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Why the Alumina Limited share price is rocketing higher

One of the best performers on the Australian share market today has been the Alumina Limited (ASX: AWC) share price.

In early trade the alumina and aluminium company’s shares are up a massive 9.7% to a 52-week high of $2.94.

Why are Alumina’s shares on a tear today?

Investors have been fighting to get hold of Alumina’s shares after a significant jump in commodity prices overnight and the release of Alcoa Corp’s quarterly earnings.

In respect to the latter, Alumina owns a 40% share of the AWAC joint venture with Alcoa which makes up part of the U.S. mining giant’s bauxite and alumina business segments.

According to an update released by Alumina today in relation to this quarterly earnings release, Alcoa’s alumina segment was down slightly on the previous period due to lower index pricing and higher costs.

However, it still generated significant positive cash flow and led to the company receiving gross distributions of US$266.2 million. Management opted to reinvest US$52.8 million of these proceeds as equity contributions, meaning net cash receipts from the AWAC joint venture stood at US$213.4 million during the quarter.

Pleasingly, since then alumina prices have rallied significantly, which should lead to bumper net cash receipts in the next quarter.

According to the Financial Times, alumina prices hit an all-time high of over US$700 a tonne overnight as supply concerns grew after US sanctions hit Russian producer Rusal.

These sanctions have led to Rio Tinto Limited (ASX: RIO) preparing to declare a force majeure on its contracts with Rusal, causing chaos throughout the whole industry.

In addition to alumina prices soaring, the aluminium price rose 5% overnight and reached its highest level since 2011.

Should you buy Alumina shares?

With prices at such high levels Alumina is undoubtedly positioned perfectly to enjoy bumper profits during this quarter. However, I’m not convinced that prices are sustainable at these levels and expect them to pull back in the coming weeks.

In light of this, I think investors ought to consider Rio Tinto ahead of Alumina if they want exposure to aluminium and alumina. I believe its diverse operations will allow it to benefit from the high prices, but also reduces the impact of any pull back in prices.

Though, I would still choose mining giant BHP Billiton Limited (ASX: BHP) ahead of both of these miners, even after its strong gain today.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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