Aluminium is of immense importance in the modern world. The industrial metal is used in cars, planes and trains as well as in building facades, bicycles, deodorant sprays and food packaging. Consequently, the upswing following the Corona recession has given a strong boost to the price of the pale grey metal. On a one-year horizon, the price of the next due future is up by almost half - more on this later. Unsurprisingly, the price upswing is having a full impact on the shares of metal producers. This also applies to Alcoa in particular: within twelve months, the stock market value of the US group has almost tripled (see chart). The company from the "Steel City" of Pittsburgh in the southwest of the US state of Pennsylvania already played a key role in the emergence of the aluminium industry.
In the 1890s, company founder Charles Martin Hall found a way to produce aluminum using electrolysis. Since the French chemist Paul T. Héroult made a similar discovery at the same time, the production process still in use today is called the "Hall-Héroult process". Alumina obtained from bauxite ores is first mixed with the mineral cryolite. This mixture is used to produce pure aluminium by means of fused-salt electrolysis. Alcoa covers the entire value chain: According to its own information, the company holds one of the world's largest portfolios of bauxite mines. Alcoa extracts a wide variety of cast products from the red ore through its own refining and smelting operations. The industrial metal is sold in the form of plates and pistons, on rolls or as powder, among other things.
Business is humming: from April to June 2021, Alcoa earned USD 309m on the bottom line. In the first three months, net income was USD 175m, while the company had actually been in the red in the same quarter of the previous year. According to its own statements, Alcoa benefited from increased demand and rising prices. On average, the group collected USD 2,753 for a tonne of aluminium sold from April to June - 62% more than in the same period last year (see chart). "Alcoa had an excellent second quarter and first half," CEO Roy Harvey was pleased to report. Although the top manager's forecast was also positive, Wall Street initially reacted sniffily to the interim report presented on July 15. In the meantime, the setback has been eradicated and Alcoa shares have defended their overriding upward trend. What remains is a comparatively high price volatility. So far this year, the stock has shown a volatility of more than 60%. By way of comparison, the ratio for the S&P 500 Index is 12.6%.
As is well known, volatility is one of the determining parameters for the conditions of a barrier reverse convertible. As a general rule, the more volatile the prices, the higher the coupons and/or the thicker the risk buffers. Against this background, it is obvious to pursue a yield-optimisation strategy with Alcoa. Leonteq has launched Softcallable Barrier Reverse Convertibles on the Wall Street stock. The new issue is available in two different currencies: If allocated in CHF, the guaranteed coupon is 14% p.a., while the USD variant yields a 100 basis points higher quarterly payout. The barriers are uniformly located at 60% of the initial level. As long as Alcoa does not fall to or below this level during the 15-month term, the maximum return is fixed. In the event of a threshold violation, the partial protection expires. The investment would then be linked to the ups and downs of the underlying. Speaking of risk: The increased volatility has a favorable effect on the terms of the Barrier Reverse Convertible, and not without reason. Increased price swings also entail an increased risk of barrier breakage.
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