Friday, 02 October 2015 17:52

Alcoa to Separate into Two Public Companies, Completing Multi-Year Transformation

Alcoa announced on September 28 that its Board of Directors approved a plan to separate into two independent, publicly-traded companies. The Upstream Company will be comprised of Global Primary Products - Bauxite, Alumina, Aluminum, Casting and Energy. The Value-Add Company will include Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions. The transaction is expected to be completed in the second half of 2016. At that point Alcoa shareholders will own all of the outstanding shares of both the Upstream and Value-Add Companies. The separation is intended to qualify as a tax-free transaction to Alcoa shareholders for U.S. federal income tax purposes.

Both independent companies will attract an investor base. Both entities will be capitalized prudently, with the Value-Add Company targeting an investment grade rating and the Upstream Company a strong non-investment grade rating. After the separation, the Upstream Company will operate under the Alcoa name. The Value-Add Company will be named prior to closing.

“In the last few years, we have successfully transformed Alcoa to create two strong value engines that are now ready to pursue their own distinctive strategic directions,” said Klaus Kleinfeld, Chairman and Chief Executive Officer. “After steering the Company through the deep downturn of 2008, we immediately went to work reshaping the portfolio. We have repositioned the upstream business; we have an enviable bauxite position and are unrivalled in Alumina, we have optimized Aluminum, flexed our energy assets, and turned our casthouses into a commercial success story. The upstream business is now built to win throughout the cycle. Our multi-material value-add business is a leader in attractive growth markets. We have intensified innovation, made successful acquisitions, shed businesses without product differentiation, invested in smart organic growth, expanded our multi-materials profile and brought key technologies to market; all while significantly increasing profitability.”

Mr. Kleinfeld concluded, “Inventing and reinventing has defined our Company throughout its 126-year history. With the unanimous support of Alcoa’s Board we now take the next step; launching two leading-edge companies, each with distinct and compelling opportunities, and each ready to seize the future.”

Management Structure and Governance

Upon completion of the transaction, Klaus Kleinfeld will lead the Value-Add Company as Chairman and Chief Executive Officer. He will also serve as Chairman of the Upstream Company for the critical initial phase. Each company will have its own independent board of directors that will include members of the current Alcoa Board. Full management teams and boards for both companies will be named in the months leading up to the launch of the two companies in the second half of 2016.

The Upstream Company

After the separation, the Upstream Company will be a cost-competitive industry leader in bauxite mining, alumina refining and aluminum production, positioned for success throughout the market cycle. The company’s footprint will include 64 facilities worldwide, and approximately 17,000 employees. Revenues for the 12 months through June 30, 2015 totaled $13.2 billion, with $2.8 billion in EBITDA. It will be committed to disciplined capital allocation and prudent return of capital to shareholders.

Global aluminum demand is expected to grow 6.5 percent in 2015 and double between 2010 and 2020.

The Upstream Company’s asset base will include the world’s largest bauxite mining portfolio, with 46 million bone dry metric tons of production in 2014. It has a low 19th percentile position on the global bauxite cost curve. With proximity to owned refinery operations, its mining reserves will provide a consistent supply of low-cost bauxite. Alcoa has been building its third-party bauxite business and is well-positioned to meet growing global demand.

The Upstream Company’s alumina refining system will be the world’s largest, with operations well positioned to serve major adjacent growth markets in Asia, the Middle East, and Latin America. It has a 25th percentile, first quartile position on the global alumina cost curve, with a target to reach the 21st percentile by 2016.

The company will be the world’s fourth largest aluminum producer with a highly competitive second quartile cost curve portfolio. The power production capacity will be of approximately 1,550 megawatts with operational flexibility to profit from market cyclicality.

Alcoa has reshaped its Alumina and Primary Metals segments by closing 1.4 million metric tons, or 33 percent, of total smelting operating capacity since 2007. As a result, Alcoa has dropped eight points on the global aluminum cost curve since 2010 to the 43rd percentile, and is targeting the 38th percentile by 2016. Additionally, Alcoa has secured approximately 75 percent of smelter power needs through 2022.

Alcoa has grown total value-add product shipments from its smelters from 57 percent in 2010 to 65 percent in 2014, delivering $1.3 billion in total incremental margin. In 2015, value-add products are projected to represent approximately 70 percent of smelter shipments. Alcoa has also invested in the most advanced, low cost integrated aluminum complex in the world in Saudi Arabia, with the refinery and smelter now fully operational. Alcoa reformed pricing in the alumina market in 2010 by introducing the Alumina Price Index (API) to sell smelter-grade alumina based on alumina market fundamentals rather than London Metal Exchange pricing. In 2014, 68 percent of Alcoa’s total third-party smelter-grade alumina shipments were based on API/spot market pricing. That is projected to grow to approximately 75 percent in 2015. Additionally, the Upstream business has achieved productivity gains of approximately $3.9 billion between 2009 and 2014.

The Value-Add Company

After the separation, the Value-Add Company will have 157 global operating locations and approximately 43,000 employees. Pro-forma revenues for the Value-Add Company for the 12 months through June 30, 2015 totaled $14.5 billion, with $2.2 billion in pro-forma EBITDA.

EBITDA margins for the value-add portfolio have increased from 8 percent in 2008 to 15 percent in 2015 on a pro-forma basis for the twelve months through June 30, 2015. The overall contribution of the value-add portfolio to Alcoa’s after-tax operating income has more than doubled from 25 percent in 2008 to 51 percent in 2014. EBITDA margins in the combined downstream segments (Engineered Products and Solutions and Transportation and Construction Solutions) have increased from 14.6 percent in 2008 to 20.9 percent in 2014, and in the midstream (Global Rolled Products) from $108 per metric ton in 2008 to $289 per metric ton in 2014.

Approximately 40 percent of the Value-Add Company's pro-forma revenues for the 12 months through June 30, 2015 came from the aerospace market. Automotive revenues are expected to increase 2.4 times from 2014 to $1.8 billion in 2018.

For More Information

Alcoa will hold its third quarter conference call as scheduled on October 8, 2015 at 5:00 PM Eastern Daylight Time to present quarterly results.

For more information, visit www.alcoa.com, follow @Alcoa on Twitter at www.twitter.com/Alcoa and follow us on Facebook at www.facebook.com/Alcoa

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