Shares of Alcoa Corp. (NYSE:AA) tumbled more than 12% by 10:30 a.m. EDT on Monday after the U.S. Treasury Department said it might relieve sanctions against Russian aluminum giant Rusal if its CEO gives up control. That news caused the price of aluminum to sell off.
Earlier this month, the price of aluminum spiked after the U.S. government slapped sanctions on Rusal, the second-largest supplier of aluminum to the U.S. and Canada. That news sent the stocks of U.S. aluminum producers like Alcoa and Century Aluminum (NASDAQ:CENX) soaring on the belief that they'd profit from the higher prices that would likely result from the sanctions.
However, the Treasury Department said on Monday that it could relieve those sanctions if Rusal CEO Oleg Deripaska gives up control of the company. He's the primary target due to his role in Russia's purported interference in the 2016 U.S. election as a result of his close ties to Russian President Vladimir Putin and Paul Manafort, the former Trump campaign manager.
In addition to potentially easing the direct sanctions against Rusal, the Treasury Department also extended the deadline for U.S. companies to wind down their dealings with the Russian aluminum giant until Oct. 23. That extra time is necessary given that the U.S. buys 10% of its aluminum, or about $1 billion per year, from Rusal.
Alcoa and other U.S. producers like Century Aluminum stand to win if the sanctions remain in place. According to analysts, Alcoa could generate $40 million in free cash flow this year if the price of aluminum stays high, which could have enabled the company to return money to shareholders in the second half of the year. However, if the U.S. drops the sanctions, it would likely push the price of aluminum even lower, potentially wiping out that extra profit. That uncertainty and volatility are why investors might want to watch this situation from the sidelines.