Alcoa Corporation (AA.US): Subsequent production resumption in the Middle East is expected to be more gradual, and new capacity planned before the war may be difficult to implement.

Wall Street financial giant Jefferies Financial Group Inc. (Jefferies) recently released a research report after meeting with Alcoa Corporation (AA.US) executives, showing that Alcoa Corporation's business complexity and execution risk over the past several years have suppressed its valuation, while the AliGroup acquisition, pre-closing cash accumulation, progress in Western Australian mining approvals, and improved cash conversion from existing assets are expected to drive a valuation re-rating. The firm maintains a relatively positive stance on aluminum prices and a relatively neutral view on alumina, reiterating its "Buy" rating on Alcoa Corporation and a US$60 price target, implying upside of as much as 53.1% from last Friday's closing price of US$39.19 shown in the research report. In addition, "Australian-listed security AAI" also received a "Buy" rating with an A$87 target; the US$60 target is based on net present value analysis, not a simple application of the price-to-earnings multiple. In the view of the Jefferies Financial Group Inc. analyst team, even if aluminum prices enter a normalization phase, the company may still reduce its valuation discount through asset integration, stable production, and cash accumulation. "Australian-listed security AAI" refers to the CHESS Depositary Interests (CDIs) of Alcoa Corporation listed and traded on the Australian Securities Exchange (ASX) under the ticker AAI, quoted in Australian dollars, representing an interest in Alcoa Corporation common stock; it corresponds to the same Alcoa Corporation as the US ticker AA and is not a separate Australian aluminum company. The aluminum market is arguably digesting the price premium brought about by the earlier Middle East supply shock. According to the Jefferies Financial Group Inc. research report focused on Alcoa Corporation and aluminum market trading, the LME aluminum price has fallen significantly by about 17% from early June, mainly affected by the resumption of production in the Middle East and increased supply from Indonesia; on November 3, LME three-month aluminum fell another 2% to US$3,032.50/tonne. The Middle East supply that had previously supported the rally was disrupted on a large scale under the political crisis of GEO Group Inc; the progress of electrification and AI computing infrastructure construction for aluminum demand still deserves attention, but the market has begun to re-estimate the supply-demand balance once new supply is delivered. By comparison, the LME aluminum price had previously hit US$3,707.50/tonne on June 1, 2026, the highest in more than four years. Alcoa Corporation's previously announced financial data show that this major global producer focused on bauxite and aluminum products had third-quarter revenue of US$3.704 billion, up 23.7% year on year, slightly below the Wall Street analyst consensus of about US$3.77 billion; adjusted EPS was US$1.82, above the US$1.51 expectation and compared with a loss of US$0.02 in the prior-year period. However, adjusted EBITDA excluding special items was US$789 million, down 12.4% quarter on quarter, largely indicating that operational improvements are not yet fully offsetting the decline in aluminum prices. In the view of Jefferies Financial Group Inc., what truly strengthened financial resilience was free cash flow of US$472 million in the quarter, totaling US$894 million over the past two quarters. The resumption process is pushing aluminum prices down; power costs and trade flows determine profit distribution Resumption in the Middle East can increase supply, but the pace of recovery depends on actual production economics. Alcoa Corporation management pointed out that alumina import costs for some Middle East smelters have exceeded US$800/tonne, subsequent resumption is expected to be more gradual, and new capacity planned before the war is also harder to implement; at the same time, the company expects China's 45 million tonnes/year primary aluminum capacity cap to remain enforced. The market's disagreement over 2027 supply and demand happens to center on whether this new supply can be delivered on schedule: a series of recent dynamic forecast reports compiled by institutions show that CRU expects a global aluminum surplus of 1.4 million tonnes next year, Wood Mackenzie expects 500,000 tonnes, and Bank of America expects only 239,000 tonnes, with the latter two emphasizing constraints from Indonesian ports, power, and supporting construction. Therefore, Jefferies Financial Group Inc.'s bullish case for Alcoa Corporation includes the judgment that supply growth is constrained by costs, but it does not mean that global supply is certain to remain in persistent shortage. The positive impact of the currently booming AI computing infrastructure construction process on Alcoa Corporation is transmitted mainly through data center construction, supporting power grids, and competition for power resources. The large-scale expansion of AI computing resources increases aluminum demand and also makes it harder for new smelting capacity to obtain low-cost electricity; the Jefferies Financial Group Inc. research report points out that power equipment accounts for more than about one-third of aluminum production costs, so assets with stable, low-cost power sources are more competitive. The profit Alcoa Corporation ultimately earns also depends on the difference between the "LME base price + regional premium + product premium" and actual costs. Jefferies Financial Group Inc. believes