Earnings Transcript for AWC.AX - Q2 Fiscal Year 2021

Operator: Thank you for standing by and welcome to the Alumina Limited Half Year Results Conference Call. All participants are in listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Mr. Mike Ferraro, CEO. Please go ahead.

Mike Ferraro: Good morning, everyone. Welcome to Alumina Limited's results presentation for the 2021 half year. Before I proceed any further, please note the disclaimer. All references to currency are in U.S. dollars unless otherwise stated. I'm pleased to announce that Alumina Limited has recorded a net profit after tax of $73.6 million for the first half of 2021 and declared a fully franked interim dividend of US$0.034 per share. Our alumina refinery portfolio achieved a first half production record of 6.4 million tons. Underpinning this is AWAC's ability to weather worldwide events with a focus on health and safety, protecting the workforce and safeguarding our long-life, low-cost alumina and bauxite assets. 2021, so far has been a turbulent year for both the alumina and aluminum markets. The first half of 2021 has seen some of the highest aluminum prices in a number of years. The alumina price averaged $288 per tonne for the half and is now around $300 per tonne. It has been held back by high freight costs and the rest of the world alumina surplus. The increase in the aluminum price is attributable to strong demand, supply tightness, higher delivery costs and production restrictions in China. Alumina aluminum now exceeds $2,500 per tonne. AWAC's production costs have increased in the last half. Whilst the alumina price has not seen the same increase as aluminum, AWAC still maintained a very positive alumina margin. 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. Despite impacting -- COVID impacting the alumina and metal markets, we continue to have a positive outlook for both commodities. Looking forward for the rest of 2021, we still see metal production continuing to grow as government stimulus and demand encourage increased smelter production which will support demand for alumina. We are pleased that the Portland smelter put in place new power arrangements which ensures the future of the facility and is a great outcome for our investors, Portland employees and the local community. As the focus on a decarbonized world grows, aluminum has a potentially large role to play due to it's light weighting and recycling properties. And we are well placed to be part of this journey; this all goes well for aluminum long-term demand and consequently, alumina as well. Sustainability continues to be an area of focus. We are pleased that key metrics continue to trend in a favorable direction. Refinery emission intensity has continued to decrease and currently averages 0.51 tons of CO2 per tonne of alumina produced. The AWAC refinery is a first quartile on the refinery global emissions curve. At Portland, emissions intensity at the smelter decreased by 11% since 2019 to 13.8 tons of CO2 per tonne of aluminum, placing Portland a second quartile on the global smelter emissions curve. The smelter continues to benefit from the growth in renewable generation in Victoria. Grid greening; a focus on energy efficiency and fuel mix and the closure of high emission assets, has resulted in AWAC reducing it's CO2 emissions by 42% since 2010. A comprehensive picture of AWAC's sustainability performance will be in our 2020 sustainability report which will be issued at the end of August. We have also upgraded our TCFD reporting to include risks and opportunities associated with climate change over the next three decades. We are targeting full compliance with TCFD during 2022. Also, this year, we joined the Aluminium Stewardship Initiative. The ASI is the global preeminent standard setting and certification organization for the aluminum value chain. Over the coming decade we expect AWAC's carbon footprint to continue to improve and exceed the IPCC's targeted 45% reduction in greenhouse gases by 2030. Improvement would be facilitated through potential fuel switches as well as the continued influx of renewables in Victoria, benefiting the Portland smelter. While smelters benefit directly from a change in generation mix in an electrical grid, decarbonizing an alumina refinery is more challenging. It requires large amounts of energy to generate steam for digestion and calcination. Steam generation has been mainly sourced from natural gas, coal or fuel oil. A potential solution to decarbonize alumina refining could be mechanical vapor recompression. In May, Alcoa Australia and ARENA announced that they are pursuing an MVR development project with feasibility studies and a trial to be undertaken at the Wagerup refinery; this will involve using renewable energy to power compressors to recycle waste vapor into steam. The major benefit of MVR is that it reduces the energy used for digestion and when combined with renewable electricity, it could reduce a refinery's carbon footprint by 70%. MVR can also reduce the refinery's water consumption. MVR research and development demonstrates that AWAC is serious about further reducing it's emissions and continue to be a leader as a low-emission alumina producer. I'll now hand over to Grant to discuss AWAC and Alumina Limited's financial performance.

