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Alcoa Corporation (AA)

Q3 2021 Earnings Call· Thu, Oct 14, 2021

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Transcript

Operator

Operator

Good afternoon and welcome to the Alcoa Corporation, Third Quarter 2021 Earnings presentation, and conference call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to James Dwyer, Vice President of Investor Relations. Please go ahead.

James Dwyer

Analyst

Thank you, and good day, everyone. I'm joined today by Roy Harvey, Alcoa Corporation President and Chief Executive Officer, and William Oplinger, Executive Vice President, and Chief Financial Officer. We will take your questions after the comments by Roy and Bill. As a reminder, today's discussion will contain forward-looking statements relating to future events and expectations that are subject to various assumptions and caveats. Factors that may cause the Company's actual results to differ materially from these statements are included in today's presentation and in our SEC filings. In addition, we have included some non-GAAP financial measures in this presentation. Reconciliations to the most directly comparable GAAP financial measures can be found in the appendix to today's presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA. Finally, as previously announced, the earnings release and slide presentation are available on our website. With that, here's Roy.

Roy Harvey

Analyst

Thank you, Jim. And thanks to those who are joining our call today. We had another strong quarter bolstered by aluminum prices that are higher than we've seen in more than a decade. As in every quarter, Will and I will discuss these results and take your questions. Before we get underway, however, and particularly at a time where we are experiencing rapidly changing market dynamics, I would like to reinforce once again that our values, which we established when we launched as an independent company in 2016, continue to guide us. It's not just about the results, but also how we achieve them. Our values continue to be foundational for our Company and are embedded in all of our decisions. Now, as Alcoa Corporation approaches its five-year anniversary, we've been reflecting on the achievements Alcoans across the globe have helped us to accomplish. It is clear that our strategic priorities are creating value. Today, Alcoa is much stronger than when we launched. We have significantly improved our processes, we've strengthened our balance sheet, we've reshaped our portfolio. We've responded to society's need for responsible production, launching the industry's most comprehensive portfolio of low-carbon products. And we've also certified many of our assets to the stringent standards of the Aluminum Stewardship Initiative. In addition, our strategic priorities have helped us to do exactly what we said we wanted to do, strengthen our company to prepare for an even brighter future. And today, we've reached an important milestone. As you saw from the press release that we just issued, Alcoa has decided to initiate a quarterly dividend. Additionally, we've authorized a new share repurchase program that will complement our existing program that was authorized in 2018. These decisions concerning capital returns aligned with our existing capital allocation framework and reflect two…

William Oplinger

Analyst

Thanks, Roy. This quarter was even better than the previous one. Revenues at $3.1 billion were up $276 million or 10% sequentially. Revenues were up $744 million or 31% from the same period last year on higher aluminum and alumina prices. Realized aluminum prices were up 13% sequentially and 64% year-over-year. Third-quarter earnings per share was $1.76 per share, $0.13 per share higher than the prior quarter, and $2.02 per share higher than the year-ago quarter. Adjusted earnings per share for the third quarter increased 38% sequentially to a record $2.05 per share. Adjusted EBITDA, excluding special items, also increased up 18% sequentially to $728 million, much higher than last year's $284 million. These charts, which debuted last quarter, showed that the Aluminum segment with modest income taxes and virtually no minority interest continues to outperform and drive record net income. In the first 9 months of 2021, the aluminum segment has had its best year so far with nearly $1.4 billion or 73% of Alcoa's total adjusted EBITDA, excluding special items of $1.9 billion. That segment EBITDA generated record-adjusted net income. Before this year, our best full-year adjusted net income was in 2018 at $698 million. In 2021, our adjusted net income for the first 9 months is already $822 million or $124 million higher. Now with aluminum prices remaining at post-global financial crisis highs and alumina prices recovering nicely, earnings should be even better in the fourth quarter. Now let's review adjusted EBITDA in more detail. The $110 million increase in adjusted EBITDA, excluding special items was driven by higher metal prices, as well as favorable currencies, slightly higher alumina prices, and better product pricing in alumina and aluminum. However, as you know, a bauxite unloader at Alumar sustained structural damage in mid-July and we ramped down refinery…

