Alumina Limited (OTCQX:AWCMF) Q2 2022 Earnings Conference Call August 22, 2022 8:00 PM ET
Company Participants
Mike Ferraro – Chief Executive Officer
Galina Kraeva – Interim Chief Financial Officer
Conference Call Participants
Rahul Anand – Morgan Stanley
Paul Young – Goldman Sachs
Lyndon Fagan – JP Morgan
Paul McTaggart – Citigroup
Glyn Lawcock – Barrenjoey
Operator
Thank you for standing by. And welcome to the Alumina Limited Half Year Results Conference Call. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Mike Ferraro, Chief Executive Officer. Please go ahead.
Mike Ferraro
Good morning, everyone. Welcome to Alumina Limited’s results presentation for the 2022 half year. Before I proceed any further, please note the disclaimer, all references to dollars are U.S. dollars unless otherwise stated.
Alumina Limited had a strong first half with a net profit of $168 million, which was 128% higher than the corresponding period in 2021. It reflects the strength of our operations combined with global supply disruptions, which resulted in an average realized price of $398 per tonne of alumina.
Despite cost pressures, our margin strengthened, supported by higher alumina prices. Consistent with our dividend policy of distributing all available cash to our shareholders, we have declared a very healthy dividend for the half of $0.042 per share.
While the second half will be challenging due to current high input costs, our medium-term outlook is positive. The demand for aluminum will continue to grow to support global decarbonization, which will result in greater demand for alumina.
Before we take you through the financial highlights and market conditions, I would like to say a few words on our ESG performance, which is fundamental to our long-term sustainability. In advance of our sustainability update, we are pleased to present a snapshot of some key metrics.
Refinery emission intensity for 2021 was roughly flat at 0.516 tonnes of CO2 per tonne of alumina produced. All of AWAC’s refineries are first quartile on the Refinery Global Emissions Intensity curve and AWAC is the lowest CO2 emitter amongst major alumina producers.
Emissions should reduce, assuming mechanical vapor recompression is deployed and there remains the option for a fuel switch at Alumina. The Portland smelter, as well as other AWAC facilities continue to benefit from electrical grid greening.
AWAC’s total greenhouse gas emissions declined to 8.8 million tonnes from 9.1 million tonnes in 2021, as a result of reduced production and also due to the Portland smelters improved emissions intensity. AWAC now derives 36% of its electricity from renewable generation. Our joint venture has understood the importance of biodiversity and rehabilitation through 60 years of operations, which has entailed mining in the Jarrah and Amazon forests.
AWAC’s bauxite mines tend to be shallow as the ore body is below relatively thin top soil and overburden layers. This means that once the ore is mined, we can progressively rehabilitate an area.
Before an area is in mined each site is required to conduct an assessment, identify material risks to biodiversity and implement the biodiversity action plan to manage these risks. Mine rehabilitation is also planned in the early stages of mine development, with the objective to rehabilitate so there is no net biodiversity loss.
In 2021, AWAC planted 550,000 native Jarrah forest plants at the Huntly and Willowdale mines. What makes this achievement even more important is many of the collected seeds require heat, smoke treatment or propagation using techniques pioneered by AWAC. AWAC is also forecast to increase the number of seedlings planted to 750,000 per annum.
In the coming years, commodities, such as aluminum will become even more critical in the transition to a lower carbon economy, as it is required for solar panels, electric vehicles and electrical transmission.
AWAC’s refinery decarbonization strategy involves pursuing mechanical vapor recompression and electric calcination. Ultimately, decarbonization of the aluminum chain itself will require massive amounts of renewable energy.
In order to transition, we need policy clarity to support investment and a mutual understanding that technology readiness will not be linear, but rather lumpy. Research and development can take many years and technology deployment will take time as well.
In their recent special report, Manufacturing Australia had a number of priorities for governments to enable and coordinate emission reductions. Of high importance to Alumina Limited is ensuring that Australia has a manufacturing foundation built on low cost, firm and delivered clean energy.
Additionally, co-investment in R&D will help prove and scale breakthrough technologies. An example of this is the federal and Western Australian Governments contributing to the R&D of AWAC’s MVR and electric calcination technologies.