Grant Dempsey: Thank you, Mike and good morning, all. I will first give an overview of AWAC's performance and then move on to the financial results of Alumina Limited. The first half continued the trend towards COVID normal, consolidating the recovery of both aluminum and alumina. Whilst the alumina price was constrained by abnormally high freight costs, AWAC's low-cost, long-life assets once again delivered an impressive result. AWAC recorded an EBITDA of $465 million and net profit after tax of $202 million with strong cash flow from operations, $318 million. AWAC again, set production records for both alumina and bauxite, whilst primary aluminum output remained stable and third-party shipments of bauxite reduced slightly, largely due to port congestion. Increased raw material costs, higher-than-planned maintenance, unplanned outages and negative currency movements all contributed to higher alumina costs in the first half. I will now go through AWAC's operating performance in more detail. Whilst AWAC experienced some unplanned maintenance and outage issues impacting costs, it's refineries as a whole performed strongly, producing 6.4 million tons of alumina, a first half production record. Alumar, Pinjarra and Kwinana all increased production in the first half, whilst San Ciprian was negatively impacted by industrial action and Wagerup by mill failure and washing plant issue. The API was about 9% higher in the first half. Since the end of the half, prices have continued to rise and are now trading largely around $300 per tonne, underpinned by a higher China alumina price which is now above $400 per tonne. AWAC's cash cost per tonne of alumina increased by 12% from the prior half to average $230 per tonne. The higher Australian dollar negatively impacted conversion, bauxite and energy costs, accounting for around $8 to $9 per tonne of the increase. In addition to the currency impact, bauxite costs were higher, largely due to the crusher move at our Willowdale mine. Higher-than-expected maintenance, unplanned outages and increasing power and oil prices also contributed to the higher production costs. Looking forward to the second half; assuming the Australian dollar stays around the current level, the Australian refinery should see improvements to cash cap driven by the completion of the crusher move and seasonally lower maintenance costs, some of which will be offset by delayed maintenance from the first half. The Alumar and San Ciprian refineries, however, will see significantly higher costs driven by the large increases in energy and caustic prices we've seen, the impact of which are lagged and will start to materialize in the second half. Bauxite cost for those refineries will also be higher, driven by increased freight prices and unfavorable currency movements. Lastly, the alumina refinery will experience significantly higher conversion costs related to a damaged bauxite unloader which we have previously announced. The net effect of these movements is that we currently expect system-wide cash cap to end up being largely in line with the first half. When the rest of the world is in surplus, the API largely approximates the Chinese import parity price which is simply the China average alumina price adjusted for the cost of importing alumina. It is effectively the incentive price for Chinese smelters to import the rest of the world surplus. Earlier in the half, when there was some regional tightness in the rest of the world due to alumina restocking, the API was at a slight premium. Other than that, it reverted to trading largely in line with the import parity price. A major market disruption occurred this year when the cost of freighting alumina to China spiked from it's 10-year largely stable average of approximately $20 per tonne, reaching $48 in March, it now sits over $50 per tonne. Freight costs have a dollar-for-dollar impact on the China import parity price. In the chart, we estimate what the price might have been if the freight was in line with it's 10-year average. This shows that the freight shock potentially reduced AWAC's margin by up to $16 per tonne for the half, with the impact concentrated into the second quarter. If we make the adjustment based on spot prices today, the import parity price would be over $330 per tonne which if API was around that level, would see AWAC's margin in line with it's long-term average at around $100 per tonne. I will now talk to AWAC's full year outlook. Despite operational disruptions, we expect alumina production to remain unchanged at 12.8 million tons with all locations producing near or above nameplate capacity. Third-party bauxite shipments were lower than expected in the first half due to poor congestion and loading issues predominantly caused by COVID changes to schedules and policies. Some of this will be recovered in the second half but the forecast shipments for the year has been revised down marginally to 7.4 million tons. Portland's first half EBITDA included $20 million in revenue recognition relating to the final adjustment under the Portland restart assistance package established in 2017. While this won't be repeated in the second half, the smelter will benefit from new lower energy contracts and aluminum prices which are now trading significantly higher. Sustaining CapEx includes the completion of the crusher move at the Willowdale bauxite mine as well as the construction of new residue storage areas and tailing ponds Alumar and Juruti. It is now forecast to increase to around $240 million, driven by the higher Australian dollar and some unplanned maintenance. AWAC's forecast for cash restructuring-related items has decreased to around $65 million due to delayed remediation activities at Point Comfort. Now, let's turn to Alumina Limited's results. Alumina Limited recorded a net profit after tax of $73.6 million, a strong result as AWAC and the global economy emerged from COVID. Alumina announced a fully franked interim dividend of US$0.034 per share to be paid on the 15th of September. This continues to demonstrate the company's ability to pay healthy dividends through the cycle, representing an average dividend yield over the last five years of 7.5%, fully franked. As previously announced, any excess cash benefits relating to AofA's disputed transfer pricing tax assessment is quarantined. To that end, we held back $30 million from the interim dividend. Going forward, the tax shield benefits for AWAC are largely immaterial and will not be quarantined from cash available for dividends. Given Alumina Limited has virtually no debt and access to $350 million of facilities, we are in a strong position to withstand any further shocks as well as take advantage of opportunities as they arise. We have great confidence in AWAC's Tier 1 assets and believe that it's margins should track back towards long-term average once we see the Handysize freight costs normalize. Thank you. And I'll now hand back to Mike to provide you with an overview of the market.