Roy Harvey

Analyst

As Will noted, the aluminum segment has a significant role in our profitability. The LME aluminum price is the highest it has been in 13 years and has doubled relative to the low point in the second quarter of 2020. In addition, regional premiums are being influenced by higher transportation costs into deficit markets, such as North America and Europe. The continued economic recovery in the tightness of supply has continued to support this LME rally and high regional premiums. We continue to see positive GDP and industrial production across the world's leading economies, which supports aluminum demand across all major end-use sectors. This year, we expect the annual global demand for primary aluminum to increase approximately 10% relative to 2020 and to surpass the pre-pandemic levels of 2019. Strong demand is also being supported by China's continued status as a net importer of primary aluminum. In 2021, China has curtailed more than 2 million tons of annualized capacity due to power shortages and its enforcement of policies related to energy and the environment. These curtailments represent one of the largest supplies cuts the aluminum industry has ever experienced, particularly given that they are occurring during a year in which we have seen strong demand growth. These supply dynamics are not only occurring in China, there have been recent reports in Europe regarding energy shortages and high-power costs that may lead to smelting cuts there as well. For Alcoa's commercial impacts, we are also seeing significant year-over-year growth for our value-add aluminum products. In the third quarter, the premiums we earn for value-add products were up relative to the second quarter. Strong demand supported high spot premiums for open volumes. Much of our volume for value-add products are sold in annual contracts, so only a portion benefits from high spot…

Operator

Operator

We will now begin the question-and-answer session. [Operator Instructions]. When called upon, please limit yourself to two questions. At this time, we will pause momentarily to assemble the roster. And our first question comes from Carlos De Alba of Morgan Stanley. Please go ahead.

Carlos De Alba

Analyst

Hello. Good afternoon, guys. Congratulations on the quarter. Just a couple of questions on first on these smelters. You could maybe give a little bit more color as to what else could you guys do in terms of maybe increasing, if you're planning, maybe on doing it, reviewing potential restarts of the capacity that it is curtailed right now? Some of which has been only a few quarters when -- when you took actions, but the market has changed, so wondering if there are any potential restarts above and beyond Alumar. And on Alumar are there -- is there any color on the type of power agreement that you guys were able to secure, is it a renewable power mini-hydro? And why only in 2024 will be fully sourced with that power? And then if I may squeeze another 2nd one on alumina, particularly the recently announced HPA project. Could you comment a little bit more about the economics over the prior year, particularly maybe what is the likely spread on prices for these types of alumina above and beyond the smelter grade alumina that you mostly produce? Thank you very much.

Roy Harvey

Analyst

Yeah, Carlos, thanks for the question. So let me start off and Bill can complement as we go through this. But let me start with your question about smelters. I think the fact that it took us some time to work through the restart of Alumar, I think is a pretty good example of the type of effort that needs to go into any restart. Alumar was a pretty clear decision because we had access to very competitive power. It also happened to be renewable energy, like you said, starting in 2024. It is a very competitive plant and so it checked all the boxes and then, of course, hit the fact that we were all -- that the domestic market inside of Brazil is also short. So that increases the financial outcomes of that particular decision. Each of the other smelters that we have curtailed right now was curtailed for a very specific reason. And so, as we go through those analyses, we obviously look at today's pricing. We look at how that pricing will continue into the future and then connect that back to where we think those particular smelters would be located on the cost curve. And I think what you should take away from the Alumar decision is that we are focused, not just on being successful in today's environment, but in having a very competitive smelter through all the potential commodity environments in the future. We want it to be successful through that commodity cycle. And so, we'll continue to look. There is nothing further that we want to announce right now. We do have more capacity curtailed. However, it would -- we would need to find that long -- longer-term power that would fit the cost competitiveness criteria that we have. On your question…

William Oplinger

Analyst

Nothing further to add. I think you covered it well, Roy.

Roy Harvey

Analyst

Thanks, Carlos.

Carlos De Alba

Analyst

Thank you very much. Roy. Just one clarification. Is it fair to say that going forward, if you were to restart any remaining curtailed aluminum production, that the type of power, meaning it has to be renewable power or not necessarily?

