Analysts at Bank of America Merrill Lynch (BAML) projected that Alcoa Inc (NYSE:AA) would deliver a poor financial performance for the second quarter of the current fiscal year. The aluminum giant is expected to report earnings per share (EPS) of $0.06, lower than the consensus estimate of $0.10 and its $0.11 EPS during the previous quarter.

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Factors Responsible For Decline Of Alcoa

According to the analysts, the primary cause of the decline of Alcoa Inc (NYSE:AA) was due to the 8 percent quarterly drop in 15-day-lagged LME pricing, which offsets the seasonal improvement of the company’s mid- and downstream segments.

The analysts said that the management of Alcoa Inc (NYSE:AA) anticipated that its ATOI during the second quarter would be flat in upstream (alumina and aluminum) excluding LME and foreign currency exchange. The management projected a 15 percent to 20 percent increase in rolled products and 5 percent increase in engineered products and solutions.

BAML analysts expect that the management of the aluminum giant will focus on its cost-cutting efforts and productivity improvements. Alcoa Inc (NYSE:AA) is also expected to provide details regarding the possibility of smelter closures. The analysts noted that the company revealed in May that it will review 4 to 5 smelters for possible shutdown.

The analysts also emphasized that the rising interest rates triggered concerns regarding the sustainability of the current elevated LME warehouse aluminum supplies. They noted that the LME Aluminum pricing already weakened as the regional premium in the United States reached an all time high of $0.12/lb.

“We think substantial price recovery is unlikely over the next 2-3 years and we tested valuation and debt metrics at $0.05/lb increments from $0.70-$0.95/lb. Every $0.05/lb change in LME price is $430-$480M of EBITBA, $0.20-$0.25 of EPS, and $230-$330 million of FCF x Ma’aden cost,” wrote BAML analysts in a note to investors.

The analysts said that Alcoa Inc (NYSE:AA) will be able to reduce cash burn by reducing its $550 million of growth capex, and by paying pension with stock instead of cash. The analyst also suggested that the company could sell non-core assets, and boost productivity gains and cost cutting such as closing high-cost facilities.

In May, the credit rating of Alcoa Inc (NYSE:AA) was downgraded by Moody’s to junk due to the volatility in metal prices and macroeconomic conditions. BAML analysts believed that the rating have a minimal impact because less than $1 billion of its debt matures over the next four years and its revolver matures around 2017.

BAML analysts maintained their neutral rating for the shares of Alcoa Inc (NYSE:AA) with a price target of $9 per share.