Mike Ferraro: Thank you, Grant. In the first quarter of 2021, higher LME prices encouraged the rest of the world's smelters to ramp up and restart some capacity and to add to alumina stocks; this drove an increase in alumina demand and some regional tightness. API averaged $299 per tonne in the first quarter, $20 higher than the second half of 2020. Alumina prices were lower in the second quarter due to abnormally high Handysize freight rates to China. These reduced the Chinese import parity price. API averaged $288 in the first half of 2021. The reduction in alumina output at Alumar in July has caused the shortage in the Atlantic. The API has since increased to around $300 per tonne. The import parity prices recently -- has risen recently above $300 per tonne, with a higher Chinese alumina price, currently at above $400 per tonne. This should underpin the API while supply outside China remains in surplus, even once Alumar returns to full production. As this graph shows, the 10-year Handysize freight rate from Australia to China averaged $19 per tonne from 2011 to 2020. Due to a perfect storm of increased costs, COVID impacts, late harvest issues, shipping disruptions and decreased availability, the rate reached $48 per tonne in March 2021. The import parity price, as Grant noted, is the Chinese average alumina price adjusted for the cost of importing alumina. The port and handling costs are small and do not change much. The VAT is fixed to 13%. Therefore, the two key variables are the Chinese domestic price and the freight price from Western Australia to China. There has been an alumina surplus to smelting needs outside China this year. As expected, this has been exported to China as a market of last resort. In these circumstances, the alumina price outside China typically approximates to the Chinese import parity price; therefore, the higher the freight cost, the lower the import parity price into China. [Technical Difficulty] and late harvest issues have abated. However, a number of the factors behind high freight costs for small ships are continuing to impact rates. It is difficult to estimate how long these factors will last and when rates will fall again to the long-term average which should result in an increase in the alumina price in times of alumina surplus outside China. The surplus of 1.4 million tons of smelter-grade alumina was produced outside China in the first half of 2021 and was exported to China. This is in line with the full year surplus we forecast in February. We expect both alumina and aluminum production to grow outside China in the second half and for the global alumina market to be broadly balanced after a further 1.6 million tons of alumina exported to China. Chinese metallurgical alumina production is expected to register a 6% growth in 2021 to meet the 5% growth in primary aluminum production. The rest of the world metallurgical alumina production growth of 2% is forecast for 2021. Given China's cap on primary aluminum capacity as well as strict carbon policies, we have seen one Chinese primary aluminum smelter project under consideration in Indonesia. In China, input costs have surged since May. This included domestic bauxite, caustic soda and particularly coal. As a result, we saw the Chinese marginal alumina production cost increase by 9% from February to $376 per tonne by the end of the first half. In the second half of 2021, Chinese alumina prices are forecast to be under continued upward pressure given high production costs, potential supply disruption caused by China's carbon policies as well as logistics disruptions caused by potential COVID outbreaks. These cost pressures should underpin the API. Global aluminum demand has bounced back this year to around pre-COVID levels. We forecast over 6% growth for the full year. We expect global aluminum demand growth to ease in 2022 and 2023 to between 2% and 3% and rest of the world aluminum demand to grow by 3% to 6%. In the medium to longer term, we anticipate strong demand growth as the world decarbonizes and aluminum's lightweight and recycling quality has become more highly valued. More aluminum is required in clean energy technologies, from solar panels and wind turbines to electric vehicles and electricity grids. The International Aluminium Institute forecasts global demand for aluminum will grow by 88% from 2019 to 2050. This will require growth in both recycling rates and primary aluminum production which is positive for the medium to longer-term outlook for Alumina. To summarize, despite abnormal freight markets disrupting our margins, Alumina Limited had a solid first half in 2021, thanks to our world-class, low-cost global assets which enables us to continue generating consistent dividends. Whilst this year, the rest of the world alumina market is in surplus, that surplus will be absorbed by China. Increasing costs for refining in China is underpinning the API. We expect continued improvements in our margins once freight costs normalize. In the longer term, regarded as a middle of the future, a strong demand growth for aluminum is expected, especially in a decarbonized world which will support alumina demand. AWAC will continue to focus on carbon emissions and other sustainability initiatives to ensure it remains a low emission producer compared to the rest of the industry and to meet community expectations for addressing climate change. Thank you for listening. I'll now hand back to the moderator for questions.

Operator: Thank you. [Operator Instructions] Our first question comes from Rahul Anand from Morgan Stanley, Australia. Please go ahead.

Rahul Anand: Hi Mike, Grant and Charles [ph]. Thanks for the opportunity. First one is on the costs. Perhaps, Grant, if you can help us understand some of that increase. I mean you talked about it in the introductory comments. So I just wanted to touch on that a bit more, if I can. Firstly, on currency, what are your estimates for the full year guidance? And as the currencies come off, what type of impacts are you expecting? Now obviously, caustic, there's a six to nine month lag and we're probably going to be in higher caustic environment for the second half. And then the last part of that question is really that crusher move at Willowdale. Are all the impacts now through? And are we not going to see any leftover in the second half? I'll come back with another one. Thank you.

