Full Year 2020 Alumina Ltd Earnings Call Southbank Victoria Feb 23, 2021 (Thomson StreetEvents) — Edited Transcript of Alumina Ltd earnings conference call or presentation Monday, February 22, 2021 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Grant A. Dempsey Alumina Limited – CFO * Michael Peter Ferraro Alumina Limited – MD, CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Glyn Lawcock UBS Investment Bank, Research Division – MD, Head of the Australian Mining & Energy Team and Research Analyst * John Charles Tumazos John Tumazos Very Independent Research, LLC – President and CEO * Lyndon Fagan JPMorgan Chase & Co, Research Division – Analyst * Paul Young Goldman Sachs Group, Inc., Research Division – Equity Analyst * Paul Joseph McTaggart Citigroup Inc., Research Division – Director and Metals & Mining Analyst * Peter O’Connor Shaw and Partners Limited, Research Division – Senior Analyst of Metals and Mining * Rahul Anand Morgan Stanley, Research Division – Equity Analyst ================================================================================ Presentation ——————————————————————————– Operator  ——————————————————————————– Thank you for standing by, and welcome to the Alumina Limited Full Year Results. (Operator Instructions) I would now like to hand the conference over to Mr. Mike Ferraro, the CEO. Please go ahead. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Good morning, everyone, and welcome to our results presentation for the 2020 full year. Before I proceed any further, please note the disclaimer. I’m pleased to announce that Alumina Limited has recorded a net profit after tax of $146.6 million for 2020 and declared a fully franked final dividend of USD 0.029 per share. We are pleased with this result given the impact of COVID globally. Our alumina refineries achieved an annual production record of 12.8 million tonnes during 2020. Underpinning this is AWAC’s focus on health and safety, protecting the workforce and safeguarding our long-life, low-cost alumina and bauxite assets. Not surprising, during 2020, the alumina and aluminum markets both experienced significant turbulence. For alumina, the price bottomed out at $225 per tonne in April before recovering and then increasing to just over $300 per tonne in late 2020. The increase in price was attributable to an increase in costs, intermittent supply shortages and increased demand for alumina, driven by higher aluminum prices. Aluminum prices also bottomed during April last year at $1,422 per tonne before recovering to over $2,000 per tonne in December. Prices in excess of $2,000 per tonne have not been seen since 2018. Despite lower alumina prices in the first half, AWAC maintained a positive alumina margin of $69 per tonne for the year. Our resilience and AWAC’s position as a low-cost refiner enabled Alumina Limited to continue to provide shareholders with consistent dividends, whilst maintaining a strong balance sheet. Whilst COVID impacted the alumina and metal markets during 2020, we continue to have a positive outlook for both commodities. Looking forward to 2021, we see a reduced primary aluminum surplus in the rest of the world, driven by growth in aluminum consumption. We are forecasting a rest of the world surplus of 2.9 million tonnes of metallurgical alumina, which is likely to be exported to China to balance the market. On the horizon, we’re also beginning to see the development of green aluminum. We’re starting to see early stages of green premiums in Europe, but no stable premium has emerged as yet. A focus on sustainable supply chain is becoming more prevalent, and the increasing demand for low-carbon aluminum is driving change within our industry. Governance of AWAC operations is reinforced by the Aluminium Stewardship Initiative certification of all its directly owned and managed facilities. ASI certification means those sites that have been assessed and proven to operating conformity with a common standard for the aluminum value chain on environmental, social and governance performance. AWAC’s refining portfolio is the lowest CO2 emitter amongst major producers and positioned AWAC to launch the world’s first low-carbon alumina brand, EcoSource. EcoSource alumina is a smelter grade alumina with carbon emissions that are better than the vast majority of the industry and has no more than 0.6 metric tonnes of carbon dioxide equivalents per tonne of alumina produced. In 2020, Alumina Limited strengthened its sustainability governance and strategy by establishing a Sustainability Committee. A materiality assessment was undertaken of Alumina Limited and AWAC’s business to better understand our most important ESG risks and opportunities. We undertook steps to improve the structure and transparency of our ESG reporting and conducted a GAAP analysis to TCFD reporting guidelines. We continue supporting Alcoa in the development and adoption of industry best practice dam management procedures and standards. This graph shows CO2 emission levels by alumina refineries globally. As you can see, almost all the refineries emitting more CO2 than the global average are run on coal. AWAC is well positioned as it principally uses gas. AWAC’s EcoSource alumina product represents half the global average in CO2 emissions. Around 68% of all alumina production is based on coal and oil. In contrast, close to 90% of AWAC’s production is based on gas. AWAC has set a range of sustainability goals to achieve positive ESG outcomes. Foremost is the protection of its workforce and commitment to limiting risks to worker safety and well-being with a goal of 0 fatalities and serious injuries. AWAC’s Western Australian facilities operate in a water scarce region. Water intensity reduction targets of 5% by 2025 and 10% by 2030 are in place. CO2 refinery emission targets have also been set, committed to a 12% reduction by 2030. Reduction targets also include land requirements for bauxite residue and mine rehabilitation performance. AWAC is extraordinarily well placed with Tier 1 global assets. It is vital to be not only low cost, but also low emitters as the world decarbonizes. I’ll now hand over to Grant to discuss the financial results of AWAC and Alumina Limited in further detail. ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Thank you, Mike, and good morning, all. I’ll start with the performance of AWAC before coming back to the financial results of Alumina Limited. As with most businesses, COVID loomed large in 2020. It drove volatility in the markets in which AWAC operates and pose an ongoing potential threat to production. However, AWAC’s operations remained strong as did its business model. The robust profit and cash flow demonstrated once again that AWAC’s low-cost, long-life assets are resilient in the face of significant uncertainty and volatility. AWAC recorded an EBITDA of $896 million and a net profit after tax of $402 million. Deferral of some noncritical CapEx underpinned a strong cash flow from operations of $672 million. The decline in the alumina price index throughout the first half of 2020 significantly impacted AWAC’s average realized price for the year. However, even in April where the API was as low as $225 per tonne, AWAC remained profitable and cash generative. Remarkably, given the COVID environment, AWAC finished 2020 with annual production records for both alumina and bauxite. Primary aluminum production and third-party shipments of bauxite remain relatively stable. Higher production, process efficiencies and a decline in raw material prices all contributed to lower alumina cost per tonne. This was partially offset by the start of new energy contracts in Western Australia. I will now go through AWAC’s operating performance in more detail. A number of AWAC operations are located in areas which were significantly affected by COVID-19. However, the rapid response by AWAC to identify and mitigate potential risks to its people and operations and the successful implementation of COVID-safe environments meant that the pandemic ended up having limited operational impact. AWAC refineries performed strongly, producing 12.8 million tonnes of alumina. Pleasingly, output for all refineries increased, except San Ciprian, which was affected by industrial action in the fourth quarter. This has now been resolved. The average realized price in 2020 tracked the decline and then the recovery of the API to be, on average, about 20% lower than 2019. The API was impacted by the initial COVID shock and a lower and flatter industry cost curve. It recovered off its low of $225 per tonne to average $271 for the year, ending 2020 above $300 per tonne, which has so far been sustained into 2021. AWAC’s average realized price for 2020 was $268 per tonne and has trended higher in 2021, in line with the increase in API. AWAC’s cash cost of production was 5% lower in 2020, averaging $199 per tonne, with the first half averaging $193 and the second half $205. Record production, lower oil costs and a strong U.S. dollar drove energy conversion and bauxite costs lower in the first half. The price of caustic soda also continued its decline throughout the year. As previously announced, new gas contracts in WA came into effect midyear, which accounted for approximately $10 per tonne of the increase in the second half. Moving to 2021, cash costs will continue to trend higher, driven in the first half, in part, by seasonal maintenance, high raw material prices and increased haulage at Willowdale ahead of the changeover to the new crusher. The Australian dollar has continued to trend higher, which will further increase the cost of production at the West Australian refineries. This chart shows AWAC’s margin in real 2020 dollars since the inception of the API, adjusted to reflect the current portfolio of assets and API pricing contracts. The adjusted 10-year average is approximately $107 per tonne and would be in the mid-$90 range if the high and low years were smoothed out. AWAC’s production cost is less volatile than high cost producers due to its long-term gas contracts, lower usage of caustic and the freight advantage proximity of its bauxite mines. This means that as oil, coal and caustic prices change, it has a greater impact on those marginal cost producers, and therefore, the API in an efficient market than it does on AWAC’s costs. The substantially lower fuel and coal prices in 2020 and continued lower caustic prices led to a lower and flatter industry cost curve, driving the API down more than AWAC’s costs and reducing its margin to $69 per tonne, which is about 1/3 lower than AWAC’s long-term trend. However, coming into 2021, we have already seen the impact of rising oil and coal prices as well as a weakening U.S. dollar. This has seen the industry cost curve move up and steepen, driving the API back up over $300 per tonne. While AWAC’s costs have also increased, they have done so at a much slower pace, which has seen AWAC’s margin trend higher year-to-date. Absent demand and supply shocks, the alumina market has operated relatively efficiently over the past decade, with API movements largely reflecting changes to marginal cost production. Given AWAC’s substantial cost advantage, this efficient market supports its strong margin throughout the cycle. AWAC’s Tier 1 assets have demonstrated both resilience to negative shocks such as COVID and the ability to take advantage of supply side interruptions as well as increases in raw material prices. I will now talk to AWAC’s full year outlook. We expect the strong operating performance to continue with alumina production forecast to remain relatively stable at 12.8 million tonnes, with all locations producing near or above name cape (sic) [nameplate] capacity. Third-party bauxite shipments are expected to increase due to higher production at CBG in Juruti and delayed shipments from the end of 2020. Total CapEx is now forecast to be around $250 million, covering significant projects, including the crusher move at the Willowdale bauxite mine, which will be completed this year, and the construction of new residue storage areas. AWAC’s 2021 forecast of cash restructuring related items has increased to around $75 million due largely to the timing of remediation activities at Point Comfort and Suralco. The outlook for the cash cap is largely dependent on continued operating performance, raw material costs and the Australian dollar. This slide highlights the key sensitivities. Now let’s turn to Alumina Limited’s results. Alumina Limited has continued its run of strong results, recording a net profit after tax of $146.6 million, a good result considering the challenging global backdrop. Alumina Limited announced a fully franked final dividend of USD 0.029 per share to be paid on the 16th of March. The dividend reinvestment plan is suspended and will not apply to the final dividend. Since changes were made to AWAC’s distribution policy in 2016, Alumina has paid, including the 2020 final dividend declared, approximately $1.5 billion to its shareholders, representing an average dividend yield of 7.5% over that period, all fully franked. Both the 2020 interim and final dividends declared represented 100% of the available