I will now hand over to Galina who will talk you through the finance section.
Galina Kraeva
Thank you, Mike, and good morning, all. I will start with the review of AWAC’s performance before addressing Alumina Limited’s results. In first half, AWAC recorded an EBITDA of $836 million and $439 million of net profit after-tax. Excluding significant items, recorded EBITDA and profit after-tax were $707 million and $380 million, respectively. The significant items are predominantly non-cash and includes $121 million positive change in fair value of Portland’s energy contracts.
Despite a slight decrease in alumina production and an increased production cost, the high average alumina price resulted in strong cash flow from operations of $495 million. The aluminum realized price was also significantly higher than the first half of the last year and positively contributed to the AWAC’s result.
Let’s go through AWAC’s operational performance in more detail. In the first half of 2022, AWAC produced 6.1 million tonnes of alumina, 5% less than record production in the first half of the prior year. Except for San Ciprian, all other AWAC refineries were affected by either operational or weather events that led to reduced production rate.
At Alumina, production was negatively affected by extremely heavy rainfall, which caused external power outages and operational challenges. Western Australian operations were also affected by operational issues and increased unplanned maintenance.
Continued escalation of natural gas prices in Spain prompted the San Ciprian refinery to reduce its production rate in the second half, initially by 15% and then further to 50%, 60% of its 1.6 million tonnes of annual capacity.
Overall, we expect total production in the second half of 2022 to be consistent with the first half. This is as a result of improving operational stability and production rates in Western Australia and in Brazil, offset by production curtailments at San Ciprian refineries.
Production disruptions in late 2021, COVID restrictions in China and the Russia-Ukraine conflict in early 2022 led to a period of elevated aluminum prices. This resulted in AWAC average realized price of $398 per tonne of aluminum, $77 per ton higher than the 2021 average.
AWAC cash cost of production averaged $304 per tonne, an increase of $74 per tonne compared to the first half of the previous year. Higher global energy prices accounted for almost half of these cost increases and more than 70% including the increase in the cost of costs.
Reduced production level at the Western Australian and Brazilian refineries also contributed to an increased production cost on per ton basis. A negative foreign currency movement in Brazilian real was offset by a favorable movement in Australian dollar.
The average cost of production peaked at $321 per tonne in the second quarter of 2022. With the partial curtailment of San Ciprian refinery and the improved production run rate in Western Australia and Brazil, the average cost of production is expected to improve in the second half of the year.
Despite the increased cost of production in the first half, AWAC’s margin averaged $94 per tonne of Alumina, $34 per tonne higher than the first half last year. The margin for AWAC portfolio excluding San Ciprian refinery was around $130 per tonne, which is above the 10-year average.
Turning now our attention to AWAC capital projects. First half capital expenditure in 2022 was higher than 2021 about approximately $15 million, amounting to $110 million. The most significant projects were residue storage and tailing dam projects in Brazil, as well as Juruti mine move. Second half capital expenditure is expected to be higher than the first half as Juruti mine move continues to progress and seasonal maintenance projects prompts up.
Moving to the full year outlook, based on operational performance in the first half and the announced reduction in San Ciprian production, we have revised the full year alumina production guidance down to 12.1 million tonnes to 12.2 million tonnes.
Third-party bauxite shipments are forecast to be 3 million tonnes. This is revised down primarily due to suspension of Juruti bauxite sales to Rusal.
Aluminum production is forecasted to be 160,000 tonnes, an increase from prior year, as new ports come online, although slightly below our previous guidance.
Sustaining CapEx and gross CapEx guidance have been revised down by $35 million, mostly due to the favorable currency movements. AWAC’s full year forecast for cash restructuring-related items remained stable at around $70 million.
Now turning to Alumina Limited results. Alumina Limited recorded a first half net profit after-tax of $168 million, an excellent result, reflecting 128% improvement on the previous corresponding period. Excluding significant items, net profit after-tax was $120 million.
Alumina Limited announced a fully franked interim dividend of $0.042 per share to be paid on 15th September. This once again demonstrated the company’s ability to pay healthy dividends through the cycle.