Grant Dempsey: Sure. Thanks, Rahul. So as you have identified, there's quite a few factors that are driving costs, some up, some down, for the second half. Largely, the crusher move -- or natural crusher move is done. There is still some infrastructure being moved around it but that's not really impacting costs dramatically. The costs in the first half were up due to some of the haulage issues. You're right that over the last couple of weeks, the Australian dollar has come down. But we've sort of factored that now into my comment this morning that if that has stayed up in the $0.75, $0.76, $0.77, you probably would have seen costs go up in the second half, driven, as you said, by a lag in caustic and a little bit of a lag in oil prices as well in some of the contracts. So, they are the two biggest raw material cost drivers for the second half but also some costs coming out of some delayed maintenance in the first half due to some unplanned maintenance in the first half which we highlighted and also the bauxite unloader is going to have some incremental costs in the second half. So there is cost pressures; we're not -- it's going to mitigate what we would normally see as a second half decline in cost just because of maintenance schedules. We're probably going to end up -- as we currently sit with the current sort of spot around 72%, we'd probably end up plus or minus where the first half was.

Rahul Anand: Okay, perfect. One quick follow-up on that; caustic. How is the group-level consumption tracking currently in terms of per tonne of alumina produced? Are we sitting at still that around 95 to 100 mark or how should we think about that?

Grant Dempsey: No. We sit -- we normally sit around the early-70s. We're probably a little bit higher in the first half just because, again, of the Willowdale crusher move. When you use new bauxite, you often use a bit more caustic. So we're probably in that sort of early-70s, mid-70s, late-70s kilos per tonne, depending on how the operation is performing. So that's one of our advantages over the long term, is we don't mind caustic prices going up because it drives the marginal costs of other producers up higher than it does ours but it does drive our costs up obviously.

Rahul Anand: Indeed, yes. Thanks. Look the second question is around growth projects, perhaps one for Mike. Mike, when would the right time be to start looking at those studies again that you shoved at the start of COVID?

Mike Ferraro: Well, we're constantly monitoring that. But at the moment, it's fair to say they're still sitting on the shelf. And the best I can say is that we'll continue to monitor it. We don't have a view as to when the right time. It will depend on a range of factors, the amount of supply coming on to the market, our assessment of alumina prices and so on. So we don't have a set date yet. We just regularly monitor it.

Rahul Anand: Okay, perfect. One final question is around that ATO dispute. Any updates around that? And then how should we expect what happens after a resolution? I mean if you do win that case, you have quarantined a bit of money because of the tax shield. And then if you do lose, you've already benefited from that tax shield. What are some of the impacts? Can you please remind us? Just because it's been going on for some time, it would be good to get an update on that. Thanks.

Mike Ferraro: I'll go through the process, where it's up to and Grant can talk to you about the impact of the tax shield at the end of it. Basically, it's fair to say it's probably going slowly. We had expected it to be more advanced at this point in time. We're still in engagement and consultation with the ATO and having various workshops and in the process of finalizing submissions to put to them. We had expected that possibly the ATO would respond by the end of this calendar year. I'm not so confident that, that will be the case due to delays, COVID impacts, inability to meet and so on. And so, I suspect it will be sometime next year. I can't really make a call. And after that, if the response from the ATO is not positive, then we would have the right which we would, to institute proceedings. So, you're talking a few years after that as you go through various courts and potential appeals. Grant, I'll hand over to you on the shield.

Grant Dempsey: Sure, I'll try and keep it simple. So, the answer is that if it gets withdrawn or we win everything that's happened to date gets largely reversed. So if you remember, there's two factors here. One is AofA got a AUD707 million tax deduction from the initial assessment which when you work through the -- and then they also paid an amount in terms of the 50% of the primary tax for the initial assessment. So that all works out to about the US$30 million our share that we have received in what we're calling excess tax benefit for the year which we've held back. What happens if we win? Obviously, the AofA now need to put that $707 million back into their accessible income. So they pay tax on that. They net that off against getting the prepayment back. And if exchange rates stay much the same, it's about US$30 million share as well in U.S. dollar terms. There are some -- as I called out, there's still some interest deduction going on. It's relatively immaterial, so that number will build a bit. And so at the time -- when that event happens, AofA will be distributing lower distributions to us and we will use the $30 million we quarantine to top up the dividends on the way through; that's the option that we have and we're looking at now.

Rahul Anand: Okay. All right, perfect. That's helpful. Thanks very much for that Grant and Mike. I'll pass it on.

Operator: Our next question comes from Paul Young with Goldman Sachs. Please go ahead.

Paul Young: Good morning, Mike and Grant. A few more questions on unit costs and more broadly across -- really across the industry. I mean first of all, just an observation on your cost. I mean thanks for the commentary around broad guidance of flat costs in the second half. I mean that would be a great outcome if you can orchestrate that considering the cost inflation we're seeing. And just on that, obviously, as cost inflation comes through, it's obviously good news for you guys considering the top end of the cost curve moves up and you just want your margins to expand more than the top end of the curve which always happens. So just on that, you called out the coal -- higher coal prices are coming through and flowing through the Chinese cost curve. Do you get any sense of the consultants that you use and experts that there are more contract resets on gas and coal flowing through in the second half on the Chinese cost curve? The second question is on the Handymax unwind, maybe one for Grant. This one, I guess, took us all by surprise in the first half and yourselves, it sounds like. I mean everything you were saying about the unwind -- potential unwind of the Handymax load rate is -- I really just cannot see that sort of happening considering the oil prices is still rising and the freight is just super tight globally. So can you maybe just talk about what gives you any conviction at all that the freight rate -- actually Handymax rate might actually unwind in the second half?

