The mechanism is mostly understood, but not perfectly. Most people know that a cow has multiple stomachs. The second stomach is called a rumen. A cow chews it's cud (essentially big mashes of grass and grain, which a stomach cannot digest). This cud is passed through the first stomach and into the rumen, which contains beneficial, digestive bacteria. The bacteria in the rumen essentially ferment the cud and make compounds which can be digested in the subsequent stomaches. Unfortunately, methane is a natural byproduct of this process.

AT and a number of other algae contain very low amounts of a compound called bromoform. Bromoform in high amounts is toxic, but it's believed that bromoform in these trace amounts changes the chemical reaction being undertaken within the rumen such that methane is no longer a product. The result is a more efficient digestive process, essentially lending energy back to the cow. Easier digestion for cows seems to equal better health and immunity, increased length of heat, increased food conversion ratios and perhaps just happier cows. There is a possibility of interaction with additional trace nutrients and compounds in the algae as well, and this is being researched.

Something to note is that AT is not the only algae that reduces methane production in cattle. It is just, by far, the most efficient. And algae is not the only product which decreases methane in cattle, as well. Companies are marketing probiotics and small molecule methane inhibitors which do similar jobs, but again, AT is nearly twice as effective.