Roy Harvey

Analyst

We consider the type of energy and how that fits with our short-term, medium-term, and long-term environmental criteria as part of any of those decisions. The fact is that we've just re-powered the Portland facility, which has a goal to move towards more renewable energy. But because it has a relatively short timeline, we were comfortable stepping into that power contract at that time. When you look at Aluma, of course, this is a longer power contract, and not the fact that it was renewable becomes more and more important. So, I know that doesn't specifically answer your question but it gives you a feel for how we look at ESG criteria and specifically the percentage of renewable power that goes into those contracts as we make those decisions.

Carlos De Alba

Analyst

Thank you, Roy and Bill. Congratulations on the results again.

Roy Harvey

Analyst

Thanks, Carlos. See you.

Operator

Operator

The next question comes from Emily Chieng, of Goldman Sachs. Please go ahead.

Emily Chieng

Analyst

Hi, Roy and Bill. Congratulations on the quarter. Maybe I'll start off with a quick question around the capital allocation strategy now. The leverage is in good shape. You've got the capital returns piece in place and you've addressed half of -- roughly half of your smelting capacity portfolio review. Firstly, how do you think about the execution of the buyback? Will it be more systemic or opportunistic in nature? And then the latest thinking around the pensions and potential [Indiscernible].

William Oplinger

Analyst

So, thanks, Emily. Let me take the second question first and that's around the pensions. Pensions are in much better shape than they have been historically. Global pensions are greater than 90% funded. At this point, the U.S. pensions are close to 100% funded. And so, the net liability has really significantly been reduced. We still have a fairly large gross liability and we will be looking at opportunities to opportunistically annuitize more of that gross liability. We have moved -- at least in the US, we've moved the asset portfolio to a more defensive strategy that should inoculate it from large changes in interest rates but we will be looking at opportunities to annuitize going forward. As far as capital allocation goes specifically to your question around the timing of the buybacks, we will do that based on -- our continuing analysis of the market, financial and other factors. And so, we'll be doing that over time. I think if you step back and look at where we've come on the capital allocation program, as Roy said, the four-prongs, we just now have announced the return to shareholders, so we've executed well on the capital allocation program.

Emily Chieng

Analyst

Thanks. That's really helpful. And just 1 follow-up; when you think about the current state of the aluminum markets, what are Alcoa's views around potentially investing in either Greenfield capacity or Brownfield opportunities in cleaning some production creep at your lower-cost assets. I'll leave it at that. Thank you.

Roy Harvey

Analyst

Sure. And I can take the first snap at that one, Emily. The fact is that we are creeping some of our very low-cost facilities that have long-term power. So, you look at Canada and those are places where we can creep our technology. It's relatively nuts-and-bolts. It actually takes a lot of thoughtful approach for all of our engineers on-site and our operators, etc. So, we are very much in line with that. When it comes to Greenfield or Brownfield, obviously, we need to look at a much longer timeline for aluminum pricing and try and think through supply-demand. As we see, there seem to be some real structural shifts that are happening inside of aluminum today, -- so that certainly strengthens the case. It also connects with the energy market. And as we talked about with Carlos, it's a question about renewable energy. And as you look at a smelter decision, obviously that becomes immensely important to find something that is both low carbon and renewable. The third thing that we need to be thinking about is capital costs. We need to solve the capital cost issue between what capital can you spend and still get a very good financial return on it? And so that's something that because they were able to construct plants so inexpensively in China, and because of this last decade where we had overproduction, it essentially made it impossible and made every single brownfield or greenfield that's grown up over that time period to not have gotten the returns that are expected by our stockholders. So, we take that very seriously. It takes some time to see how the structural shifts will play out. I would also put into the mix of facts that we're in the midst of developing ELYSIS Technology. And so, there is a very real decision between investing in conventional technology when we have what we think will be the preferred solution for zero-carbon smelting long into the future. And so that one is the wildcard. But I'll tell you it is weighing very heavily on our minds and it's a very important project for us.

Emily Chieng

Analyst

Thanks for the color, Roy.

Roy Harvey

Analyst

Thanks, Emily.

Operator

Operator

The next question comes from Alex Hacking of Citi. Please go ahead.

Alex Hacking

Analyst

Thanks, Roy and Bill. So, first question on San Ciprian. I understand it's obviously a sensitive situation, but are there any deadlines there or dates to reach a resolution? And then, second question, a bit random, but the shortages of alloying agents, magnesium, and so on, does this have any effect on Alcoa or -- any commentary around that would be helpful. Thanks.