the company has already benefited net from the 50% Section 232 tariff reshaping trade flows: if Canada alone obtains preferential treatment, the US still needs to import aluminum from other sources, the Midwest premium may remain supported, and the company's low-cost Canadian assets may earn additional profit; if exemptions are broadly extended to other aluminum-producing countries, a decline in the premium would weaken this advantage. This is also why Jefferies Financial Group Inc. argues that AI computing demand, tariffs, and electricity prices must be analyzed within the same profit framework; whether Alcoa Corporation can further benefit from demand growth still depends on changes among aluminum prices, regional premiums, and production costs. The logic behind the US$60 target: improved cash flow supports valuation, and the acquisition provides further catalysts The AliGroup acquisition is the most important company-level catalyst. The initial consideration is about US$4.1 billion, including US$3.1 billion in cash and about 17 million Alcoa Corporation shares, plus contingent consideration of up to US$750 million linked to commodity prices, with closing expected in the first half of 2027. Its value lies in expanding the integrated scale of bauxite-alumina-primary aluminum and improving procurement, operations, and supply chain allocation; the company expects synergy net present value of about US$900 million and expects the transaction to be accretive to EPS and free cash flow after closing. Jefferies Financial Group Inc. particularly values the pre-closing cash accumulation: cash generated by the target under the "locked box mechanism" was about US$300 million at the end of the third quarter, and the firm expects it may exceed US$800 million by mid-2027, which, combined with Alcoa Corporation's own cash flow, helps reduce post-merger net leverage. This cash represents economic value accumulated by the target before closing and does not mean the US$3.1 billion cash consideration automatically decreases; the company's quarter-end cash resources of US$4.408 billion also include US$2.6 billion raised from bonds issued for the acquisition. Mine sources and operational stability determine whether cash flow improvement can continue. Third-quarter alumina production rose 11% quarter on quarter, and the Pinjarra refinery resumed operations, but the alumina segment's adjusted EBITDA still posted a loss of US$1 million; the aluminum segment contributed US$862 million, showing that current profitability is mainly supported by smelting operations. Fourth-quarter production and shipments for both segments are expected to increase, but the aluminum business faces quarter-on-quarter pressure of about US$30 million from raw materials and maintenance, with another about US$30 million from alumina costs. Although Western Australian approvals have made progress, accurate distinctions are still needed: the government announced it will approve the 2025-2029 mining management plan, the new temporary exemption is actually valid until the end of 2027, and the environmental review for a new long-term mining area has not yet been completed. The ELYSIS technology, renewable power, and 2050 net-zero operations target highlighted in the Jefferies Financial Group Inc. research report relate to long-term costs and asset competitiveness. The AI computing infrastructure process also brings other specific monetization opportunities: part of the land at the old Massena East plant is intended to be provided to a buyer for data center development, with potential proceeds of up to US$315 million, but payment is tied to permits, capacity expansion, and commissioning. Jefferies Financial Group Inc. is bullish on the strategic value of the AliGroup acquisition, but the earnings and cash flow forecasts in the report are still calculated on a standalone Alcoa Corporation basis. Therefore, what deserves the most attention in valuation is that Jefferies Financial Group Inc.'s model has not yet incorporated AliGroup consolidation, and it does not forecast consecutive sharp increases in aluminum prices and EPS over the next two years: the assumed average annual LME aluminum prices for 2026-2028 are US$3,298, US$3,197, and US$3,086/tonne, respectively, with adjusted EPS of US$6.53, US$5.30, and US$5.48; over the same period, however, free cash flow per share listed in the report rises from US$2.43 to US$3.71 and US$3.96. An important condition for the cash improvement is that the roughly US$899 million outflow in 2026 for working capital and discretionary pension payments does not recur in subsequent years. At the model page reference price of US$40.18, the 2027 P/E is about 7.6x, EV/EBITDA about 3.9x, and free cash flow yield about 9.2%. Whether these low multiples can upside depends on cash release and acquisition execution, not merely on cyclical stocks looking cheap. US$40.18 is the share price used in the model when calculating valuation metrics; US$60 is the target price. For example, US$40.18 divided by 2027 forecast EPS of US$5.30 gives about 7.6x P/E; this represents the valuation of the stock at US$40.18, not the valuation corresponding to the US$60 target price. The US$60 target is derived using net present value analysis. The Jefferies Financial Group Inc. research report gives Alcoa Corporation bull, base, and bear scenarios of US$90, US$60, and US$30, respectively, with the bull and bear scenarios corresponding to aluminum and alumina prices about 15% higher and lower than the base case, clearly showing that commodity prices, as well as acquisition catalysts and the cash flow growth trajectory, will still determine the valuation range.