Elliott Associates, the hedge fund run by billionaire Paul Singer, recently revealed a more than 6% stake in metals company Alcoa (NYSE: AA). It’s the same hedge fund that usually targets technology companies, such as Citrix (NASDAQ: CTXS), but has played in the commodity space in the past – namely by breaking up Hess (NYSE: HES).commodity play 

But back to Alcoa. Famed value investor and fellow billionaire Seth Klarman has also been buying Alcoa. Klarman’s Baupost Group added Alcoa to its portfolio during the third quarter, making it the hedge fund’s third-largest holding. It owns 4% of the company.

The stock is up nicely over the last few weeks, but is still down 40% over the last year. As the world’s third-largest producer of aluminum, Alcoa is heavily tied to the price of aluminum, which has been on the decline for more than five years now.

But Alcoa is still the top billionaire commodity play around. 

Catalysts at Alcoa

The key for investors that are skeptical of commodities is that Alcoa has already agreed to break itself into two parts.

Alcoa’s split will include creating a company that focuses on custom-made and engineered products for the aerospace and auto industries, dubbed the “value-add” company. The remaining “upstream” company will produce aluminum and other metals. So basically, Alcoa is separating the commodity business from the engineered products.

Elliott is supportive of Alcoa management’s plans to split. The fund has said that it believes the spinoff will create value substantially above the current share price. 

So Where’s the Value Elliott Sees?

Aluminum is a cyclical industry, and we could be close to the bottom in pricing. Alcoa also has some of the lowest costs of production in the industry. But the hedge fund really sees value in the split-up of the company, which is expected to close in the second half of 2016.

Of note, Elliott said that the market is undervaluing Alcoa’s manufacturing business given the fall in aluminum prices. A split could help the market properly value the company. Elliott has already been in talks with management to boost value post-split. This includes selling off the power generation assets following the breakup.

Beyond that, Alcoa is already making moves in the right direction. This includes closing high-cost smelting plants and cutting refining capacity to better navigate the fall in metal prices. Intuitively, it makes sense to sell the power assets, which will no longer fuel the smelters that Alcoa is shutting down.

Key Dynamics

It’s worth noting that the upstream business has historically generated the bulk of Alcoa’s operating income. But over the years it’s been making large investments into the production (value-add) parts of the company.

Those should start paying off going forward and further reduce its reliance and sensitivity to aluminum prices. Part of that includes its quest to be an ultra-low-cost producer. Alcoa has a joint venture with Saudi Arabian mining company Ma’aden, which has been producing for less than a year. This is said to be the lowest-cost aluminum production operation in the world.

The company also has the opportunity to boost margins in its value-add company following the spinoff, as that business has margins well below direct competitors.

It’s also worth noting that Alcoa offers a 1.3% dividend yield. And its margins, which could be better, are still above major peers. At just over 6 times forward EV/EBITDA (enterprise value-to-earnings before interest, taxes, depreciation and amortization), it’s the cheapest we’ve seen Alcoa in close to five years.

Commodities have been a tough group of stocks to own over the last few years. Alcoa has been no different. But the company’s recent plans to split, and activist investor Elliott Associates’ involvement, makes it one of the only commodity stocks worth owning today.

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Published by Wyatt Investment Research at