 and AWAC's ability to operate in the lowest quartile cost of operations in mining and refining has attracted investors.
Investors looking to jump onto the bandwagon might want to take a step back and consider the following three reasons why Alumina's great run might not go on for much longer:
- Bauxite is abundant. Bauxite, the key raw material in producing aluminium can be found in many countries across the world. The barriers to entry in mining bauxite are quite low and so as demand for it increases, more players will enter the market and increase supply which will in turn could lower prices.
- Demand from China might be increasing but they are becoming more self-sufficient. In 2014, Indonesia (which was a large supplier of bauxite to China) banned the export of unprocessed minerals. Since then, Chinese alumina production has been increasing which creates competition for AWAC. There have even been reports of China investing into production operations that have poor returns. If true, this would erode AWAC's cost-advantage. It doesn't matter how cost efficient your operations are if your competitor is willing to produce at a loss-making rate.
- Alumina Limited's entire business model is focussed on one commodity. As a result, its share price is vulnerable to volatility in commodity prices. The company also has no control over AWAC which it runs through a joint venture with Alcoa Inc. Alcoa Inc owns 60% of AWAC.
Investors might want to avoid the bet on commodity prices and look elsewhere.