cash for distributions, despite the market uncertainty. This demonstrates our confidence in the AWAC business and Alumina’s very strong balance sheet. If disclosed at a half year, the short-term cash impact of the ATO examination will actually be positive for AofA due to the fact that the cash tax shield benefit of the initial interest assess is greater than the initial cash outlay. The net impact on 2020 distributions received by Alumina was largely immaterial. In the first half of 2021, however, we do expect to receive excess cash benefits of approximately $30 million to $35 million, which we plan to quarantine from the interim dividend. Our investment in AWAC’s portfolio of low-cost, world-class assets, together with a very strong balance sheet, underpins the company’s capacity to deliver strong returns to shareholders throughout the cycle. That was tested in the first half by the impact of COVID-19, but Alumina’s business model was rock-solid and withstood that uncertainty. Thank you, and I’ll now hand back to Mike to provide you with an overview of the market. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Thanks, Grant. I’ll now discuss in more detail aluminum supply and pricing, followed by a discussion of market outlook for alumina. COVID led to a 5% reduction in global aluminum consumption in 2020, as shown in the chart. Packaging was the only sector in which there was positive global growth. However, lower consumption did not lead to lower aluminum production. A production surplus outside China added around 2.5 million tonnes of primary aluminum to stocks. Around 1 million tonnes of the surplus was exported to China, partly offset by some remelt exports from China. Subject to any major COVID relapses, we expect global aluminum consumption growth of 6.8% in 2021. Motor vehicles, in particular, electric vehicles, commercial and residential building as well as our aluminum consumer packaging will be the driving force for the demand growth. After reaching a COVID low of around $1,420 per tonne, the LME aluminum price recovered strongly in the second half of 2020. From December through to mid-February, the aluminum price has been within the range of $1,952 to $2,147. The main reason for the rise and recent relative stability has been economic recovery, helped by government stimulus. This has increased demand for aluminum. Smelting costs rose in the second half on higher energy and alumina costs. A weaker U.S. dollar was also a factor, as was reduced availability of scrap and aluminum emerging from warehouses. The higher aluminum price led to some smelter restarts, which increased demand and prices for alumina. This graph shows the global historical primary aluminum surplus or deficit since 2008. As you can see, outside the 2 economic shock years of 2009 and 2020, there is usually a modest surplus or deficit. Although the global surplus in 2020 was a little higher than in 2009 in terms of weeks of consumption, the surplus last year was smaller, given increasing consumption since 2009. The surpluses forecast in 2021 and 2022, as shown on this graph, are lower due to expected consumption growth outpacing production growth. We expect around 1 million tonnes of additional primary aluminum production outside China in 2021. This will be from a mix of new capacity, restarts and better operational performance. Part of this increase has been incentivized by recent higher aluminum prices. This will require a corresponding volume of just under 2 million tonnes of additional alumina. Looking at the next 5 years, we see continued growth in aluminum production outside China. This should be across a number of regions. This growth would require close to 8 million tonnes of extra alumina production. The appendix contains a table which shows the alumina refinery projects either under construction or consideration outside China. Whilst there is likely to be meaningful extra alumina production from Indonesia and India by 2023, we expect there would still be a sizable gap if 8 million tonnes of additional alumina is needed by then. Outside China, around 1.4 million tonnes of extra alumina production is expected in 2021. This will be mainly from Indonesia and India, although we have already seen the Bintan project in Indonesia delayed to the second quarter of 2021. We also expect production from Phase 2 of Kendawangan in Indonesia to be delayed until later this year. Better operational performance at some refineries this year will lift production. Overall, the 1.4 million additional tonnes is less than the 2 million tonnes of aluminum needed for new smelting production forecast this year. Even though we entered 2021 running on an alumina surplus outside China, that surplus will be less than what it was in 2020. The smelter grade alumina surplus outside China in 2020 was 3.8 million tonnes. This is forecast to reduce to 2.9 million tonnes in 2021 due to increased aluminum production. The forecast surplus this year is expected to be exported to China, which will experience a modest deficit after imports. Chinese smelter grade alumina production is expected to increase by 3.8 million tonnes or 5.6% this year, while smelting production is expected to increase by around 4.7%. There was a 12% drop in global refining costs last year. Outside China, average production costs dropped by 10% in 2020. Fuel costs dropped by 22% as the oil price plunged, while bauxite costs dropped by 6% due to lower energy and freight costs. Caustic input costs also dropped by 10%. We expect higher energy and freight costs in 2021 to add to refining costs generally, but do not see much upward pressure on caustic prices outside China. Energy prices are expected to remain relatively flat for AWAC in 2021. AWAC is largely protected from potentially higher freight costs as most of AWAC’s bauxite is near AWAC refineries. Average alumina cash costs in China decreased by 13% in U.S. dollar terms in 2020. The marginal cost in China, which is the key factor driving importing of alumina by China, was $298 per tonne in 2020. Bauxite now accounts for 50% of the alumina production costs in China. We expect higher ocean freight costs in 2021, triggered by higher oil prices, to bring some upward pressure to seaborne bauxite costs. Average caustic and coal prices are also likely to be higher in China this year as markets recover. To summarize, despite subdued markets, Alumina Limited had a strong year in 2020 thanks to our world class, low-cost global assets. The global aluminum market is forecast to be balanced in 2021. As the world recovers from COVID, positive