Roy Harvey

Analyst

So, Alex, let me cover San Ciprian quickly, and then I'll pass over the alloying question to Bill. So, there are no specific dates that we have in mind right now. Alcoa continues to seek a solution for San Ciprian. The fundamental problem is the price of power in Spain in which we've seen exacerbated over this last little period with the pretty wild ride that's happening in energy markets inside of Europe. The price of power in Spain, before we hit this crisis has far exceeded what other global smelters are experiencing. And so, we've been trying to find a deal with the government that allowed us to address this underlying issue around San Ciprian not being competitive. With that said, we had denounced the collective dismissal. Since then, we've restarted their strike, which is why we have the -- we've talked about the financial impacts that have on us. We are now in the midst of an appeal to the decision that was made in the Galician courts. And so, all of that, there is very little specificity around when that will be settled, but it is at the very top of our minds. It is obviously a very important financial impact. And we will keep you informed as we learn more.

William Oplinger

Analyst

Hi, Alex. Let me take the alloying agent’s question. Just to put it in perspective, silicon and magnesium are the two alloys that were really -- are currently in a lot of people's minds. We buy about 20,000 metric tons of each, of magnesium and silicon. As you know, China accounts for about 80% of the magnesium output and 70% of the global silicon output. And the same dynamics that we're seeing to a large extent in the aluminum industry are occurring in the magnesium and the silicon industry due to production cuts in China. The good news though, Alex, is that we pass through the majority of that impacts onto our customers and we would project that through either smart buying or customer contracts would be passing through about 95% of the impact of higher magnesium and silicon to our customers.

Alex Hacking

Analyst

Thanks, Bill. If I could just follow up. Are shortages a concern, more so than the ability to patch the price through?

William Oplinger

Analyst

Shortages are a concern and our procurement team is actively working on trying to make sure that we have enough material to be able to supply our customers. But shortages are our concern.

Alex Hacking

Analyst

Okay, thanks so much. Appreciate the time.

William Oplinger

Analyst

Thanks, Alex.

Operator

Operator

The next question comes from Lucas Pipes of B. Riley Securities. Please go ahead.

Lucas Pipes

Analyst

Hey, good afternoon. And I would like to add my congratulations on a good quarter. My first question is in a similar vein, but maybe a bit higher level, just in terms of aluminum prices today, obviously, incredibly strong. Have you tried to kind of tease out what is demand-pull here? What is cost-push? And where some of these bottlenecks could lead us? I would very much appreciate your perspective.

Roy Harvey

Analyst

Sure. Lucas, let me give you probably a non-answer to this. I think trying to parse out what's being driven by demand, which obviously continues very strong, although we are seeing some issues around supply chains that are causing some of that to pull back a little bit. And we're seeing an incredible change in what's happening on the supply side. And so, when you look outside of China, which is probably the less influential on supply, we're starting to see those European smelters, many of which are tied to market prices, are simply not able to continue to operate in times like this. And I think we've seen the first couple of steps as a reaction. Of course, that's a point in time that will continue through time, but we'll see where that takes us. So not easy -- even with the prices that we have right now, not easy to keep supply when gas prices have increased so much inside of the European Union. Inside of China, they've seemed to have the perfect storm of flood events, of decisions around environmental audits and environmental policies. It's connecting over with their dual control system. I think that in the short term when you look at it, we've seen between 23 million tons of curtailments that have happened because of the short-term issues. When you start to project that out longer. I think the fact is the policies that China's put into place is what's driving this fundamental change, not just for aluminum today but aluminum longer into the future. And so, when I think about the impact on pricing right now, I think demand continues to be strong and that's very good. But I think the real structural shift sits very much on the supply side. And is not -- more you have physical shortage is right now and you see that the inventories being drained, you see that with what's happening with regional premiums as well. But people are also looking towards the future and saying that there simply isn't enough new capacity coming online. And certainly not enough new capacity being fueled by renewable energy in order to meet the future demand. So, I think that, to me, it bodes well both for today's prices, which acquires are very attractive, but also for the long-term structural changes happening in the pricing environment.

Lucas Pipes

Analyst

Thank you. Thank you very much for that perspective. And just at the end, you touched on my follow-up question. You've mentioned also throughout your earlier comments that you have access to renewable powers is a key item for increasing capacity. And what role can you play to tackle that? You own renewable energy assets today. Could -- would you expand those? Do you look more to developers to provide that power? How will that bottleneck [Indiscernible]?

