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Shareholder Value—Programs & Actions

 Alcoa Share Price Performance
Alcoa has been listed on the New York Stock Exchange (ticker symbol: AA) since 1951 and had an estimated 292,000 common shareholders as of February 11, 2009 (annual shareholder meeting record date). Common shareholders owned, on average, 810 million common shares in 2008.

In 2008, our total shareholder return was significantly impacted by the global economic downturn, which was out of our control. However, we are able to control how well our businesses handle and respond to this crisis, which we are accomplishing through the previously mentioned actions. We see a bright future for aluminum and, over the long-term, this is the right business to be in, as the benefits of aluminum match three of the most compelling mega trends: demographics, urbanization, and environment.

We have delivered returns to shareholders, in part, through quarterly dividends, which have been paid uninterrupted since 1939. Our Board of Directors determines whether dividends will be paid and, if so, the amounts, taking into account various factors that include operational performance and capital requirements.

In March 2009, our Board of Directors reduced the quarterly common stock dividend to US$0.03 per share from US$0.17 per share, as a result of the impact of the global economy on Alcoa’s capital structure. This decision will preserve more than US$400 million of cash annually and was made after comparisons to peer companies and consideration of the interests of our shareholders.

To further improve our returns to shareholders, our Board of Directors authorized a new share repurchase program that became effective in October 2007. The new program authorizes the purchase of approximately 217 million shares and expires on December 31, 2010.

We purchased 33 million shares during 2008 (no purchases were made in the last three months of the year), bringing the total share repurchases under this program to 101 million shares, or 47% of the total amount authorized. To conserve cash through the global economic downturn, we decided to temporarily suspend the share repurchase program.

Performance data
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Return on Capital
One of the most important indicators of how we are performing in a capital-intensive industry such as ours is return on capital (ROC). As such, constantly improving ROC remains a key objective of the company. In 2008, our ROC stood at 1.5%.

We are approaching the end of the most aggressive organic growth program in Alcoa’s history. This fact, coupled with the global economic downturn, resulted in a much lower ROC than in past years.

After excluding growth investments and construction work in progress, our ROC in 2008 was 3.3%. The adjusted ROC further demonstrates the tremendous impact the global economic downturn has had on our business.

Once the global economy recovers, we do expect our ROC to begin to ascend to the levels achieved prior to these extraordinary market conditions. We firmly believe we will be able to generate an ROC that is well in excess of the cost of capital, because we have an unlimited amount of potential and value locked in the capital investments we have made over the past few years.

Performance data
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Positioning for Growth
A strong balance sheet—measured in terms of the relationship between debt and total capitalization—is crucial to enabling profitable growth through both the general economic and aluminum cycles. Our target debt-to-total capitalization is between 30% and 35%.

At the end of 2008, our debt-to-total capitalization stood at 42.5%. While not in our target range, we believe the actions we initiated to conserve cash will impact this ratio in a positive manner. Even though our debt-to-total capitalization is higher than we like, our balance sheet is relatively strong considering the status of the economic and financial markets in which we are operating across the globe.

Our strong balance sheet has allowed us to retain an investment grade rating with major agencies, such as Standard and Poor’s Ratings Services (S&P) and Moody’s Investors Service (Moody’s), for more than 30 years. Our long-term debt is currently rated (as of February 2009) “BBB-” by S&P and “Baa3” by Moody’s. Fitch Ratings has also rated our long-term debt as investment grade, currently at “BBB-” (as of February 2009).


Driving Growth
Economic value is the engine that drives our company and the benefits to our stakeholders. To increase this value, we continue to manage our investment decisions and portfolio actions on the basis of contribution to profitable growth.

Upstream Growth Initiatives
In April 2008, we completed the successful start-up of our first greenfield smelter in two decades following a three-year construction project that set environmental and safety benchmarks. The 344,000 metric-tons-per-year (mtpy) Fjarðaál smelter in east Iceland is the most modern and technologically advanced smelter in the world.

We also completed a successful startup of a 280,000 mtpy plant in Mosjøen, Norway, that will produce anodes for the Fjarðaál and Mosjøen aluminum smelters. This facility is one of the world’s largest and most environmentally friendly facilities of its type.

The world’s largest alumina refinery expansion at the Alumar consortium plant in São Luís, Brazil, is expected to be completed by mid-2009. When finished, this investment will increase production at the refinery from 1.4 million mtpy to 3.5 million mtpy.

Development of the bauxite mine, port, and railway in Juruti, Brazil, is also expected to be completed by mid-2009. The mine is expected to initially produce 2.6 million mtpy of bauxite.

Construction continues to progress at two hydroelectric power projects in Brazil in which we hold an equity interest. One such project, the 1,087-megawatt Estreito plant, will bring approximately 150 megawatts of power when it is completed in 2011. The other project, the 210-megawatt Serra do Facão plant, will bring approximately 65 megawatts of power when it is completed in 2010.

In 2007, we entered into a memorandum of understanding (MOU) with the Greenland Home Rule government regarding cooperation on a feasibility study for an aluminum smelter with a 360,000 mtpy capacity in Greenland. The MOU also encompasses a hydroelectric power system and related infrastructure improvements, including a port. In 2008, Greenland’s parliament allocated funding to support the second phase of joint studies with us in determining the feasibility of the project. These studies are expected to extend through 2010. When it reconvenes in late 2009, Greenland’s parliament is expected to consider Greenland’s ownership position in the project.

In 2008, pre-feasibility studies were completed related to the potential development of an alumina refinery in Guinea. In addition, the agreement that set forth the development framework for the refinery was extended to 2010. Further project activities are under consideration at this time, but execution is dependent upon economic conditions globally and in Guinea specifically.

