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Alcoa Heads for Biggest Gain Since 2016 on $1 Billion Revamp

Joe Deaux
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Alcoa Heads for Biggest Gain Since 2016 on $1 Billion Revamp

(Bloomberg) -- Alcoa Corp. shares headed for the biggest gain since early 2016 as investors welcomed the company’s plans to get leaner by selling assets to weather a market rout.

The largest U.S. aluminum maker outlined its restructuring plans in an earnings statement Wednesday in which it predicted that world demand may contract by as much as 0.6% this year, reversing a July outlook for growth of at least 1.25%. The asset sales follow the company’s worst streak of quarterly losses in at least three years.

The forecast came a day after the International Monetary Fund cut its 2019 global growth forecast, citing a broad deceleration across the largest economies. Metal producers have been caught in the crossfire as a trade war between the U.S. and China hurt global growth, curbing demand for industrial raw materials.

“A leaner and lower-cost Alcoa should be well positioned for the eventual cyclical recovery in global demand for metals, and longer term investors may consider buying these shares at current levels,” Jeffries LLC analysts Christopher LaFemina and Patricia Hove said in a note.

Alcoa shares climbed 12% to $21.49 at 9:55 a.m. in New York. A close at that level would mark the biggest since February 2016. The rally trimmed this year’s decline to 19%.

The average price for alumina, a key aluminum ingredient and one sold by Alcoa, dropped 44% in the third quarter from the same period a year earlier, according to S&P Global Platts. Chief Executive Officer Roy Harvey expressed optimism that the downturn in the market won’t last.

“When we think about 2020, we see demand springing back,” Harvey said in a telephone interview. “This isn’t a problem with the consumption of aluminum, this is a hiccup with what’s happening in the global economy.”

Over the next 12 to 18 months, Alcoa intends to pursue non-core asset sales expected to generate an estimated $500 million to $1 billion in net proceeds.

The company also plans to realign its operating portfolio, and has placed under review 1.5 million metric tons of smelting capacity and 4 million metric tons of alumina refining capacity over the next five years. The review will consider opportunities for significant improvement, potential curtailments, closures or divestitures.

“It’s also simply a way that we can make sure we have the right cash to help weather through the different parts of the market cycle,” Harvey said Wednesday. “That is for us an important component of making sure we have the cash to be able to move through our restructuring process.”

Alcoa said it’s implementing changes to make it leaner. The restructuring costs will be paid in cash in the fourth quarter 2019 with the remainder in the first quarter 2020, the company said. The new operating model is expected to generate annual savings of about $60 million in operating costs beginning in the second quarter of 2020.

The company reported a third-quarter loss of 44 cents a share, worse than analysts expected. Industrial metals have fallen as the U.S.-China trade war weighs on global manufacturing and economic growth.

Goldman Sachs Group Inc. lowered its price forecasts on aluminum earlier this month, citing strong supply growth outside of China and the negative impact of economic uncertainty on capital spending. Harvey said the downturn may not last.

“When we think about 2020, we see demand springing back,” Harvey said. “This isn’t a problem with the consumption of aluminum, this is a hiccup with what’s happening in the global economy that we believe will come roaring back once this uncertainty is behind us.”

(Updates with shares, analysts’ comments in fifth and seventh paragraphs.)

To contact the reporter on this story: Joe Deaux in New York at jdeaux@bloomberg.net

To contact the editors responsible for this story: Luzi Ann Javier at ljavier@bloomberg.net, Joe Richter

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