Alumina Limited shareholder’s has now been benefited from an average dividend yield of 7.4% over the last five years fully franked. AWAC’s strong cash flow generation, combined with Alumina Limited’s low level of debt and a positive balance sheet position enables Alumina to maintain a healthy dividend yield.
Thank you. And I will now hand back to Mike to provide you with an overview of the market.
Mike Ferraro
Thanks, Galina. The aluminum market reflects finally balanced fundamentals, where supply and demand changes are officially reflected in spot prices. The Alumina supply-demand balance and the near-term outlook can quickly tighten and result in shortages and price spikes even in the context of an expected surplus for a year. General learning from the last four years to five years is that those circumstances are increasingly occurring and have quite diverse causes.
Consistent with what we have seen over recent years, the first half of 2022 featured a series of global supply disruptions, which created a tight market and price spike, particularly in Q1. Nikolaev, one of Europe’s largest alumina refineries, ceased production in March due to the Russian-Ukraine conflict.
Chinese production was down caused by COVID restrictions and the Winter Olympics. Australian production and shipments were also lower due to unplanned outages and COVID disruptions.
The API reached $533 per tonne in March and averaged $396 per tonne in the first half. This reversed in the second quarter as the Australian government sanctions impacted the API, which I will expand on shortly.
With delays in the Jamalco restart and the commissioning of Bintan Phase II, high energy costs triggered production curtailments, particularly in Europe. These events are likely to impact alumina production outside China for the rest of the year.
On the demand side, primary aluminum production remained strong during the first half. According to the International Aluminum Institute, global primary aluminum production hit a record run rate in June 2022 at 188,000 tonnes a day. In the second half, potential curtailments are possible with higher energy prices in Europe and the U.S. putting pressure on some smelters.
At the same time, expansions and announced restarts are expected to come online, particularly in the Americas. All these factors have reduced this year’s rest of the world SGA surplus estimate before exports to China from our February estimate of 3 million tonnes to around 1.5 million tonnes.
In March 2022, the Australian Government banned alumina exports to Russia, creating an instant excess of alumina in the Pacific, which needed to find new customers. China subsequently increased production and started exporting alumina to Russia.
However, given the significant high cost of Chinese alumina, it is unlikely material volume will be exported to markets other than Russia. The China production being sold to Russia has resulted in a commensurate increase in rest of world available alumina supply.
Sanctioning by Australia and some Western producers of exports to Russia has created an additional alumina market. Post the Australian sanctions, the fine underlying balance of the ex-China SGA market persists, with an excess of 1.2 million tonnes less than 2% of the market. Since the Australian ban, the API has come down to its current level of about $330 per tonne.
The Russian-Ukraine conflict has pushed up raw material and energy prices during the first half. The rest of the world refining costs increased by 26%. At current prices, around 25% of the ex-China production would be loss making based on Q2 costs, placing refineries under economic pressure to curtail production.
As Galina has mentioned, AWAC’s production costs were impacted by higher energy costs at the San Ciprian refinery, which are now being abated as production will be cut to 50% to 60% of capacity this quarter. Our WA refineries benefit from long-term gas contracts and AWAC’s refining assets are less exposed to higher caustic prices due to lower usage per tonne.
In China, higher ocean freight rates and uncertainty about Indonesia potentially banning bauxite exports drove imported bauxite prices up substantially. Average Chinese alumina cash cost increased by 9% during the first half to $394 per tonne, including VAT.
By the end of June, around 10% of Chinese production was estimated to be cash negative and another 45% operating close to breakeven. These higher costs are now supporting alumina prices.
As China increasingly relies on imported bauxite for its alumina production, any disruption in bauxite supply, such as the Indonesian ban, is likely to lead in reductions in Chinese alumina production and increased costs.
Freight costs in the first half were higher, with Handysize freight from Australia to China reaching up to $67 per tonne. We are now seeing freight costs falling, currently sitting at around $37 per tonne. This is a positive development as this — as it lifts the import parity price into China, improves the prospects of China importing rest of the world alumina and supports the API. The current China import parity price is around $340 per tonne.
