I think getting exposure to aluminium is a great investment idea today. Fears over supply levels continue to grow and prices of the lightweight metal have struck fresh 13-year highs on the London Metal Exchange today. These gains are even more impressive given that signs of slowing global growth is smacking appetite for other riskier financial assets like shares.
In particular, concerns over smelter shutdowns in China are fanning fears over dwindling supply. Production has been closed as major aluminium-producing provinces in the country struggle to curb their carbon emissions. This is a story that could provide long-term support to metal prices as Beijing grapples to meet emissions targets. In addition, prolonged political strife in key aluminium producer Guinea could also keep prices strong.
A cheap US share to ride the aluminium boom
All this bodes well for bauxite, alumina, and aluminium company Alcoa Corporation (NYSE: AA), one of the biggest aluminium producers on the planet. Soaring prices of the commodity drove revenues at the US miner 63% higher in the three months to June. Though soaring aluminium values aren’t the only reason why Alcoa’s top line is rocketing. Production across all three of its business segments remains strong, and in the last quarter alumina output hit near-record levels.
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Alcoa has plans to hike production at its Western Australian assets to keep the bottom line rising over the long term too.
Threats to Alcoa’s profits
There are significant risks to Alcoa’s top and bottom lines, naturally. Robust aluminium prices could lead to a raft of new production capacity from other mining companies entering the market. The subsequent supply rise could in turn weigh heavily on metal prices.
Furthermore, profits at Alcoa could suffer in the short-to-medium term if a sharp slowdown in the economic recovery materialises. The latest industrial production data coming out of China was particularly concerning. This showed factory output rise 6.4% in July, slumping from growth of 8.3% in June and the fifth straight monthly decline.
7.9% dividend yields!
That being said, I think these threats could be baked into Alcoa’s share price at current levels. City analysts think the US mining stock will bounce into the black in 2021 as commodity demand recovers from last year’s subdued levels. Earnings per share of around 505 US cents are anticipated. Consequently Alcoa trades on a forward price-to-earnings (P/E) ratio of just 9 times.
An added bonus is that Alcoa also packs plenty of punch from an income perspective. City brokers think the aluminium ace will start paying dividends from this year after failing to pay out at all in 2020, 2019, and 2018. Forecasters are predicting total payouts of 1.9 US cents and 3.8 US cents per share this year and next respectively.
As a result Alcoa’s meaty 4% yield for 2021 marches to an eye-popping 7.9% for next year. Alcoa clearly isn’t without its share of risk. But at current prices of $46.40 per share I think this US share could be too cheap for me to miss.