Downstream Growth Initiatives
In February 2008, we completed a US$83 million modernization project at our Köfém facility in Hungary. The core of the investment was the modernization of Alcoa’s European Mill Products business, which involved expanding brazing sheet (used primarily in the automotive and heat exchanger markets) capability to offer a full range of gauges. In addition, Köfém began production of Alcoa’s patented Dura-Bright® aluminum wheels and opened a new manufacturing operation for airfoil castings, supporting Alcoa’s Power and Propulsion operation’s growing jet aircraft and industrial gas turbine businesses in Europe.

The expansion project at our Bohai plant in Qinhuangdao, China, is scheduled for completion in mid-2009. The expansion includes a new hot mill, cold mill, and finishing equipment, as well as a lithographic line. With this new capacity, we will be able to produce high-quality aluminum sheet products for the beverage, printing, transportation, and industrial and electronics markets throughout Asia.

Energy Initiatives
In January 2009, we finalized a 30-year hydropower contract with the New York Power Authority (NYPA) to supply two of our aluminum smelters in Massena, NY. This contract was agreed to in principle in December 2007 and is contingent upon an upgrade of the smelters.

Under the terms of the contract, the NYPA will supply power to the Massena operations for a term of 30 years following the expiration of the current contract in 2013. The contract also includes a provision to extend the power supply an additional 10 years under certain economic conditions. Following the completion of feasibility and engineering studies and approval from Alcoa’s Board of Directors, we will invest a minimum of US$600 million to modernize our operations, which would increase the smelting capacity at Massena to 278,000 mtpy.

In December 2008, we finalized new power agreements with the government of Quebec related to all three of Alcoa’s aluminum smelters in the province. The Baie Comeau, Becancour, and Deschambault smelters represent more than 25% of Alcoa’s aluminum production, and these agreements secure power for the smelters through the end of 2040. The terms of these agreements are conditional on Alcoa upgrading and expanding the Baie Comeau smelter to 548,000 mtpy at an approximate cost of US$1.2 billion. Initial engineering studies are currently underway.

In October 2008, we signed an MOU with the Bonneville Power Administration for a power contract to supply our smelter in Ferndale, Washington, through 2028. This contract would begin in 2011 (the expiration date of the current contract) and is expected to be finalized in 2009.

In July 2008, we reached agreement with the Chelan County Public Utility District on a hydropower contract to supply our aluminum smelter located in Wenatchee, Washington, through 2028. This contract would begin in 2011 upon expiration of the existing agreement.

Portfolio Management
In February 2009, we entered into an agreement with the Aluminum Corporation of China (Chinalco) in which Chinalco will redeem the convertible note issued by Shining Prospect Pte. Ltd. (SPPL) to Alcoa in February 2008 for the funding of SPPL’s purchase of ordinary shares in the London-listed Rio Tinto plc.

We will receive cash of US$1.021 billion in three installments over a six-month period ending July 31, 2009. The agreed-upon amount represents the net present value of the principal (US$1.2 billion) of the note, which was originally payable in February 2011. We and Chinalco intend to explore opportunities to expand our commercial relationship by identifying strategic ventures that will benefit from each party’s complementary strengths in bauxite, alumina, aluminum, and fabricated products.

In January 2009, we announced our intention to divest three underachieving businesses: Electrical and Electronic Solutions, Global Foil, and Transportation Products Europe. These businesses had 2008 combined revenues of US$1.8 billion and employ a combined 22,600 employees at 38 locations.

In December 2008, we entered into an agreement with Orkla ASA (Orkla) to exchange our stakes in the Sapa AB and Elkem Aluminium ANS (Elkem) joint ventures. We will receive Orkla’s 50% stake in Elkem, while Orkla will receive our 45.45% stake in Sapa AB. Once the transaction is complete, we will own 100% of Elkem, and Orkla will own 100% of Sapa AB.

Sapa AB was created in June 2007 when we contributed our soft alloy extrusion business to the joint venture, and Orkla’s Sapa Profiles business contributed its extruded aluminum business to the new entity. Elkem includes aluminum smelters in Lista and Mosjøen, Norway, with a combined output of 282,000 mtpy, as well as the anode plant in Mosjøen in which we already hold an 82% stake.

This transaction, which was completed in the first quarter of 2009, will provide us with increased smelting capacity by our gaining full control of two smelters with competitive hydropower contracts while divesting a business that we decided to exit in 2007.

In March 2008, we acquired the stock of Republic Fastener Manufacturing Corporation and Van Petty Manufacturing from The Wood Family Trust for US$276 million in cash. The two aerospace fastener manufacturing businesses are located in Newbury Park, California, and employ a combined 240 people. Republic offers a wide variety of sheet metal and aerospace fasteners, and Van Petty produces high performance precision aerospace fasteners.

In February 2008, we completed the sale of our Packaging and Consumer businesses to Rank Group Limited for US$2.7 billion in cash.


Case Studies
Measuring the Financial Impact of Alcoa's Presence
City-Initiated Sustainability Initiative Reduces Environmental Impact, Costs
Kaizen Event Reduces Pump Changeover Time
Walking the Flow Path, Three in a Row
A Stakeholder Perspective on Alcoa
Suggestion Systems Reduce Costs, Improve EHS, Engage Employees
Smelter Effort Reduces Emissions, Costs with No Capital Investment
Alcoa Business System Opens Window to Waste Elimination
Asbestos Removal Technique Increases Protection, Reduces Costs
Coating Reformulation Brings Environmental, Economic Benefits
New Rolling Method Win for Environment, Alcoa Business
Process Changes Result in 85% Reduction in Water Usage, Discharge
Waste Elimination Effort Reaps Environmental, Financial Benefits
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