Roy Harvey

Analyst

Yeah, I think it's -- I think the answer is all of the above. We could look at a number of different ways in order to try and debottleneck the process and find renewable energy. I would caution you though that we're very careful not to subsidize our aluminum business by building our own renewable energy. And I think you've seen that in Brazil. We need to, if we're going to build a renewable energy position then we'll need to decide whether that's best to put into one of our smelters or in fact better to sell it into the market. We're pretty careful about not mixing our decisions when it comes to those two different types of businesses. However, when you look at how we've been re-powering, Portland as an example, we've come through power suppliers. When you look at some of the ways that we've re-powered our Norwegian plants has been through partnerships with new wind power facilities. And so, I think the answer is, there's not going to be enough renewable power to go around. There's a lot of demand. There are a lot of new announcements on the facility. But it is incredibly complicated in order to build this new renewable power. And so, finding those spots, where you can smelt aluminum smartly and can buy and find those renewable energy contracts, is going to be then -- it's going to be the difficulty, which is what, again, create the structural change, but also the other end is going to help define and who will be able to build for the future. And one more plug for ELYSIS. As you then connect renewable energy into a 0-carbon process in such as ELYSIS, you can really demonstrate that as we head towards the world, a net 0 world by 2050, it's those types of solutions that are absolutely necessary to make that possible.

Lucas Pipes

Analyst

Really, really exciting developments in the industry. I really appreciate your perspective. Thank you.

Roy Harvey

Analyst

Thanks, Lucas.

Operator

Operator

Our next question comes from Curt Woodworth of Credit Suisse. Please go ahead.

Curt Woodworth

Analyst

Thanks. Good afternoon, Roy and Bill.

Roy Harvey

Analyst

Hi Curt.

Curt Woodworth

Analyst

So, a follow-up question to Alex on the magnesium and silicon. It does seem like there's a potential for shortages to certainly exist here and we've already seen, when you look at billet or foundry alloy premiums, they are up dramatically anywhere from 500 to well over a thousand a ton. So, it's pretty meaningful and I know that you guys tend to set those contracts on an annual basis, but are you -- do you feel comfortable with your position today? Are you looking to build safety stocks within those alloys? And how do you think that the shortage there is going to play into your negotiations around setting your value-add premiums in the next year? And can you give us any sense of the potential benefit of how those premiums could look next year relative to what you hoped to this year?

William Oplinger

Analyst

Yes. So Curt, globally, value-add products demand is very strong. We are focused on Europe and North America. And if you go around the globe on the various value-add products, we're seeing strength in flat demand

Roy Harvey

Analyst

In just about every major area, both in Europe and in North America. [Indiscernible], as you said, [Indiscernible], is extremely strong. And with some of the curtailments that we've seen in Europe due to the energy situation is taking supply of [Indiscernible] out of the market at a time when demand is very strong. And then foundry largely is an automotive market. And with the automotive chip shortage, we have seen the foundry market fall off a little bit, but we've been able to re-purpose a lot of that metal into different markets. And so, you don't really see it hitting our results. As we go into 2022, we use some of that market situation and we will be looking to

William Oplinger

Analyst

Do as well as we can with value-add premiums in 2022. And we'll be making sure that we try to pass through all the mag and silicon price increases. As far as building stocks of mag and silicon, we clearly are out there making sure that we want to be able to fulfill our customer's needs. We will do the best that we possibly can. But upstream of us, we are starting to see some force resource declared by [Indiscernible] suppliers. So, we are actively trying to make sure that we can meet our customer's and the customer's needs going into 2022.

Roy Harvey

Analyst

And Curt I'll just tease out one more point. And I mentioned it during my presentation, but I think its worthwhile reiterating it. At a time like this with increasing premiums, we don't realize all those in the current year because we don't -- we only sell a portion of our sales on spot. However, this is a great time to see strong premiums because we're in the midst of our discussions with all of our customers to set what those prices and premiums will be going into 2022. So, it's -- I think that's very good news for our value-added business, not just from the really strong demand and therefore, we can choose those products that make the most sense for us. But also, it's a good time to be setting premiums, looking now particularly in North America and Europe.