In the medium-term, as China approaches a 45 million tonnes per annum aluminum production cap, substantial growth in primary aluminum production outside China is expected to meet growing demand.
In turn, around 8 million tonnes to 12 million tonnes of additional alumina are likely to be needed by 2027. However, constraints as ability — such as the ability to secure low cost good quality bauxite, high capital costs and the availability of low cost reliable green energy are limiting the number of committed aluminum growth projects.
So far, only 3 million tonnes of additional alumina production outside China is committed in the next five years. These factors suggest there is a looming deficit of alumina in the rest of the world.
To summarize, during the first half of 2022, supply disruptions underpinned high alumina prices. The Australian ban on alumina exports to Russia changed global trade flows and induced the marginal rest of the world excess.
The Russia-Ukraine conflict has pushed up energy prices, especially in Europe. Notwithstanding higher production costs, AWAC is still in the first quartile of the global cost curve. Thanks to our low caustic usage, low-cost bauxite and long-term gas supply position in Australia.
Higher energy prices, possible supply disruptions, bauxite costs and higher global costs generally, compounded by central bank activities to control inflation influence the outlook. However, a higher Chinese import parity price, potential curtailments and cost pressures provide upside risk to the API in the remainder of the year.
In the longer term, aluminum has a key role to play in the transition to a low carbon circular economy. A positive outlook for aluminum supply growth is expected to lead to higher alumina demand and a supply gap in the medium-term outside China would strengthen prices.
Thank you for listening. I will now hand back to the moderator for questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Rahul Anand with Morgan Stanley. Please go ahead.
Rahul Anand
Hi, Mike and Galina. Good morning and thanks for the call. Look, the first question is around your guidance on the 200,000 tonne cut. Now, San Ciprian previously used to do about 1.5 million tonnes per annum, I take it probably goes to circa 1.3 tonnes. Can you, Galina, perhaps, help us understand how we should think about costs in the second half versus the first half, obviously, because you also had some Australian disruptions, as you pointed out? How should we think about the whole cost picture going into, perhaps, the second half and into CY 2023? That’s the first one and I will come back with the second.
Galina Kraeva
Okay. So with regards to the cost, first of all, obviously, in the second half of the year, we will have a favorable mix of production compared to the first half, because San Ciprian will have a lesser share in a portfolio, which will automatically improve the average price of the portfolio, but also Brazil and Western Australia are coming off the issues that they encountered, especially in the second quarter.
Brazil had experienced like its 10 years rainfall in one year, so it was pretty severe and unusual, and in Western Australia as there were a number of operational issues COVID-inclusive. So with those refineries that are much more cost effective, running at the higher rate and San Ciprian refinery will have an improved mix, which will improve our cost compared to the first half, not necessarily, but a hell of a lot, but the few bucks there and there.
In terms of what would be the cost drivers? So the caustic will continue to be pretty high, because of our delay in how it goes through the system, even though we are seeing the softening in the prices at which we buy, but the release is probably not going to come until the first quarter of the 2023. So that’s caustic.
Energy continued to be very high in Spain, although Spain is better than the rest of the Europe, obviously, and our Australian refinery is enjoying pretty much fixed price. So those are the costs and how they are going to flow through the second half and early into 2023.
Rahul Anand
Thanks, Galina. So, I guess, it sounds like circa 5% change, perhaps, in the second half versus the first half just owing to that mix changing, is that fair…
Galina Kraeva
Round about…
Rahul Anand
… to summarize?
Galina Kraeva
Yes. Round about.
Rahul Anand
Perfect. And then the second question, perhaps, one for you, Mike, in terms of the market. If I go back to the first quarter report that you put out, the chart — one of the charts in there had basically pointed to a cost curve and if we run the current spot price on that cost curve, it would indicate that more than 50% of the market at these current prices is underwater in terms of loss making. Today, obviously, you flagged circa 25% of ex-China production being loss making. I just wanted to square the circle and sort of understand how that has changed from the first quarter into your commentary today? And then, perhaps, the second part of that question is, Handymax has come off significantly, as you pointed out, about $30 to $35, yet the alumina price sits at around the $330, what has kept some of that Handymax price attaching on to that alumina price one-for-one? Thanks.
