Alcoa's (AA) Disappointing Earnings, Factory Expansion Cloud Guilty Plea to Bribery Charges

Michael Teague |

With the early Tuesday announcement of a $300 million expansion of its Davenport, Iowa factory, shares for the $10 billion aluminum giant Alcoa Inc. (AA) got a much-needed lift of just over 2 percent early on in the day’s trading session.

Auto Manufacturers Spurr Aluminum Demand

The announcement was made at the North American International Auto Show in Detroit, Michigan, and is positive news for a company that struggled under the weight of an uncertain global economy for a great deal of 2013. Automobile manufacturers have increasingly been turning to aluminum as “a cost-effective way to improve the performance, safety, durability and fuel efficiency of their vehicles,” according to Alcoa CEO Klaus Kleinfeld, who added that the Davenport upgrade would be the first of three such investments that the company will be making to meet growing demand.

And demand is indeed growing. The automobile industry expects its use of aluminum to increase drastically over the long-term, but the trend is already well underway; by next year, the amount of the metal used in car bodies will quadruple from 2012 levels.

Earnings Disappointment

The news also provides a modest palliative for the fourth quarter and full-year 2013 earnings reports the company released on Friday, Jan 10, that showed revenue off by over 5 percent on a year-over-year basis, with earnings-per-share in the negative by $2.19 on an unadjusted basis, and still shy of analyst expectations when excluding one-time items.

The timing of the previous week’s earnings release was inopportune for the company that appeared to be rallying off of an anemic this past October. All said and done, Alcoa added over 18 percent in 2013, largely thanks to the late-year recuperation, but lost nearly 6 percent last Friday after revealing its balance sheet, sending the stock into negative-performance territory for 2014.

Corruption in the Bahraini Petro-Monarchy

Still, an underwhelming balance sheet can have its uses, and this is particularly so for Alcoa. The company’s reporting is widely, if unofficially, viewed as the signal that earnings season has arrived. Furthermore, given its domestic and global business and clientele, many see its financial performance as a useful gauge of economic conditions.

Indeed, Alcoa’s report last Friday garnered far more attention than an announcement on the same day one of its subsidiaries, Alcoa World Alumina, had agreed to pay $384 million over bribery charges in Bahrain, charges to which it plead guilty.

According to a Jan 10 article from the Financial Times, Victor Dahdaleh, a British-Canadian representative of the firm who just last month managed to avoid a criminal conviction the UK, was involved paying bribes to an advisor to Bahrain’s “Prime Minister”, as well as other members of the gulf nation’s “royal family”.

Settlement

The murky deal involved a 2004 agreement that solidified a long-term distribution deal with Bahrain’s state-controlled aluminum manufacturer Alba. Offshore bank accounts in various countries were used to cover up kickback payments to Bahraini officials and businessmen, and the whole scheme was premised on the ability to artificially markup the price of aluminum by some $188 million from 2005 to 2009.

The Alcoa World Alumina joint-venture with Alba will pay $223 million in fines and penalties over the next four years in order to settle the charges, and an addition $161 million to settle civil charges brought by the Securities and Exchange Commission for various records-keeping and bribery violations.

By midday, shares for Alcoa were up by about 1.66 percent to $10.26 a piece.

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Companies

Symbol Name Price Change % Volume
AA Alcoa Inc. 30.90 -0.25 -0.80 5,778,259
KPCM King Of Pine Creek Mining 0.00 0.00 0.00 0

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