Curt Woodworth

Analyst

Okay. That's helpful. And then just a follow-up on power. I think roughly 55% of your power is LME indexed. I know you highlighted the same separate issue, but can you talk more broadly about power cost inflation through the portfolio over the next couple of quarters in the event we continue to see this energy shortage persist. Should we continue to expect those levels to have headwinds specifically at San Ciprian and more broadly, how you're thinking about that? Thank you.

Roy Harvey

Analyst

Sure, Curt. Let me just give you some data points. First, let me address San Ciprian fairly quickly. We said that the site, including the refinery and the smelter, would be about

William Oplinger

Analyst

$100 million EBITDA hit in the fourth quarter. That's a combination of two factors. One is the strike, but that's a smaller earnings impact. The largest factor here is the energy costs and the numbers that we've provided to you we're assuming about a EUR200 to EUR210 per megawatt-hour cost in Spain. The energy costs in Europe are not in a position to support smelting in Europe. If we then look at the rest of our portfolio, as you alluded to, we have some fixed-price, we have some self-generation, and we’ve got roughly 50% that is LME linked. So those LME linkages go up with LME prices. And then we have a little bit of spot pricing in Norway. So, if you boil that down combined and this is in our additional business consideration stage. When we look at the fourth quarter, we're looking at about a $50 million negative impact from energy and that breaks down between $30 million of seasonally very strong results in our Brazil hydros that the prices and volumes will come down in the fourth quarter, And then a $20 million impact from energy outside of San Ciprian. If I can just step back for a second though, and -- the aluminum segment is expecting much better shipments in the fourth quarter, and some of the higher raw material prices that we're seeing in coke and pitch, we plan on offsetting that. Because we think that both for the alumina and the aluminum segment, we will have better volumes in the fourth quarter.

Curt Woodworth

Analyst

Super helpful. Thank you, guys.

Roy Harvey

Analyst

Thanks, Curt.

Operator

Operator

The next question comes from John Tumazos of John Tumazos Very Independent Research. Please go ahead.

John Tumazos

Analyst

Congratulations on all the good times.

William Oplinger

Analyst

Thanks, John.

James Dwyer

Analyst

Thank you, John.

John Tumazos

Analyst

Thank you. The first question is the LME aluminum contract as references at 477 for the spot and 479 for the various future months. It's not perfect, but it's a reasonable benchmark, given all it's been rising dramatically in the last 6 weeks or so. Given the time lags, is 400 too aggressive a guess for the December quarter realization for alumina? First question.

William Oplinger

Analyst

John, we typically try to stay away from guesses of pricing in any particular quarter, but ASI pricing today is sitting at around $482 per ton. If I could give you a little bit of a view on the market and then you can draw your own conclusion around pricing. We have seen some curtailment of production of refineries in China for all the same reasons that you're reading about in other areas with power cuts and focus on emissions, coupled that with a very short Atlantic market because of the Jamalco shutdown where they had the powerhouse fire. That has shortened up the Atlantic market. And also, we had The Alumar ship on loader issue, which is back up and running, not the unloader itself, but the plan is back up to about 95% capacity. So combined the two of a China shortage and a short market in the Atlantic and alumina prices are running up fairly quickly. And as you know, unlike the aluminum market, there is no inventory or very little inventory of alumina. So, in the case of a short market of alumina, you typically see very quick and can see very drastic changes in pricing.

John Tumazos

Analyst

Thank you. Second question. And what I did was I took the third quarter price revenues minus EBITDA divided by tons to gas. I calculated the third quarter. [Indiscernible] was $2.34 per ton, more than last year's average. The alumina, $33 a ton, and the aluminum metal, PS0.15. Given your different guidance’s, all of those continue to accelerate [Indiscernible] I presume.

William Oplinger

Analyst

Let me just take on one market at a time. And on the Bauxite side, we're largely internally sourced on Bauxite. And year-over-year, we had a change in Bauxite pricing that lowered Bauxite pricing into the alumina business. We've shown that during the course of the year. That's what's being reflected in some of the Bauxite segment results. We just talked about the strength of the aluminum markets and the aluminum markets given the two factors that I just discussed are very strong. And then, on the aluminum side, I think Roy highlighted it pretty well, what's going on in the aluminum business. So, each of those markets, at this point, with maybe less emphasis on Bauxite is in a pretty good situation for us.