Mike Ferraro
So the Handymax price has come off, because the supply disruptions have reduced and the — there’s more stability around supply lines and the congestions at various ports, particularly in China have now lessened, so that’s slowly improved.
And I think, I know that will improve the import parity price, which for a while now is in the negative and is now positive again, so China is able to start buying. Does that answer your question on that one?
Rahul Anand
Yeah. So I guess what you are trying to say for the Handymax is that there’s a lagged impact and we should see that come through in the second half?
Mike Ferraro
Yes. Very much so.
Rahul Anand
Okay. And then the cost curve question, which was the 25% and the 50% loss making first quarter versus now?
Mike Ferraro
Yeah. I will need to come back to you on that one. I will need to have a look at it and understand the differences. There are differences. But I will revert back to you on that one.
Rahul Anand
Perfect. Great. I will pass it on. Thanks.
Operator
Thank you. Our next question comes from Paul Young with Goldman Sachs. Please go ahead.
Paul Young
Thanks. Good morning, Mike. Good morning, Galina. Happy both well. First question is on the San Ciprian gas situation. Can you, Mike, talk through your decision why this hasn’t — why decision was made not to close it, I understand it’s around the union piece and the government piece and the restart of the smelter, but just kind of hearing your views? And also, at the moment, what percentages of gas is spot, I believe it’s about 75% and how does that change over the near-term spot versus contract?
Mike Ferraro
Right. Okay. On the closure points, I think, you have effectively summarized it very briefly, Paul. There are difficulties associated with both the unionized workforce and the government and to close the facility, and as you have seen in the past with Alcoa smelter next door, took them quite a long time to reach an accommodation with all relevant stakeholders to curtail it until 2024.
At the same time, there are contractual commitments with customers, which are required to be met. We can’t really walk away from that. So really what we are seeing then is effectively a progressive reduction in production, which will obviously reduce the amount of gas — total amount of gas that we are using. I can’t give you any clear indication as to what other developments may or may not occur in the short- to medium-term on that front.
Galina Kraeva
Paul, and in terms of the way to think about the gas and contracts, so you are absolutely right, at the beginning of the year, at full capacity, we had 75% of the gas being filled at the spot price and 25% on contract linked to oil until the end of 2022. So, naturally, as we decrease the production, we will decrease the volume taken at the spot price. So, hypothetically, at the 50% run rate you have 25% linked to oil and 25% on spot.
Paul Young
Okay. Thanks, Galina. And then the next question is around, Mike, just the second half outlook and the dividend. I mean, it’s a pretty tough backdrop, I mean, your costs at $330, the price is $330, making no margin. I think, for the first time ever CapEx is stepping up significantly in the second half, probably, the biggest key to the second half I can recall on sustaining CapEx in particular. So I am just curious around that, obviously, the cash proceeds or dividend proceeds from the joint venture will be significantly lower in the second half if all things stay the way they are and you could argue there’s actually downside risk limited price, not upside in the second half. So I am just curious about how you manage this? Are you — with respect to the dividend, are you prepared to gear up the balance sheet to maintain a somewhat acceptable dividend if you call that to shareholders or are you going to stick to the 100% pass-through i.e. if your cash flow falls then you would just set the dividend fall with it?
Mike Ferraro
Hey. Paul, at this stage, we are reluctant to gear up to pay higher dividends and that’s been our policy quite consistent for some time, because I don’t like borrowing and paying out when we don’t have the ability to do that.
We have the ability to borrow but it’s not good economics, frankly. So we will have to take the rises and the falls as they come and where we are — you are quite right, there’s a lot of uncertainty, I think effectively, what we are saying there’s a lot of uncertainty out there.
There are the impost of higher costs, which most of them or a number of them don’t appear to be subsiding as rapidly as we would like, particularly energy, but we are trying to take actions.
And the API that’s, because of that level of uncertainty, there’s both downside and upside.
On the one hand, you have got some smelting production has curtailed over the last year and we have had a couple of recent announcements out of Norway, some strike actions, which will impact that, but on the other hand, you have got some expansion projects that are still underway. So it really is going to be quite an uncertain period, but probably, compounded by ongoing high costs.
