It has been a disastrous month if you have been bullish on Noranda Aluminum Holding (NOR) like me. I had first written about Noranda in March, highlighting the company's Core Program. The central part of the cost-cutting initiative was to achieve a reduction in electricity rates for the New Madrid smelting facility. The stock edged higher ahead of this catalyst and hit nearly $3.50 by mid-April.
In late April, NOR got the nod from Missouri Public Service Commission for reduced electricity rates. Although the reduction was not as much as the company was seeking, it would bring down annual power cost by approximately $17 million to $25 million. Despite this important development and achievement of a major goal of the Core Program, NOR shares have actually struggled since then.
Earlier this month, there was a huge sell-off after Apollo, the company's then biggest shareholder, sold its entire stake in the company in a secondary offering that was priced significantly below the market price. Apollo apparently needed the cash after reaching an agreement with a bankrupt miner.
After the sell-off earlier this month, NOR shares have fallen another 8% this morning. The stock is now trading below $2. So what has sparked the latest sell-off? This morning, JP Morgan analyst Michael Gambardella cut his estimates for Century Aluminum (NASDAQ:CENX). Subsequently, CENX shares have fallen sharply. Shares of Alcoa Inc. (NYSE:AA) and Aluminum Corp. of China Limited (ADR) (NYSE:ACH) were also in red at the time of writing, with ACH down nearly 6%. But NOR seems to be the worst hit.
The sentiment continues to bearish around NOR but this is not justified. I am holding on to the stock for two reasons. The first as I discussed above is the reduction in the electricity rates, which will lead to significant cost savings for NOR.
The second reason is significant insider buying activity, which reinforces my confidence in the company. Since the start of this month, there have been seven direct purchases. It must be noted that there was a direct sale as well on May 26th, with the President of Primary & Value Added Business of Norandal USA Inc., Scott M. Croft selling 30,400 shares at $2.04 per share. Still, insiders have been net buyers this month if the Apollo sale is excluded. In all, insiders have bought 155,000 shares of NOR. The biggest purchase was made by Richard B. Evans, who was this week appointed as the Chairman of the Board. Evans has over four decades of experience in the aluminum industry and has served in senior management positions at companies like Rio Tinto (NYSE:RIO) and Alcan. Evans bought 50,000 shares at $2.31 per share.
One possible reason why NOR shares are struggling is because of the company's huge debt. NOR is a highly leveraged play on the aluminum market but it must be noted that a substantial part of this debt only matures in 2019. And the company has sufficient liquidity.
Disclosure: The author is long NOR, AA, RIO.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.