John Tumazos

Analyst

Though I was referencing the cost per ton or pound.

William Oplinger

Analyst

Yes. And that's what I was, to some extent, trying to answer and that is in the case of --

John Tumazos

Analyst

The [Indiscernible] is strong and the costs are going to -- well, the cost creep doesn't matter because we're doing so well on the revenue side. I guess that is what you're saying.

William Oplinger

Analyst

Well, when we think about cost creep, then -- we should not see any costs creep for bauxite to alumina because they -- the bauxite is actually cheaper this year going into alumina. On the refining side, we are seeing some [Indiscernible] prices and that is an impact. And then on smelting, it's a combination of the energy and raw materials. And we've seen some raw material creep in the third quarter. We'll see a little bit more in the fourth quarter. But as I said in my comments, we anticipate that the volume benefits that we will be driving in the fourth quarter will offset that.

John Tumazos

Analyst

Thank you very much. It's so great to see things so good. Thank you.

William Oplinger

Analyst

Thanks, John. Nice to have you here.

Operator

Operator

My final question will come from Michael Dudas of Vertical Research. Please go ahead.

Michael Dudas

Analyst

Good afternoon. Thanks for squeezing me at the end here. Roy, through your capital allocation, which certainly I think is very good, is very well received in a very thoughtful over the previous violent cycles we've had the last few years. Maybe really touched about maybe long-term capital spending and growth opportunities without putting out a budget or guidance for future years? How does that flow through given all that you've talked about today with internal in-creep opportunities? And certainly, and I think more so on the new technology, at least as the HPA opportunities. Is there a thought to build up -- capital buildup flexibility with the strong cash flows to support that on the longer -- medium longer-term basis? How should we think about that and all over this capital allocation strategy? Thank you.

Roy Harvey

Analyst

Mike, I appreciate the question. There's always space to squeeze you in. So, I think when we step back and we think about where we find ourselves today, it's certainly been a very different situation in 18 months ago. We have opportunities that sit inside of our 3 businesses. And so, Bauxite, we obviously have the ability to create if we find the pricing environment that supportive or again if we can use that internally in one of our refineries. We have a series of medium-sized growth projects, not brownfield, but sort of large creep projects inside of the refining business in Brazil and Western Australia that we continue to evaluate. For those, we need to have both the capital costs and an operating cost, but also, a revenue side that we can feel confident that we're going to get the returns on it. On the smelting side, and we talked already a little bit about this, we have opportunities to create the current assets. So those things I think are somewhat predictable. I think we can explain them very well. I think your question gets to what comes next. And to me, we've got ELYSIS is going on. ELYSIS is going to be this revolutionary technology that once proven, I think, will set the stage for a brand-new way to smelt. And then we'll have the option of whether we choose to commercialize that in the external market, or whether we use it to move very quickly inside, to retrofit, or to build that next smelter. And very much depends on what's happening in the broader market, of course, but also, on us meeting the commitments around cost savings and capital cost efficiency. We're also working on Mechanical Vapor Recompression inside of refining. Today, we have the lowest carbon…

Michael Dudas

Analyst

Look forward to that, Roy, if we can hire a truck to take us. Thank you.

Roy Harvey

Analyst

Perfect.

Operator

Operator

This concludes our question-and-answer session. I would like to turn the conference over to Roy Harvey for closing remarks.

Roy Harvey

Analyst

Good. Thank you, Andrea. So, Bill and I have enjoyed talking to you today. Our entire executive team and the thousands of employees across our global operations are proud of the work that we're doing. What we do matter. Aluminum is strong, light, recyclable, the right material for a sustainable future; and we are the right Company to deliver. Next month will mark our 5th anniversary as an independent Company, and we've made significant progress over that time. We're excited to talk about how we'll leverage this strong foundation for the future. And we'll give you a better answer, Mike, on November 9th, when we plan to hold a Virtual Investor Day. At that event, I'll be joined by other members of my executive team to discuss various topics, including our markets, strategies, and the technologies that we envisioned for the future. The specific details for that Investor Day event will be shared by a press release next week. So, I look forward to talking we've met with many of you soon at that upcoming event on November 9th. And until then, thank you once again for joining our call today, and please stay safe and healthy. Good night.

Operator

Operator

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.