Paul Young
Got it. Great. Okay. Thanks, Mike. Thanks, Galina.
Operator
Thank you. Our next question comes from the line of Lyndon Fagan with JP Morgan. Please go ahead.
Lyndon Fagan
Thanks very much. So, I guess, I was also going to ask about San Ciprian and how the 50% to 60% of volume was arrived at as the sort of ongoing run rate? I guess, based on the fixed costs at an estimate, it looks like it would be less cash burn, sending everyone to our base and paying for a holiday rather than running it at all. And so I am trying to understand what that fixed cost base looks like and what the contractual commitments for that volume actually are, and whether you could supply that volume out of any other refinery in the business?
Mike Ferraro
I will answer the commitment. The commitment is essentially for the rest of the year on a scale down basis. So there’s really limited if no commitments on contractual arrangements for next year. On the point about putting people on holiday, which as know, Lyndon, Alcoa has done that with some smelter employees.
That may well be an option to be explored, but at the moment, where they are at is that they have been able to reduce production 50% to 60% to allow and continue system stability and meet commitments, whether there are opportunities to reduce that production further in a staged way, we really just have to sit back and wait and see how it unfolds.
Galina Kraeva
The only one thing I would add is that, San Ciprian produces quite a substantial amount of chemical alumina and that is not the product that easily replaced because it’s quite unique and special, but also higher margins, so it’s not that bad.
So Mike said it absolutely right. The main consideration is the level of reduction versus stability of the plant and meeting the obligation until the end of the year, the contracts that we can’t walk away from.
In terms of what the costs look like if everybody on paid vacation, that really depends on specifics of the agreement with the government or union so we can’t speculate at this stage.
Lyndon Fagan
Thanks. So of the $600 a tonne costs reported with the quarterly, what portion of that is a fixed cost?
Mike Ferraro
We don’t break up the costs in that way, Lyndon. So, unfortunately, we can’t give you any better guidance on that at the moment.
Lyndon Fagan
Okay. And so based on your comments, looking into next year, there is a scenario of reducing output further if the price doesn’t improve or the cost base doesn’t show much relief, is that a fair assessment?
Galina Kraeva
We have taken every possible opportunity, yes.
Mike Ferraro
Yeah. All option are being looked at, time will tell, because we are not in that position, it’s really hard for us to speculate.
Lyndon Fagan
Okay. Great. And I guess the other question I had was just on the Aussie assets, so the refineries underperformed a little bit in Western Australia in the first half relative to first half of last year.
Galina Kraeva
Yes.
Lyndon Fagan
Can you talk about what sort of improvement we should see in the second half of this year and what went on to drive that underperformance?
Galina Kraeva
So, first of all, yes, you are right, the half-on-half the production is lower, but also just to remember that last half was a record setting half for pretty much every single refinery. So we are comparing to a very high base. That’s first.
Secondly, well, you can easily calculate the improvement in the production, because whatever we are losing in San Ciprian we will get back in Western Australia refinery. So as I have mentioned, we expect the same production level as we had in the first half, but coming mostly out of Brazil and Western Australia.
Lyndon Fagan
Okay. Thanks very much.
Mike Ferraro
Thanks, Lyndon.
Operator
Thank you. Our next question comes from the line of Paul McTaggart with Citigroup. Please go ahead.
Paul McTaggart
Good morning. So you noted the kind of step up in sustaining CapEx for the second half, I mean it’s quite a skew, that’s normally a skew but that’s the biggest skew. I wanted to know, have we seen a kind of a material step-up in sort of midterm sustaining CapEx? And then — and you kindly provided restructuring related items for 2022, could you — I mean I know they are coming off and maybe if you could give us a sense of what that 2023 number would look like as well. That would be great.
Galina Kraeva
So let’s start with the sustaining CapEx. So we did mention early on that, yes, we are looking at the increased level of CapEx for the next sort of three years, four years, due to the increased level of residue storage upgrades and also some mine moves and we have just gone through the two mine moves in the second one. So those are the reasons for the total CapEx — annual CapEx increase.
