Fitch Ratings has assigned a 'BB+'/'RR4' rating to Alcoa Nederland Holding B.V.'s (Alcoa Nederland) proposed senior unsecured $750 million notes.
The proposed notes will rank pari passu with Alcoa Nederland's existing notes. Proceeds of the proposed notes are for general corporate purposes. Fitch currently rates Alcoa Nederland's Long-Term Issuer Default Rating (IDR) 'BB+', senior secured revolving credit facility 'BBB-'/'RR2' and senior unsecured debt 'BB+'/'RR4'. The Rating Outlook is Stable.
Key Rating Drivers
Weak Profitability, High Leverage: Fitch expects Alcoa's EBITDA leverage to remain above 3.0x through 2025, which is consistent with the 'BB' rating category. We expect leverage to increase with near-term operating losses until planned cost reduction actions take effect and profitability recovers. Fitch expects that the company will need external funding to support its operations and restructuring activities during this period. Alcoa's capex is expected to remain above sustaining levels while the company will likely maintain its dividend. Fitch expects this will pressure cash flow generation and could lead to negative FCF through 2025, which would strain liquidity absent external funds.
Operational and Mine-Specific Challenges: Fitch forecasts Alcoa's EBITDA margins to remain depressed through 2025, driven by operational setbacks and various mine-specific challenges. In October 2023, Alcoa initiated a restructuring plan at its Kwinana alumina refinery to respond to higher alumina production costs from using lower quality bauxite grades. The lack of economic alternative energy at San Ciprian results in unsustainable economics and a restructuring is likely needed. Higher cash costs of alumina production were not fully offset by declining caustic, calcined coke and pitch raw material costs. Fitch expects it to take at least two years for Alcoa to restructure operations and for profitability to recover.
Alumina Acquisition Long-term Positive: The company's acquisition of the remaining 40% stake in Alumina World Alumina and Chemicals (AWAC) is positive to Alcoa's long-term credit profile as it enhances its cash flow generation. Despite the alumina segments challenges, the acquisition could result in more nimble management and synergies from operating the business as a subsidiary rather than a joint venture. AWAC is an unincorporated joint venture owned by Alcoa and Alumina Ltd. (Alumina).
Credit Conscious Capital Allocation: Fitch expects share repurchases will depend on the level of the company's cash generation and for innovation project spending to be funded in a credit conscious manner. Fitch assumes that capital allocation will be balanced relative to the company's commitment to a strong balance sheet, evidenced by the company's modest dividend. Annual capex averaged about $400 million during 2019-2022 and Alcoa has guided to $550 million in capex in 2024.
Sensitivity to Aluminum Prices: Fitch assumes average London Metal Exchange (LME) aluminum prices for full year 2024 of $2,350/t, increasing to $2,400/t in 2025 and moderating to $2,200/t over the longer term. While bauxite and alumina are priced relative to market fundamentals and the alumina segment accounted for 37% of Alcoa's total segment adjusted EBITDA in FY 2023, these product prices are sensitive to aluminum prices over the long run. The company estimates a $100/t change in the LME price of aluminum affects segment adjusted EBITDA by $205 million, including the effect of the power LME-linked agreements. Alcoa has some value-added energy and conversion income, and some power costs are LME linked, but the company will remain exposed to aluminum market dynamics.
Low-Cost Position: Fitch believes Alcoa's cost position combined with its operational diversification provides significant financial flexibility through the cycle. The company assesses its bauxite costs in the first quartile, its alumina costs in the second quartile and its aluminum costs in the second quartile of global production costs. Most of Alcoa's alumina facilities are located next to its bauxite mines, cutting transportation costs and allowing consistent feed and quality. Aluminum assets benefit from prior optimization and smelters co-located with cast houses to provide value-added products, including slab, billet and alloys.
Derivation Summary
Alcoa's operating challenges and need to raise liquidity, assumed through debt, to support operations results in a weaker financial structure and financial flexibility compared with 'BBB' category mining and metals peers. Alcoa's EBITDA leverage is generally expected to be above 3.0x through 2025 and compares unfavorably with metals peer Steel Dynamics (BBB/Positive) and Commercial Metals Company (BB+/Positive) with EBITDA leverage below 2.0x through 2025. Fitch expects Alcoa's EBITDA margins to average about 10% through 2027, commensurate with 'BB+' ratings, based on a gradual return to their historic operating cost position and the agency's conservative aluminum price assumptions.
The ratings of Alcoa Nederland Holding B.V. are consolidated with those of Alcoa Corporation due to strong operational and strategic linkages, in line with Fitch's Parent and Subsidiary Rating Linkage Rating Criteria. The ratings of subsidiary Alcoa Nederland benefit from guarantees by Alcoa Corporation and certain subsidiaries.
Fitch-rated aluminum peers include China Hongqiao Group Limited (BB+/Stable), and Aluminum Corporation of China Ltd. (Chalco; A-/Stable). Hongqiao benefits from greater size, higher vertical integration and EBITDA margins above 15%. Hongqiao has a less sophisticated product range than Alcoa but it maintains a higher EBITDA margin due to the scale and efficiency of its core aluminum smelting business. Hongqiao's EBITDA net leverage is lower than Alcoa's, but Alcoa has better operational and end-market diversity.
Chalco is rated on a top-down approach based on the credit profile of parent Aluminum Corporation of China (Chinalco), which owns 32% of the company. Fitch's internal assessment of Chinalco's credit profile is based on the agency's Government-Related Entities Rating Criteria and is derived from China's rating, reflecting its strategic importance.
Key Assumptions
Fitch commodity price deck for aluminum (LME spot) of $2,350 in 2024, $2,400 in 2025, and $2,200/t in 2026;
Estimated shipments at guidance;
Higher cash costs of alumina production;
Capex at guidance, above historical spending;
Alumina acquisition closes as per the stated terms in 3Q24;
Minimum liquidity of $1.5 billion;
Dividends at current rate.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade
EBITDA margins expected to be sustained above 15%, indicating higher value-added production and/or more disciplined markets;
EBITDA leverage expected to be sustained below 2.0x.
Factors that could, individually or collectively, lead to negative rating action/downgrade
EBITDA leverage expected to be sustained above 3.0x on a sustained basis;
EBITDA margins sustained below 10%.
Liquidity and Debt Structure
Adequate Liquidity: Fitch views Alcoa's liquidity as adequate and, as of Dec. 31, 2023, was supported by $944 million of cash on hand and an undrawn $1.25 billion secured revolver expiring June 27, 2027. The facility has a debt/capitalization maximum of 0.6x and a minimum interest coverage ratio, substantially EBITDA/cash interest expense, of 3.0x in 2024 and 4.0x thereafter. Fitch anticipates liquidity could be strained absent additional external funding given our view on negative FCF through the forecast.
Issuer Profile
Alcoa Corporation is among the world's largest and low-cost bauxite and alumina producers with a leading position in second quartile cost aluminum products.
Date of Relevant Committee
01 March 2024
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
ALCOA CORPORATION 
