Jefferies analyst Chris LaFemina has called Alcoa’s Elysis smelting project, a joint venture with Anglo-Australian Rio Tinto (RIO), a potential “game changer” that would position Alcoa as a “truly green aluminum producer.” Alcoa is using the process on a small scale and aims to prove it at the commercial level in coming years.

Alcoa shares, at about $56, are down 43% from $98, reached in March before aluminum prices fell nearly 40% to about $2,400 a metric ton, or $1.09 a pound. The stock trades for just over seven times projected 2022 earnings of $7.68 a share and has a similar estimated 2023 price/earnings ratio.

“Alcoa is inexpensive,” says Timna Tanners, an analyst at Wolfe Research. “It has an advantaged cost position and isn’t getting much credit for its green initiatives.” She has an Outperform rating and price target of $62.

While based in Pittsburgh, Alcoa has the vast bulk of its operations outside the U.S. It mines bauxite, an aluminum ore, mainly in Australia. It uses that to make alumina, an intermediate product, and then refines alumina into aluminum at smelters globally, including a 120-year-old facility in Massena, N.Y. Alcoa separated its aluminum-product business into Arconic (ARNC) in 2016 and now is focused on making alumina and aluminum.

Aluminum is still made in the same electricity-intensive process that Alcoa founder Charles Hall developed in the late 19th century. Alcoa benefits because some 80% of its electricity comes from renewable sources, most relatively cheap, carbon-free hydropower. Its production emissions—about five tons of carbon per metric ton of aluminum—are a third of the industry average of 15 tons because many rivals rely on coal-generated power. That’s increasingly important, as many Alcoa customers, including Apple (AAPL), focus on carbon footprints. Alcoa’s overall costs are in the bottom half of the industry.

Aluminum is used widely. It’s in cars, planes, packaging, wiring, and wind- and solar-power components. Used instead of heavier metals and plastic, it improves vehicles’ mileage and is recyclable. It can offer the strength of steel with a third of the weight. Ford Motor ’s (F) top-selling F-150 pickup has an aluminum body.

“Aluminum is vital for the ongoing transition to build the electric vehicles and renewable-energy infrastructure the world will need to transition to a low-carbon future,” said CEO Roy Harvey on Alcoa’s earnings conference call in July. Citing an industry trade group forecast, he said demand could rise 80% by 2050, off a 2018 base.

China plays an oversize role in the aluminum market, accounting for over half of global demand and production.

In an Apple podcast this year, Eric Mandelblatt, who runs Soroban Capital Partners, an investment firm that owns Alcoa stock, said China had “destroyed” the aluminum market by vastly expanding electricity-powered smelters in the past 20 years, to take advantage of its large coal reserves.

Aluminum prices have averaged less than $2,000 per metric ton in the past decade, and are now no higher than they were in 1989. The bull case is that China is getting more eco-conscious and vows to cap its smelting capacity at 45 million metric tons annually, versus about 40 million now. Global production capacity is 69 million. Alcoa makes about two million tons a year.

“Nobody is taking the handoff,” Mandelblatt said on the podcast, referring to construction of new smelters. That could tighten the supply/demand balance in the coming decade. High power prices in Europe and elsewhere already have idled one to two million metric tons of aluminum capacity. Alcoa CEO Harvey said on the July conference call that 10% to 20% of global capacity is uneconomic.

When Mandelblatt, who declined to comment to Barron’s, spoke in February, aluminum was at $3,200 a ton—it peaked this year at $3,900—which would let Alcoa earn $12 to $13 a share annually. At $5,000 a ton, which he termed a dream scenario, Alcoa’s EPS could jump to nearly $30.

He also saw the possibility in the next decade that Western countries could levy a carbon tax of perhaps $100 a ton on “dirty” aluminum made by China and other countries. That would benefit Alcoa, especially if its new smelting technology proves out.

Alcoa has used its strong earnings recently to bolster its balance sheet. It has just $299 million of net debt, against a $10 billion market value, and total obligations, including pensions and retiree healthcare, of $1.2 billion, versus $3.4 billion at year-end 2020.

Alcoa pays a 10-cent quarterly dividend and bought back $350 million of stock—about 3% of its shares outstanding—in 2022’s first half.

“We have substantially strengthened the balance sheet and have made great headway on improving our portfolio,” Alcoa Chief Financial Officer William Oplinger told Barron’s in an email. “As a cost-focused, pure-play aluminum company, we are well positioned to capitalize on the growing demand for aluminum.”

There are caveats, including a weak Chinese property market that’s cutting demand for aluminum. But with its low-carbon footprint, sturdy balance sheet, and potential breakthrough technology, Alcoa has both the metal and mettle to be a long-term winner.

Write to Andrew Bary at [email protected]