Mike Ferraro: Maybe I can take the freight point and then Grant can look at the cost aspects of it. We don't know. We can't really make a call at this stage as to whether the freight rates will unwind in the second half or later. We certainly talked to a range of industry experts, freight experts and so forth. And it really depends, Paul, on the COVID disruptions being resolved or largely resolved and the market adjusting back to a normalized level. So we really can't call it at this point in time. On your points about cost increases in coal and gas, I can't really answer as to whether customers -- all our customers and producers other than ourselves are putting in place resets. But we do know that coal prices are going up. We do know that in China, some refineries are in the process of converting from coal to gas. And that will increase their cost of production as they use, to some degree, imported gas. So we do expect to see continued cost pressures upwards. Grant, is there anything you want to add to that?

Grant Dempsey: Yes. No, I think that's right. I think the cost inflation, as you called out, Paul, is something we're not -- especially if it's raw material costs, it's not something we're unhappy about. We're seeing that already, especially in the last number of weeks. The China price has been driven up over 400. I think it's 407 today which is largely driven by those cost pressures coming into the 90th percentile of the local providers. And I think in terms of the freight, it's -- oil is obviously one part of it but oil is not really that much higher than it has been in different parts in the last 10 years. So that would -- when freight has been relatively stable. So the major drivers, as Mike alluded to, are more about COVID and some supply and demand issues which are the things that need to unwind for that to get back somewhere near this long-term average. And again, we don't know the timing of that.

Mike Ferraro: I think the trade disputes and wars have had a bit of an impact as well because different trade routes have to be worked through. For example, the coal that was exported from Australia to China is now going to different places and China is buying from other parts of the world. And that involves longer freight times and inability for ships to travel to the same ports at the same speed that they were doing before. So that's causing timing issues as well.

Paul Young: Okay, thank you. Next question is on Portland. It's finally generated some free cash and the outlook actually has improved for the smelter. If I look at, I guess, the go forward and the viability of the smelter, a big part of it is switching to renewables and it really could be a decent test case for the industry. I mean it's the first, I think, smelter in Australia that's actually chewing or consuming, I should say, some renewables. Can you maybe just step through what the plan is on the increased percentage of renewables? And also, I noticed that -- and correct me if I'm wrong but the guidance for aluminum has been reduced a little bit. Is that because you're seeing some minor productivity challenges or impacts as you transition to more renewables?

Mike Ferraro: On the renewables front, we see through the renewables coming through the electricity grid in Victoria. We think that by the end of the decade, we could be using over 40% renewable energy. That doesn't include any new developments that might take place in sort of big battery storage and so forth. But we're certainly not forecasting that into our assessment because you would need very large battery storage facilities to take renewable energy to make sure that we have firm power at Portland. But certainly, with the grid greening that's going on in Victoria, we certainly expect an increase in renewable consumption, as I said, to probably close to 40% compared to just over 30% at the moment. Sorry, remind me your other point Paul?

Paul Young: Yes, it's on productivity impacts -- on increasing...

Mike Ferraro: On productivity, yes. No, what -- I think what's happened is that as we sort of start to focus on that facility and more time is being spent on relining pots rather than patching and taking a longer-term approach, taking into account that it will remain open. So that's having some impact as some of the pots need to get a full relining and that takes time.

Paul Young: Yes. Okay, that does make sense. Thanks, Mike. Thanks, Grant.

Operator: Our next question comes from Lyndon Fagan with JPMorgan. Please go ahead.

Lyndon Fagan: Thanks very much. Look I just wanted to ask about the EcoSource branding again. I'm just wondering if you've had any inquiry specifically about that and whether any customers are expressing an interest to pay more for it? I'm just trying to work out the purpose of that brand being basically at this stage.

Mike Ferraro: Thanks, Lyndon. It's still very early days for EcoSource. There are customers that are expressing strong interest in acquiring EcoSource. And I know one customer, significant customer is very keen to get as much as it can. Are we getting any material premiums on that product yet? The answer is no. I think we'll still need to see the development of consistent premiums coming through in green aluminum before we see a movement in the EcoSource product. But I think it's a good product. It is something that customers do want but I think it will take time for it to evolve as a premium product at a material level.

Lyndon Fagan: And I guess what do you think is the end game in terms of what premium you might be able to extract from it and when, I guess?

Mike Ferraro: Absolutely, yes. It depends on the premium that's achievable on green aluminum. And as it goes down to scope one and two assessment in that green aluminum, that's where it becomes relevant. As to how long that's going to take, I would hope that it will probably be faster than people would ordinarily think because of the significant movement to decarbonize the metal and use it as a renewable source.