aluminum demand and production growth is forecast. Longer term, we expect an alumina supply deficit in the rest of the world as demand for aluminum product grows again. Whilst it is well understood that AWAC has a portfolio of low-cost mining and refining assets, AWAC is also the lowest CO2 emitter per tonne amongst major alumina producers, which supports the strength and sustainability of the AWAC asset base. Thank you for listening. I will now hand back to the moderator for questions. ================================================================================ Questions and Answers ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) Your first question comes from Rahul Anand with Morgan Stanley. ——————————————————————————– Rahul Anand, Morgan Stanley, Research Division – Equity Analyst  ——————————————————————————– A couple of questions from me, please. Firstly, perhaps, you’ve obviously talked about the requirement of additional 8 million tonnes of alumina production ex-China. With that in mind, how should we think about potentially your refinery expansion studies? And when they might be coming back into focus again? That’s the first one. I’ll come back with the second. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Sure. Those refinery studies are currently on hold. At the moment, we’re not sure when they’ll be dusted off the shelf and revisited. I think we want to see a, as we expect, a period of sustained growth in the alumina price and demand, but we haven’t yet made up our minds when we’ll revisit the projects. ——————————————————————————– Rahul Anand, Morgan Stanley, Research Division – Equity Analyst  ——————————————————————————– Okay. Second one then for Grant, perhaps. Grant, you talked about first half costs now. Obviously, the exchange rate potentially has about a $10 a tonne impact on your production cost next year. But you were mentioning the crusher moves, et cetera. Are you able to provide a bit more color as to how we should be thinking about it? Perhaps, if you can’t talk numbers, maybe in terms of work index or something else that provides a bit of a benchmark for us? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Yes. Yes. So you’re right with Australian dollar depending, of course, how long that stays up at these levels. The sensitivities are provided there. The 2 other things we called out, maintenance, which I think I can — that tends to be sort of in the $5 to $6 range higher in the first half than the second. Now that does bounce around year to year, depending on the exchange rate. Obviously, last year, it wasn’t higher because the exchange rate was lower in the first half than the second. So that does tend to put costs up in the first half. In terms of the crusher move, I can’t really guide to much other than it is going to be higher, largely just driven because the haulage just is obviously at its peak at the moment until the crusher moves. We expect the crusher to move sort of into the back end of the first quarter, second quarter. There is still a lot of work to do in terms of the facilities for the rest of the year, but that would start to tend down at the end of the first half. So it will just be higher in the first half and then we should get some savings on that in the second. ——————————————————————————– Rahul Anand, Morgan Stanley, Research Division – Equity Analyst  ——————————————————————————– Got you. Okay. Then just one final one perhaps for you, Mike. One of the longer-term trends, per your presentation, obviously, the switch to gas in China from coal. Is there sort of any internal work that you can point to in terms of what that might do for that top end of the cost curve and, obviously, benefit Alumina Limited’s production and price? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Well, certainly, that process that China has indicated it’s going to go through will increase the initial cost of construction and infrastructure investment. So we think in the short to medium term, that will increase the cost curve. Longer term, it all depends on, obviously, on the price of gas, and we haven’t worked through that yet. I suppose to add to that, China has proposed to introduce a carbon tax, announced that this month, I think. And we haven’t seen the makeup of that. I suspect heavy emission industries like smelting will get an exemption for a period of time, but over the longer term, that will also increase the cost curve. ——————————————————————————– Operator  ——————————————————————————– The next question comes from Paul Young with Goldman Sachs. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– First question, Mike, is on the Chinese costs, I guess, the breakdown that you provided on Slide 27, one of the last slides you just spoke about. The trend down was to USD 271 a tonne in 2020. Two questions on that. Can you confirm that, that $271, is that measured at the refinery at the Chinese port? Or back to the Western Australian, WA Ports? And then second to that, do you have a sense of where that number is now at spot? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– I think that’s measured at refinery, to your first question, Paul. Where that number is currently at spot, I don’t have that. But we expect that to be increasing this year, really driven by freight costs and oil prices. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Okay. And thermal coal, contract prices in China. Any sense of the consultants who are using the feedback from them and anyone on the ground about any pressure on the cost curve from increasing thermal coal? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Yes. I think that is correct, Paul. I think the view is that the thermal coal prices will continue to remain high, if not increase, and that will add further pressure. But most of it at this stage we see coming through oil and fuel and shipping costs. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Yes. Okay. Great. And then a question on the Portland smelter, Mike. Alcoa has mentioned a few things about discussions with the government and also potentially looking at a renewable component within the power contract. But I note that it did report negative EBITDA in the December half and that’s even with the government assistance, which I think was $8 million or $9 million. I don’t have the accounts in front of me. But is it free cash flow positive now? And also, I’d note that your guidance on aluminum production this year basically implies the smelter runs for the full year. So can you maybe just provide us an update on where the discussions with the government are at the moment? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Sure. So it’s fair to say that I think the discussions with both state and federal have been positive. And more or less, some arrangements have been agreed with them on a go-forward basis, certainly in principle. What’s still outstanding is working through with the energy supply companies. Those discussions have been constructive and positive, but we’re not there yet. And so we hope that certainly from our perspective, that compromises can be reached and resolved on a go-forward basis. But just to emphasize, not there yet, Paul. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Yes. And when is the contract? When does the government assistance in the power contract, when do they expire? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Middle of the year. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– The current ones, yes, middle of the year. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– 30 June effectively? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– That’s right. ——————————————————————————– Operator  ——————————————————————————– You next question comes from Lyndon Fagan with JPMorgan. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– Look, just to continue on with Portland. On Page 20 of the result, you’ve got the Portland government facility forgiveness, which is a $22 million credit. Just wondering if you can explain the mechanics of that. And whether your discussions with the government include anything like that going forward? That’s the first one. ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Yes, Lyndon. So look, effectively, the simplest way of explaining is it’s a cash flow neutral arrangement we have. Obviously, we don’t talk about some of the terms and details of it, given it’s confidential, but from an accounting point of view, once you meet certain milestones being open, so effectively, the cash flow is done as alone, and then it gets forgiven. So that’s why you do see some lumpy profits as it were because they just — we’ve met a milestone. So therefore, we no longer have to pay that loan back along the way. And that moves around from first half to second half, depending on when the milestones are met. So it’s not necessarily a representation of the profitability of the business. It’s just the accounting for it. And any new arrangements, again, aren’t referenced to the old arrangements. It’s a whole new discussion. So again, I don’t want to talk too much about the actual terms of any discussions that are going on now, but it’s not tied to how it was done 5 years ago. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– Okay. And so the second half EBITDA loss, is that sort of just related to the power price going up with the aluminum price? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Yes, it’s that plus. Again, there was just probably no forgiveness in that particular period, and that can reverse. They often happen after certain times and they can happen not within the time frame of the second half. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– Okay. I might take some of that off-line. And just going back to your comments, Mike, about the green premiums that you mentioned in Europe. Can you maybe discuss a bit more about what you’re seeing in terms of those numbers? Like what are they? And how robust are they, I guess, in terms of trying to rely on them? And whether, in fact, you’re getting contacted by customers willing to pay more for green alumina. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– That market, green premiums in Europe, is not yet robust, Lyndon. Last I heard, the prices were ranging at about $7 to $9 a tonne. But I wouldn’t place any reliance on that yet because it’s still early days. Our customers prepared to pay a premium. I think it’s still being worked through. Certainly, customers are demanding and want to be buying green alumina and green aluminum, and you’re certainly seeing that with the packaging manufacturers. You’ve seen some auto deals recently signed by Rusal with one of the auto manufacturers. I think it’s not yet coming through in the context of premiums for those products, but we’ll just see how things unfold and the level of demand that grows with it. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– So that $7 to $9 is on the alumina price. You’re talking about alumina premiums there, are you? Or is that aluminum? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– That’s aluminum. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Peter O’Connor with Shaw and Partners. ——————————————————————————– Peter O’Connor, Shaw and Partners Limited, Research Division – Senior Analyst of Metals and Mining  ——————————————————————————– On bauxite and WA, 2 questions. Firstly, your ESG comments, Mike, early in the call regarding initiative to reduce residue. How do you do that? And secondly, on future bauxite moves and tenure and licenses and approvals in WA. When do you next need to reach out to the government/EPA for permitting new areas of mining in WA? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Sure. So on the emitting, I think our existing licenses go for about another 20-plus years. So we’re still fine. But I think there are some renewal — automatically renewal coming up in 2025 on one of them. And so certainly, at this stage, we don’t foresee any issues or problems. Sorry, what was your first question, Peter? ——————————————————————————– Peter O’Connor, Shaw and Partners Limited, Research Division – Senior Analyst of Metals and Mining  ——————————————————————————– The comments you made in your ESG slide about a move towards reducing bauxite residue. How do you do that? What’s the plan? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Well, we’ve installed press filtration at 2 of the refineries in Western Australia. So we expect once they’re fully up and running to significantly reduce from wet to dry stacking, which reduces the total area. And there is a fair amount of work going on both at our company level, but also at an industry level to find alternative uses for all residue. So for example, there’s trials in [bit] manufacturing, mixing it with cement. There’s trials on road construction. In fact, I read about the other day, but I haven’t looked at it, the possibility of using it for carbon capture. So I think drive to prove — to reduce the footprint and improve it will drive outcomes in the context of sustainability going forward. The land use and rehabilitation of that land use is [particularly there] at a high level that are being investigated, Peter. ——————————————————————————– Operator  ——————————————————————————– The next question comes from Paul McTaggart with Citigroup. ——————————————————————————– Paul Joseph McTaggart, Citigroup Inc., Research Division – Director and Metals & Mining Analyst  ——————————————————————————– So I just want to follow-up on the cash restructuring charges, which increased. Because you mentioned it was bringing forward to some of those remediation costs at Point Comfort and Suralco. So it’s not an absolute increase. Just wanted to be clear, this is simply a timing issue of those restructuring costs. And maybe… yes. ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Yes. Sorry. Yes, Paul, that’s right. It’s largely actually because we didn’t spend as much in 2020. So it’s probably not so much a bring forward. It was a delay in 2020, which partly with cash preservation, but actually probably mostly was around just the COVID impact on getting — this requires experts and consultants and people to get to site, which was difficult, especially in the first half. So no increase overall. It’s just a pushing from last year into this year. ——————————————————————————– Operator  ——————————————————————————– The next question comes from Glyn Lawcock with UBC — UBS. ——————————————————————————– Glyn Lawcock, UBS Investment Bank, Research Division – MD, Head of the Australian Mining & Energy Team and Research Analyst  ——————————————————————————– Mike, just going back to the carbon trading scheme. I think you said it — you made a comment about you’ve not seen the details. Anything you can add to the one line you’ve put in the result on the carbon trading scheme? Or are you really — you’ve only just seen the introduction and that’s it? And then the second question is just on the market. It feels like there is a bit in there for everybody. I understand, obviously, energy and freight and FX is increasing the curve — cost curve. But then you talk about the Chinese refineries moving to the coast. Imported bauxite, obviously, you need less of it, need less caustic as a result of imported baux. So I mean, is that sort of a case of good for ’21, but after ’21, things start to move the other way on the Chinese cost curve? I mean how do you see this playing out over the medium to long term? Because it sounds like it’s positive short term, but I can’t quite figure out what you’re trying to say on the medium to longer term with all those inputs. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Okay. No, I think when we expect the cost curve to continue to rise in China, including the medium to longer term, I think, certainly, in the context of bauxite, China will continue to import bauxite. Yes, with imported bauxite, they’ll use less caustic, and if they’re building more refineries on the coast, there’s less inland freight charges. But we’re currently in an oversupplied market of bauxite, and we don’t expect that to continue in the medium to longer term. And as China continues to import bauxite, that will add to the cost, both the base cost of the bauxite and the freight component. So we don’t expect a cost curve. You might get a blip like you had last year, but we don’t expect longer term for the cost curve to reduce, and we expect it to continue to rise. It may not rise dramatically. It might flatten out at some point. But certainly don’t expect a consistent longer-term reduction. On the carbon trading scheme, no, I don’t have any other information on that. I think it’s still very early days, both in China and in Europe. ——————————————————————————– Operator  ——————————————————————————– Next question comes from Lyndon Fagan with JPMorgan. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– Just a couple of follow-ups. So on the restructuring charges for Point Comfort and Suralco, how long do these go for? I’m just wondering if you can update us for how many years we need to model this stuff for? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– So they go for about 10 years, plus or minus. But I think as I’ve pointed out, probably in the mid year, you tend to spend 40% of them over the first couple of years and 40% over the next 4 years, and then it tails off for the last 20% over the last 4 years. That’s — obviously, it changes from refinery to refinery, but that seems to be the trend over the ones that we’ve closed to date and certainly the forecast we have. Now again, it got pushed out a little bit because 2020, we couldn’t do a few things we wanted to do. So that curves moved a bit. But if you look from where we are now, we’re elevated this year. We’ll be elevated again in ’21. And then it will start to follow that pattern where it will move down over the following 4 years, and then smooth out from there. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– And so are you able to sort of quantify how much is left to spend on these assets? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Look, I think it will be somewhere in the sort of USD 250 to USD 300, but obviously, that does change around with forecasts. And that’s across all of the ones that we’ve announced, closures over the course of the next decade. So if you look at the 75 we’ve called out this year, that follows that pattern I just sort of pointed out, if we do that over a couple of years. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– That’s really helpful. And then the other question I had was on the third-party bauxite shipments. I’m just noticing the guidance is a bit stronger in ’21. Are you able to sort of talk more about what’s driving that? And whether there is any ambitions again to increase that further going forward? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– So some of it’s just natural increases in CBG, which has been planned as it comes in with different phases. A little bit more in Juruti as well, just reflecting the sort of local dynamics. But also, there was actually a couple of shipments towards the end of 2020 that got pushed into ’21. So that accounts for some of it as well. So it’s just a mixture of all those 3. I don’t see that necessarily increasing again next year in the same kind of velocity given some of it’s just a mix from 2020 to 2021. ——————————————————————————– Operator  ——————————————————————————– Your next question comes from Paul Young with Goldman Sachs. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– A few follow-ups. First of all, I might have missed this, but what FX are you using for your CapEx guidance? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– It would have been done a little while ago. So it would have been probably in the 77 range, I suspect, in terms of forecast. So it’s a little bit lower than where it is today. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Okay. Great. Okay. So pretty close there. The second one, just on the ATO situation at the moment. First of all, you mentioned about quarantining of $30 million to $35 million of cash in this half. First question, does that relate — is that the tax benefit relating to the interest deduction? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Yes, it’s what we’re calling sort of the excess tax benefit. The tax benefit is greater than that. So if you look at — it might be worth just giving a little bit of explanation. We did some of this at half year as well. But yes, the primary assessment in Australian dollar terms I’ll start with because that’s what it was done as sort of AUD 214 million, and we had interest of AUD 707 million. So the tax benefit on that AUD 707 million is AUD 214 million. So it’s about the same as the primary assessment as it happens. AofA had to pay half of the primary assessment in July, which it did do. So about AUD 107 to — so we could move forward with the objection process. No more payments are due until it’s resolved. And so for the tax year that we’re in, AofA gets that full tax benefit, which is what we’re calling the excess tax benefit of about AUD 105 million. And what we’ve basically called out, again, as expected, I think we sort of thought this would happen in midyear, we got pretty much the cash outlay that was done in July versus the benefits that came through the course of 2020 largely was immaterial, they largely netted themselves off because they’re getting that tax benefit by not paying tax each month until it’s resolved. And so until it’s used up. But we will get the excess tax benefit through the course of the first half. And that, depending on exchange rate, where it comes in is at that $30 million to $35 million our share. And so we’re expecting to get that sort of excess cash benefits to Alumina Limited through the distributions, and we’ll hold that back. Because what happens is when we win the case, AofA will need to pay tax on the deduction that it’s deducted. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Right. Okay. I think you might have answered or touched on the second question as you said when we win the case. Can you maybe talk about what — about the court dates and what we should be looking at for as far as the legal time frame? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Sure. So we don’t have court dates yet. Court proceedings have not been commenced by us. So we’re really still working through our case to present to the ATO within their internal process. We would expect that to be completed probably no later than sometime during the second quarter, and then that would be presented to the ATO. And then we’re not sure how long the ATO will take to digest, come back, discuss, engage on that front. So if I was putting a sort of an estimate on this, Paul, I would say, we probably won’t know the outcome of the discussions with the ATO until probably towards well into the second half of the year, if not the final quarter. And then just to round off on that. If it goes — it’s not resolved, it goes to court, then you’ve quite some time after that. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– And just to confirm. Back on the ring-fencing, quarantining of $30 million to $35 million, Grant, you’re not expecting anything in the second half. This is just accumulative for the first half. It’s $30 million to $35 million, nothing. You’ve used all those tax benefits up and that will be done this half. ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– We’ve used the initial tax benefits up. There is ongoing interest still being charged on the amount that’s outstanding, but it’s at a lower amount. And we’ll — that probably, as of today, works out to sort of be in the USD 6 million our shares. So we’ll deal with that in the second half, depending on what it actually works out to be. But it’s much — it’s much less material than the initial assessment. ——————————————————————————– Paul Young, Goldman Sachs Group, Inc., Research Division – Equity Analyst  ——————————————————————————– Great. And final one for me, Grant. Just on the Juruti and the [miners]. Can you just update us on the studies, the time frame there in the studies? And also refresh the, I guess, the capital, CapEx estimate on that project? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– So we haven’t talked about the CapEx estimate. That’s what they’re working through now. There is lots of different ways they could do this move. So I think it’s actually just leading to try and work through it. They really didn’t do much on the planning last year. There is a little bit in the CapEx slated for this year to do some planning. And I would suspect through the course of this year, we’ll have a much better idea as to whether they are going to go ahead, when they’re going to go ahead and in what form. So it really is a little bit up in the air in terms of until the planning is done, which actually is just beginning and is slated for this year. ——————————————————————————– Operator  ——————————————————————————– (Operator Instructions) The next question comes from Peter O’Connor with Shaw and Partners. ——————————————————————————– Peter O’Connor, Shaw and Partners Limited, Research Division – Senior Analyst of Metals and Mining  ——————————————————————————– Grant, wouldn’t that $30 million to $35 million quarantined amount comes through in the first half, which is around about USD 0.01 per share. Alcoa clearly won’t be calling that out in their result. Will you and your summaries that come out of the quarter call it out, so we don’t get a double count of dividends? Just throwing out there over kind of a request or a helpful hint. ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Yes. Yes. So we — that number is what we are expecting to get above the normal operating cash flow. It’s a number that’s pretty easy to predict. It’s AUD 707 million times the 30% tax effect times whatever the exchange rate applicable. So that’s why we’ve got a little bit of a range on it because the exchange rate could move, and we’ll get it and we’ll withhold back whatever we get. ——————————————————————————– Peter O’Connor, Shaw and Partners Limited, Research Division – Senior Analyst of Metals and Mining  ——————————————————————————– Okay. But you understand that we obsess about dividends every quarter with our currently run numbers and try and work out what they’ll be. So you’ll give us some guidance to call that number out clearly when it comes through? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– Yes. ——————————————————————————– Peter O’Connor, Shaw and Partners Limited, Research Division – Senior Analyst of Metals and Mining  ——————————————————————————– Okay. Got it. And back to the issue of closure costs and restructuring charges. I know I’m getting ahead of myself with Portland because it’s not done and dealt yet. But closure cost estimates for Portland, when and if that occurs? What are they now? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– We haven’t — we know what they are, but we haven’t disclosed those, Peter. So it all depends on what the outcome is, and then we’ll have some better clarity. ——————————————————————————– Operator  ——————————————————————————– The next question comes from Rahul Anand with Morgan Stanley. ——————————————————————————– Rahul Anand, Morgan Stanley, Research Division – Equity Analyst  ——————————————————————————– Just one follow-up from me, please. Grant, perhaps. I noticed at the AWAC level, the SG&A costs were down year-on-year significantly, $122 million to $90 million. Just wanted to get a bit of a gauge on that going forward. How should we be thinking about these? How much of that cost out is sustainable? And then secondly, just on the inventory build. You’re up to $570 million, how much of that is price? And how much of that is volume? ——————————————————————————– Grant A. Dempsey, Alumina Limited – CFO  ——————————————————————————– So on the SG&A, I think there’s 2 factors. Obviously, the restructure that Alcoa did in the back end of 2019 had some benefits flow through last year. So I think that won’t — that trend won’t necessarily keep going, but that was a bit of a one-off benefit for 2020. Exchange rates would have also impacted that, not so much in Australia, but certainly in the Brazilian operations would have benefited from exchange rates on that. On the inventory, I may have to get back to you on that, to be honest. So I don’t want to mislead you on the question in terms of what that buildup is. ——————————————————————————– Operator  ——————————————————————————– The next question comes from Lyndon Fagan with JPMorgan. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– Look, just one more. Can we talk a bit more about EcoSource? So I’m just interested in the branding that you’ve come up with. It looks like at 0.2 tonnes, most of your production will be very close to that. How have you come up with that 0.6? And is this something that’s sort of planning to be marketed heavily to try and get the premium that you were mentioning earlier? I’m just interested a bit more about that. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Yes, Alcoa is certainly marketing that quite strongly for last few months now, Lyndon. And we don’t have an update on yet as whether they’re achieving the sort of — achieving premiums. I don’t believe that’s the case at the moment. But certainly, there is a preference from a number of customers to take that product. The calculation and how they put it all together, to be honest, is beyond me. But certainly, when you look at our portfolio where we predominantly — where we use gas in WA. We use gas at San Ciprian. We do use oil in Alumar, but the longer-term plan is to transition that to gas as well. That 0.6 is reflective of the fact that most of our — the great majority of our alumina is produced using gas rather than coal or oil. So that’s a reflection of that. ——————————————————————————– Lyndon Fagan, JPMorgan Chase & Co, Research Division – Analyst  ——————————————————————————– So the 0.6 is an Alcoa figure that’s sort of conveniently sitting above a lot of the production rather than some sort of industry standard. Is that correct? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– It’s a 0.6 that they have calculated in the context of what our refineries produce and how they’re produced. But you’ve seen the table in the materials, which shows what the emission standards are like for coal producers, which are much higher. So yes, that’s been internally calculated. ——————————————————————————– Operator  ——————————————————————————– Next question comes from John Tumazos with John Tumazos Very Independent Research. ——————————————————————————– John Charles Tumazos, John Tumazos Very Independent Research, LLC – President and CEO  ——————————————————————————– In your Slide 23, you list the 4 million tonnes of primary growth outside of China in the next 5 years. Is that gross or net? How much would the offsetting reductions be? And secondly, in the fourth quarter, Alcoa’s realization was 14.1% of LME and the current instantaneous price is about 14% of LME. That’s the lowest since ’07. Why do you think that’s so extreme? ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Okay. I’ll have to get back to you, John, on the first one, whether it’s gross or net. I think it’s gross, but I’d need to double check on that, so we can come back to you on that. In fact, I think it is gross. So I think that’s right. On the LME, the 14.1%. It’s really reflective that the market has been in surplus of alumina, which has dragged down. And even though we’ve seen a significant rise in LME recently, we’ve seen some increase in alumina prices in the API, but not to the same extent because of that surplus which will continue for part of this year. Having said that, personally, I’m quite optimistic that we’ll see an improved percentage. The demand for aluminum is growing strongly, possibly greater than we think, and certainly, tailwinds are there. And so if more smelters increase their production and open curtail or facilities, particularly outside of China sooner than we expect, then we would see an uplift in the alumina price and potentially an increase in that percentage. But I think it’s being dragged down currently by the surplus. ——————————————————————————– Operator  ——————————————————————————– There are no further questions at this time. I’ll now hand back to Mr. Ferraro for closing remarks. ——————————————————————————– Michael Peter Ferraro, Alumina Limited – MD, CEO & Executive Director  ——————————————————————————– Thank you, everyone, for making the time to listen in today. And I hope that’s been useful for you and certainly has for us. And we look forward to speaking again soon. Thank you. ——————————————————————————– Operator  ——————————————————————————– That does conclude our conference for today. Thank you for participating. You may now disconnect.