As far as the allocation between the first half and the second half, we historically see in the second half higher, because the first half is a rain season in Brazil, so then not much can be done there. So most of the CapEx in Brazil, in particular, it gets bulked up in the third quarter, fourth quarter. So those are the reason for the lumpiness of the CapEx.
Mike Ferraro
Going forward.
Galina Kraeva
And going forward, as I have mentioned, we do expect that level kind of CapEx for the next three — around three years. In terms of the restructuring related items, it’s a very difficult item to predict, because it all depends on approvals granted for remediation and what work is planned, but it would be safe to assume at least the same level for the next year.
Paul McTaggart
Okay. Thanks, Mike. Thanks, Galina.
Operator
Thank you. Our next question comes from the line of Glyn Lawcock with Barrenjoey. Please go ahead.
Glyn Lawcock
Good morning, Mike. Maybe just to do a little bit more on San Ciprian, just so I am clear. You obviously have a contract to buy spot gas, I am just wondering, is that a volume contract as well, so are you actually having to find and on sell it or can you just simply not buy the gas you don’t need now that you have reduced San Ciprian, just trying to understand the legalities around your gas commitment? Thanks.
Galina Kraeva
I can’t, Glyn, I know that it’s fully flexible on volume, whether it’s — you just don’t take it or you sell it back, I can’t tell you, Glyn, I am sorry.
Glyn Lawcock
Okay. But we are not at this stage, it doesn’t feel like you, there’s any risk to the cost reduction coming…
Galina Kraeva
No.
Glyn Lawcock
… through as you pull it back? So, Galina, maybe just then, so are you prepared to help us understand. So like when you set a few dollars off $304 and you look at the spot price at the moment, is the business as a whole AWAC making cash at the moment?
Galina Kraeva
Yes. We are. We still, like, it’s a very skinny margin, but we still are positive, yes.
Glyn Lawcock
And then enough to cover the AWC costs of about $20 million a year as well?
Galina Kraeva
So far, yes.
Glyn Lawcock
Okay. And then maybe just switching gears then, on the Alcoa second quarter call, I talked about Portland and I think the CEO described it as fixed close it or sell it. Is there any update you can share with us on the specific — on the site of Portland at the moment?
Mike Ferraro
Yeah. Portland is still in the Group, both within AWAC and the other shareholders, investors and that’s the case. And certainly, options have been looked at from time-to-time, but it’s — for the time being it’s staying in the Group.
Glyn Lawcock
Okay. Thanks, Mike.
Operator
Thank you. Our next question comes from the line of Hayden Bairstow with Macquarie. Please go ahead.
Unidentified Analyst
Hi. Good morning, Mike and Galina. It’s Austin [ph] from Macquarie. I believe most of the questions have been asked already just one quick one on the market. I am wondering if you see anything on the ground from your Chinese customers in terms of behaviors given that the going through this power rationing, which have impacted the local refinery and smelters? Thank you.
Mike Ferraro
Sorry, did you say in China?
Galina Kraeva
Yeah.
Unidentified Analyst
Yeah. Just wondering if you see anything…
Mike Ferraro
Yeah.
Unidentified Analyst
… on the — yeah, on the ground…
Mike Ferraro
Yeah. We are so…
Unidentified Analyst
…just given this recent news.
Mike Ferraro
Yeah. There’s two provinces in China and the Southwest, if I am not mistaken, who are required to reduce power consumption and so it’s affecting all industries, so that the energy can be diverted to the residential sector and I believe it’s impacting about 1 million tonnes of alumina and 1 million tonnes of minimum per annum at the moment whilst these restrictions are in place.
Unidentified Analyst
Okay. Thank you, Mike.
Mike Ferraro
Okay.
Operator
Thank you. [Operator Instructions] There are no further questions at this time. I will now hand back the call to Mr. Ferraro for closing remarks.
Mike Ferraro
Thank you everyone for listening this morning. I appreciate your time is busy and I appreciate the questions and interest that you have taken. So I am sure we will speak to some of you very soon. Thank you for attending.
Operator
Thank you. That does conclude our conference for today. Thank you for your participation. You may now disconnect.
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