Lyndon Fagan: Right. The next question, just a quick one on CapEx. Obviously, it's gone up a little bit in the guidance. And at $265 million, we're a fair bit higher than that five-year average. Just wondering what you think sort of long-run sustaining CapEx is for the AWAC business now?

Grant Dempsey: It's Grant here. It's a good question. This year, obviously, we've had the Willowdale crusher move which has been quite elevated and most of it done in the first half where the Australian dollar was quite high. So a fair amount of that is just the translation back to U.S. dollars from where we sort of thought at the beginning of the year. Obviously, we've got a little bit of work to do with the bauxite unloader as well in Alumar. But -- so it is elevated. We probably will have -- we'll continue to have some elevated CapEx over the next number of years just with some plateau move still being worked on in Juruti, another mine move in Australia. So I'd say over the next -- the rest of this decade, potentially, we have slightly higher than the long-term average. But that's all being worked through in terms of how we plan there, how we smooth that. But these levels are -- I'm not saying this is the new norm but it's likely to be a little bit more elevated for the next little while.

Lyndon Fagan: Great. And just a final one on Portland. So if we've got sort of $37 million of EBITDA but then we take out the $20 million of government assistance, is that -- how do we sort of look at it going forward? Is that the profitability we should expect going forward? Or I'm just wondering if you can -- obviously, the price will move around. But as far as what we reconcile for costs after sort of doing those sums, is that where we're at going forward roughly?

Grant Dempsey: No, that's where we were in the first half with obviously a different energy contract than we've got in the second half. So you probably won't -- given they're commercial and confidence, we won't get a lot of visibility until you see them, unfortunately, in the second half. Obviously, they're lower. Energy makes up 35% to 40% of the cost. So -- and they're relative -- so it's a good portion of the costs. So really, it's difficult to give guidance on that without talking about the energy contract specifically. As Mike did also call out a bit, we'll probably not just have lower production but a slightly elevated cost from relining the pots that we'll work through to 2022. Certainly, we'll have a better outlook on cost as well. It's not just energy costs but we are at a little bit of catch up in terms of taking a longer-term view of the refinery -- of the smelter, sorry. So, look that's the starting point with lower energy costs and then higher prices. We're obviously expecting to have higher profits in the second half.

Lyndon Fagan: Great. And will there be any ongoing accounting for government assistance in other forms with the new structure?

Grant Dempsey: Not like we have had because it's a very different arrangement. So mostly the federal government is almost like a bit of fee-for-service. So there might be some timing differences in accruals at different times. And the Victorian one probably only really starts to kick in if the smelter doesn't retain it's profitability. So, I suspect the answer is no; it's going to look a lot cleaner than it has in the past in terms of just margin and costs.

Lyndon Fagan: Great. Thanks a lot guys.

Grant Dempsey: You're welcome.

Operator: Our next question comes from Hayden Bairstow with Macquarie. Please go ahead.

Hayden Bairstow: Good morning, guys. Just a couple of quick ones on the volumes. Just interested to understand the reduction in bauxite third-party shipments. Is that just Kwinana that's giving issues with port access or is there sort of other issues that we need to think about there? And also on the alumina. Obviously, the Alumar outage, just understanding what's factored into the guidance for you guys for that; and hence the reason for the no change in your guidance on alumina. Thanks.

Grant Dempsey: So, I can take that. So the third-party is probably more out of giving than it is out of anywhere else in terms of the reduction. And it's just largely to do with -- again, it's relatively small in the scheme of things, particularly when you compare it to the overall profitability of AWAC. It's largely just due with timing and congestion everywhere and we don't expect to make up for it. Given where the third-party bauxite market is as well, there's no necessary urgency to move heaven and earth to increase that. So it's largely just taking a pretty pragmatic view to where we think it could be at the end of the year. On the bauxite unloader as we sort of called out, it was sort of about 3% to 4% of our production on a sort of daily basis and that when it comes back on, we've made some assumptions. It's relatively small in the scheme of things. And whenever we provide guidance, it's usually rounded. And so it's -- it probably has changed from where we hoped it might get to but it's unchanged from where we forecasted at the beginning of the year. We'll have opportunities in the fourth quarter to make up for some lost production on some of the other refineries as they kick in.

Hayden Bairstow: All right, great. Thanks [ph].

Operator: Our next question comes from Peter O'Connor with Shaw & Partners Limited. Please go ahead.

Peter O'Connor: Good morning, Mike. Good morning, Grant. Good morning, Charles [ph]. Four questions for me. Firstly, financials, Grant. Just the dividend that flowed through from the joint venture, doing the mechanics or the analytics of how that flows, it looks like it should have dropped out about $0.032. It came out at $0.034 which is nice. Why and how?

Grant Dempsey: No, I think it should have been that $0.034. So I can take -- maybe I can take that off-line and make sure to check your numbers versus our numbers. But no, it's just -- there's no -- there's often a little bit of rounding but not $0.002. So I haven't got 5A right in front of me but it's really just taking the 137 less the cost. So it is in our 4D. I can refer to the page a bit later on, Peter, if that's okay.

