Alcoa Faces Hefty Charges on Facility Potline Closure and Demolition

An SEC filing from Monday showed that Alcoa management approved on May 15, 2013 the permanent shutdown and demolition of two potlines. The capacity being removed is 105,000 metric-tons-per-year the smelter located in Baie-Comeau in Québec, Canada with the remaining capacity of 280,000 metric-tons-per-year composed of two prebake potlines. The company showed that these are among the highest-cost smelting capacity in the entire Alcoa system.

Alcoa is postponing the construction of a new potline there in Baie-Comeau and will begin preparations for the upgrade by investing $100 million in the smelter over the next three years. The closure is projected to result in an immediate 40% reduction in greenhouse gas emissions for this Baie-Comeau facility in Canada.

Alcoa showed that this was part of its 15-month review of 460,000 metric tons of smelting capacity that management is targeting to remove. The two Soderberg technology potlines will now be fully shut down by the end of the third quarter of 2013, with demolition and remediation activities starting in the fourth quarter of 2013 and expected to be closed by the end of 2015.

The charges look big, and frankly the company might want to consider how it uses these charges ahead. Management expects to record restructuring-related charges of between $190 million to $215 million, or $135 million to $155 million after-tax. These charges will remove another $0.11 to $0.13 from earnings per share)in 2013. Some 30% of those charges will be taken in the second quarter. Cash costs during 2013 are expected to reach about $100 million and here is a breakdown of the charges:

• $95 million to $105 million for employee–related costs;
• $55 million to $60 million for the accelerated depreciation of the potlines and related fixed assets;
• $35 million to $40 million for asset retirement obligations resulting from the planned demolition of the two potlines;
• and $5 million to $10 million for other related costs, net of scrap recovery.

Of all the charges disclosed, Alcoa represents that roughly $130 million to $150 million will result in future cash outlays. That figure includes $95 million to $110 million in 2013. Keep in mind that Alcoa has a market cap that is now down to $9.33 billion as a result of its shares not participating in the bull market. While Alcoa generated $23.7 billion in 2012 global sales, its net income attributable to common holders was only $191 million.

Alcoa shares are up 1.4% at $8.73 in late-Monday trading and the 52-week trading range is $7.90 to $9.93.