Shares in Alcoa Corporation (ASX: AAI) have charged more than 7% higher on no news of note, however, a research report issued by UBS could explain why investors are piling into the stock.
Image source: Getty Images
Shares looking like a good buy
UBS has upgraded its rating on the miner and aluminium producer to a buy, saying that the ongoing conflict in the Middle East has disrupted the market for Alcoa's products and will continue to do so.
The broker's analyst team said:
We upgrade Alcoa to Buy as we believe smelter outages due to the protracted conflict in the Middle East will more than offset near-term demand risks resulting in stronger for longer aluminium prices & premiums. This will more than offset lower for longer alumina prices resulting in earnings resilience that is not priced in.
UBS said demand indicators for aluminium were soft and inventories in China were elevated, therefore, "against this backdrop we expect London Metals Exchange (LME) prices to consolidate near-term''.
But longer term, "we are constructive on the outlook for aluminium and believe tighter fundamentals will support elevated prices of more than $3,000/t over the next 1-2 years''.
UBS said, using conservative LME prices, they were forecasting "sequentially higher" EBITDA and free cash flow for the company in the second quarter, while divestments could drive the company's net debt below its target range of US$1 to US$1.5 billion, "opening the door for buybacks in 2H26 that will act as a positive catalyst''.
UBS said it expected more than three million tonnes worth of supply disruption from the Middle East conflict, "resulting in deficits that are likely to support higher aluminium prices & premiums over the next 1-2yrs, regardless of if/when flows through the straits of Hormuz resume''.
On the capital management front, UBS said Alcoa said during its 2025 investor day that it was targeting the monetisation of US$500 million to US$1 billion in assets from 2026-30.
Press reports confirmed that Alcoa is in advanced negotiations to sell its idle Massena East aluminium smelter in New York to the digital asset and Bitcoin mining firm, NYDIG, Alcoa have indicated a potential sale in 2026; we do not factor this into our net debt forecasts but this could lead to accelerated cash returns.
UBS is forecasting Alcoa to have net debt of less than US$500 million by the end of 2026, which they say could open the door to a buyback.
Bullish target price
UBS has a price target of $110 on Alcoa shares compared to $100.41, up 7.6% on Monday.
Alcoa is valued at $24.62 billion.
