Is there further upside after Alumina Limited's 35% share price surge?

Cost cutting and efficiency gains have improved the outlook.

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Alumina Limited (ASX: AWC) is a slightly odd company. It has a market capitalisation of $3.7 billion but in a sense it doesn't do anything! That's because Alumina is a holding company for a 40% ownership interest in Alcoa World Alumina and Chemicals (AWAC). Alumina's primary source of income is in the form of dividends received from its investment in AWAC.

The past few years have been anything but pleasant for shareholders in Alumina. In 2008 the company earned A$202 million, however in the years since then the returns have been US$300,000, US$36.7 million, US$128 million, a loss of US$62 million and a loss of US$500,000 respectively.

Dividends have been equally as volatile, ranging from as high as 12 cents per share to as low as zero.

With the share price having gained 35% in the past 6 months – compared with just 3% from the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) – it appears Alumina has started to find favour with investors.

AWAC operates in the areas of bauxite mining, alumina refining and aluminium smelting –the company is obviously beholden to the global traded prices of these commodities. Despite ongoing challenges in the market for these commodities, Alumina just experienced its best quarter since 2011 with income up 59% in the recent March quarter.

AWAC has been busy boosting the efficiency of its operations with productivity improvements, cost controls and the closure of the Point Henry aluminium smelter in Geelong, Victoria. These moves have had a positive effect on the bottom line.

With a solid balance sheet with debts under control, cash on hand of $665 million and a focus on value added aluminium production after a number of years in the wilderness, Alumina is starting to look appealing.

Resource stocks can be unpredictable and difficult to analyse. For this reason many investors choose to avoid them all together however that could be a mistake. As Alumina's share price performance has proven, there are opportunities and profits for the taking.

Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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