Peter O'Connor: Yes, got it. It must have been the tax number, the way I treated the tax number. Got it. Particularly on the operations, Mike, can you confirm with WA, just the trend -- you gave us a caustic number. Just the trend over time, maybe a decade view for the 20s, what's the caustic consumption? It sounds like it's going to stay at 75. But also strip ratio because you did mention that on mine move somewhere in the future.

Mike Ferraro: Yes, Peter. We don't have the details of the strip ratio. There's quite a lot of mine planning work going on at the moment, particularly WA and that assessment won't be completed probably until early next year. Certainly, another mine -- one of the mines will have to be contemplated in the next couple of years or so. And -- but we haven't worked through what the impact of that in the context of transportation, strip ratios and what costs are involved at this stage.

Peter O'Connor: The caustic number of 75 sounds a steady number for the medium term?

Mike Ferraro: WA should probably be even lower than that. That's probably at the high end. So I would stick to the sort of between -- low 70s.

Peter O'Connor: Okay. And Mike, on growth, MRN, thoughts about what may unfold there with mine extensions and mine life extensions and how that plays out?

Mike Ferraro: Yes. It's still being worked through as to how large the expansion will be and that's got to be worked through the joint venture partners. So I know there's a range of different opinions depending on needs. And unlike some of the other joint venture partners, we have our own source from Juruti. So that would sort of suggest that maybe we would support a smaller, new capacity mine rather than the larger one on an annual basis. But that still needs to be agreed, Peter and worked through. It will eventually land and it will be agreed and we'll move on.

Peter O'Connor: Is part of that agreement would involve a change in ownership structure to make that more workable?

Mike Ferraro: Well, one of the issues is the arrangements between Vale and Hydro and that's always been a complex issue to sort out in the context of ownership and rights to take tonnage. So I think that at least would have to -- will probably need to be sorted as part of that.

Peter O'Connor: Okay. And just lastly on strategy, Mike, thinking bigger picture and carbon -- decarbonizing. And given your portfolio of production and where it goes to third parties but also internal to Alcoa, do you need to think longer term about scope three and where your alumina goes to and what your counter-party risk is in terms of their trend in decarbonization? And to that end, are you confident with where Alcoa are headed with decarbonizing in that regard? And if they, you weren't. Does that mean you place it elsewhere to customers that are on decarbonizing route? And so how does the sales business look in a decarbonizing world?

Mike Ferraro: Certainly, in the short term, we're seeing no difficulties with Alcoa absorbing it's constant share of alumina, taking into account the sort of aluminum prices they're getting these days. They are, it's fair to say, much more attuned these days to the impact of decarbonization and playing on that space. And if you've listened to some of their presentations or viewed them, you'll find that it's playing a very important part in their thinking and strategy and development. Now they're developing the ELYSIS product which will move hopefully to commercialization at some stage in conjunction with Rio to remove the impact of carbon anodes in smelting. So, I'm pretty confident that they are applying their mines and their technology and their capability at the smelting end. They're certainly attuned to dealing with reducing our carbon emissions. They're very proud, I suppose, as we are, that we are one of the lowest carbon emitters in the alumina portfolio. But to continue to look at it and as I spoke about mechanical vapor recompression as well, that assessment is taking place as we've spoken to the internal engineers and experts at Alcoa in detail around that. We are very pleased with the focus around this area at the moment.

Peter O'Connor: Mike, if I just lastly link back that thought you just said to costs and sustaining capital which Grant mentioned earlier. Is part of the drift in sustaining capital reflecting decarbonization? And if it's not, will it?

Mike Ferraro: I think the whole issue of sustainability will have a -- is having an impact and will have an impact on the entire industry if you think about the impact on residue disposal areas and compliance with the new ICMM standards in the last year or so. So I think that's an industry-wide development and it doesn't place us in any disadvantage in the context of maintenance design structure. I think in the context of carbon, you've seen in China, there are disruptions and restrictions coming through because of carbon policies being imposed. You're seeing potentially the development of carbon pricing mechanisms in Europe and China, though fairly lenient on the aluminum sector at the moment in the short to medium term but will start to have an impact. So, I think all that needs to be taken into account. But -- on the plus side -- well, does it place us at a disadvantage? No. I think we're extremely well placed relative to the rest of the industry. What does it mean for us long term? Yes, we will need to continue to identify new ways of reducing our carbon emissions which will depend on technology development when it comes to refining in particular. But on the flip side, Peter, you're seeing that the demand for aluminum is growing and will grow because of sustainability and renewable products such as wind farms, such as electric vehicles and so forth and packaging, where there's a desire for lightweight-ness and recyclability. So I think we're pretty well placed.

Grant Dempsey: And Peter, the Page 25 of the 4D is where the reconciliation of the dividend you'll find.

Peter O'Connor: Got it, perfect. Thanks guys.

Operator: Our next question comes from Paul McTaggart with Citigroup. Please go ahead.

