Aluminum producer Alcoa Inc.’s (AA) unsecured debt ratings were downgraded by Moody's Investors Service to Ba1 from Baa3. Moreover, the rating agency assigned a Ba1 Corporate Family Rating and a Ba1-PD Probability of Default Rating. Moody’s attributed the downgrade to lower aluminum prices and weak aluminum industry fundamentals.
Although Moody’s stated that Alcoa has been successfully reducing costs and improving productivity, weak market for Alcoa’s primary metals segment and aluminum prices will make it difficult to achieve an investment grade rating.
While Alcoa’s mid stream business – Global Rolled Products – and downstream Engineered Products and Solutions business are expected to perform well, these segments, however, are currently not able to offset the slow improvement in profit in the primary business at the current debt levels.
Although Alcoa is making efforts to improve performance in its alumina and aluminum businesses, the full improvement to targeted levels in terms of cost reductions is expected to be attained by 2015. Moreover, while aluminum demand has achieved a year-over-year improvement of about 7% to 7.5 % from 2010 through 2012, the aluminum price has been in a downward trend since achieving post recession highs in 2011.
Moody’s views Alcoa’s rating outlook as stable considering weak aluminum prices over the next 12-18 months and it also includes the company's focus on cost-cutting, managing working capital, sound liquidity position and manageable debt maturities. The rating may be upgraded if Alcoa achieves a sustainable debt/EBITDA ratio of at least 3.5x, a sustainable EBIT/interest ratio of at least 4x and a sustainable (Cash flow less dividends)/debt ratio of at least 20%.
Alcoa, which is among the prominent players in the mining industry along with Aluminum Corporation of China (ACH) and BHP Billiton (BHP), is a world leader with respect to production and management of primary aluminum, fabricated aluminum, and alumina as well as the world’s largest miner of bauxite and refiner of alumina.
Alcoa currently retains a short-term Zacks Rank #3 (Hold).
Another company in the mining industry with a favorable Zacks Rank is Atlatsa Resources Corporation (ATL), having a Zacks Rank #2 (Buy).
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