This aluminum producer's shares can rally nearly 50%, JPMorgan says

Published Mon, May 8 20237:08 AM EDT

JPMorgan is bullish on aluminum producer Alcoa shares as the commodity's outlook becomes more positive. The bank initiated coverage on Alcoa with an overweight rating and a price target of $54, which implies shares rallying more than 49% from Friday's close. "Our view rests on a positive aluminum price outlook, given supply constraints and the commodity's strong secular growth trends, which can help fund shareholder returns and future growth initiatives," analyst Bill Peterson wrote in a Monday note. "The company has systematically improved its cash funding related to its pension and has no near-term debt obligations, which positions it well for a recessionary slowdown." Peterson sees aluminum taking on a key role in the energy transition over the next few decades due to its recyclability and light weight. The analyst added that carbon reduction — and ultimately elimination — in the aluminum production process will become "a defining theme," for which Alcoa is already well-positioned. "Alcoa is also well-positioned for aluminum's growing demand in the energy transition in addition to the 'greening' of the commodity itself with the launch of its low-carbon Sustana product line. The outlook also looks promising for its proprietary, zero-carbon Elysis smelting technology, which eliminates all scope 1 emissions associated with aluminum smelting, instead emitting pure oxygen as a byproduct," said Peterson. The analyst added that Alcoa will further set itself apart in terms of carbon-efficiency when initial commercial use of Elysis begins in 2024. The Elysis process was created through a partnership between Alcoa and Rio Tinto, the world's second-largest metals and mining group. According to Alcoa, the Elysis technology "emits pure oxygen as a byproduct and eliminates all of the greenhouse gas emissions associated with traditional smelting." Meanwhile, Peterson said, "Operational woes related to delayed mine permitting for its bauxite assets in Western Australia can keep costs somewhat elevated and alumina production capped near term, in our view." However, he thinks that "Alcoa can continue improving its operational execution over time, also supporting our OW view." Alcoa shares jumped 2.1% Monday during premarket trading. However, the aluminum producer's shares have declined 20.5% in 2023, and more than 40% over the past 12 months. AA YTD mountain Alcoa shares —CNBC's Michael Bloom contributed to this report.