Paul McTaggart: Good morning. So while we're on this topic of decarbonization, I just want to follow up on the MVR projects. So you mentioned that has the potential to reduce emissions by 70%-odd [ph]. And I know you're looking at the feasibility study around a 3-megawatt project. Can you give us some sense of potential timing and orders of magnitude of CapEx? Is this sort of a big CapEx spend? Or will it be absorbed in that sort of high sustaining CapEx that you pointed to?

Mike Ferraro: From a timing perspective, Peter, as you've probably read -- sorry, Paul, we're going through a pilot project. I think it will be a number of years before MVR is both proven up and implemented in the refineries. And we'd certainly start with WA. That's the thinking. We're not talking next year. We're not talking the year after. We are talking a number of years. As to exactly how many, I can't give you any more guidance than that. In the context of cost, we have asked that question of Alcoa and explored it with them but that hasn't landed either. That needs to be worked through. Having said that, whilst we think it's material, it's not so significant that it can't be absorbed in the maintenance CapEx down the track, or we just don't know what that number is yet. You really -- the space is there, it's really bringing in compressors ensuring they're connected up to the system to work. So the technology in theory works, has worked in other industries. It's the question of confirming that it works in our industry.

Paul McTaggart: Thanks, Mike.

Operator: [Operator Instructions] Our next question comes from Matthew Hope with Credit Suisse. Please go ahead.

Matthew Hope: Hi, thanks. I just wanted to look at a couple of things. Firstly, on bauxite. Obviously, the freight cost now is more expensive than the actual cost of the material. I understand you've kept it running because the freight was contracted. But at what point do you have to recontract freight? And really, I'm wondering whether this bauxite trade can be sustained into next year. Or does it fall away just because potentially the freight is too expensive? And then secondly, just on this gas contract with a new gas contract in WA. You've obviously been fairly secretive over the years about what the contract is. But just in terms of the parameters, is it going to be a more volatile contract if the terms changed? So it always used to be rolling 16-quarter pricing average. Is it still that sort of smoothing effect in the pricing? Or is it beginning to become more jagged going forward?

Grant Dempsey: On the gas contracts, no, it's relatively stable, predictable contractually. Obviously, some of these things have some complexities into it. So the changes will be more about usage than it will be about pricing. So it's a relatively stable contract for that gas. On bauxite; again, third-party bauxite, as you've probably seen, it's a relatively small part of our business. And the freight is actually paid for by the customer in that particular notion. So it's more of an issue for the refinery that takes it than it is for us. So obviously, we're always working with customers to figure out how we can get the bauxite as efficiently freight-wise as we can but that's just more of an issue for refineries that take it than anything else. But we certainly haven't -- and we've called that over the last couple of years, talked about growing the third-party market, not to do with freight, more to do with the markets relatively oversupplied. So that's why we've got a bit more of a sanguine outlook for third-party.

Mike Ferraro: And we have started to do some transshipping in Guinea with the bauxite. So that is loaded on to larger ships. And whilst the costs, yes, continue to rise, it's not as acute as the freight costs for smaller shipping.

Matthew Hope: Okay, thanks. Just one final one, if I could, just on a sort of a bigger picture issue. You mentioned that China, you estimate, is running at about 43 million tons capacity at the moment. And obviously, there's 45 million tonne capacity cap. Why do you still feel that the market for alumina is going to grow? It -- might there be a pause once China hits at 45 million tons and given that there's not that many developments of new smelters outside of China?

Mike Ferraro: I think if you look at it from a global perspective, the ultimate demand will be much higher. Certainly, the IAI, International Aluminium Institute, is forecasting significant growth in demand for aluminum over the longer term. And also in the medium term, we will see additional smelting production coming on-stream in the rest of the world. We certainly see China becoming largely self-sufficient for it's needs. So it may go to that 45 million cap. There will be some blips along the way as they focus on decarbonizing their metal production. There is -- there has been announcement Chinese companies going to build a smelter outside of China. And there are a couple of refineries that have been built by Chinese in Indonesia which the intention is to build some smelting capacity to take that offtake. So, I think there will be continued growth.

Matthew Hope: Okay, thanks.

Operator: There are no further questions at this time. I'll now hand it back to Mr. Ferraro for closing remarks.

Mike Ferraro: Thank you for listening today. As you've no doubt seen from our presentation and heard and experienced yourself, it has been a fairly tumultuous period this year and the first half and it appears to be that it will continue in the context of freight rates, in the context of increases in costs coming out of China which will underpin and help the rest of the world API price. We've also seen overnight that there's been a supply disruption to Jamalco refinery which has shut down production with the sort of a nameplate capacity of about 1.4 million tons coming out of a major fire in it's powerhouse. We're not sure what impact that had but any disruptions in a relatively balanced market may have some impact and we'll wait to see how all those developments unfold. But from our perspective, certainly in the short term, the risk is in the upside rather than the downside for those reasons and more. Thank you very much for listening and have a good day.

Operator: That does conclude our conference for today. Thank you for participating. You may now disconnect.