We are always focused on maximizing total shareholder returns, generating
above-cost-of-capital returns, and driving year-over-year earnings per share
growth. Our primary financial goal is to create significant value for our
shareholders.
In 2009, total shareholder return turned positive, which is a sign that we
are starting to recover from the global economic downturn.
Like most other stocks and the major indices, the market price of our stock
was severely impacted in 2008 by the global economic downturn that affected
financial markets in a manner that has not occurred in decades. In response, we
initiated actions
to conserve cash and preserve liquidity so that we will emerge from these
extraordinary times even stronger when the global economy fully recovers.
In 2010, we will finish implementing completed growth projects,
systematically control our cash position, and continue to be aggressive and
quick to react in an ever-changing market—all without compromising our values. As in years past, our focus will be to deliver for
today while also building for the future.
Alcoa Share Price Performance
Alcoa has been listed on the New York Stock Exchange (ticker symbol: AA)
since 1951 and had an estimated 301,000 common shareholders as of January 27,
2010 (annual shareholders’ meeting record date). In 2009, on average, common
shareholders owned 935 million shares of Alcoa’s common stock.
Our total shareholder return began to unwind the negative impact realized in
2008 from the global economic downturn and finished 2009 positive. However, the
global economy has not yet fully recovered and there is a long way to go before
our stock price returns to pre-downturn levels. While this crisis
was obviously out of our control, we were able to manage how well our businesses
handled and responded to the downturn through our actions to
conserve cash and preserve liquidity. We continuously 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 economic downturn on our capital structure. This decision, which
will preserve more than US$400 million of cash annually, was made after
comparison to peer companies and consideration of our shareholders’
interests.
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.
To conserve cash through the global economic downturn, we suspended the
share repurchase program in October 2008. Through the suspension date, total
repurchases under this program were 101 million shares, or 47% of the total
amount authorized.
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.
By the end of 2009, we completed the most aggressive organic growth program
in Alcoa’s history. As a result, there has been a negative impact on ROC because
of increased debt levels to fund certain growth projects. Over the long-term,
these projects are expected to provide positive contributions to our ROC.
In 2009, our ROC stood at (3.2)%. After excluding growth investments and
construction work in progress, our ROC was (3.0)%. Both measures reflect the
tremendous impact the global economic downturn had on operations during the
year.
Once the global economy fully 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.
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 2009, our debt-to-total capitalization stood at 38.7%. While
not in our target range, this ratio represents a 380 basis point improvement
from 2008. The actions we initiated to conserve cash and preserve liquidity
impacted this ratio in a positive manner and will continue to do so for the
foreseeable future. Even though our debt-to-total capitalization is still higher
than we like, our balance sheet is relatively strong considering the depressed
state 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
was rated (as of February 2009) “BBB-” by S&P and “Baa3” by Moody’s
(confirmed in March 2010). Fitch Ratings has also rated our long-term debt as
investment grade at “BBB-” (reaffirmed in
February 2010).
Debt-to-Total
Capitalization
Defined as (Short-term borrowings + Commercial
paper + Long-term debt due within one year + Long-term debt, less amount due
within one year) / (Numerator + Convertible securities of subsidiary + Total
equity).
Driving Growth
Economic value is the engine that drives our company and the benefits to our
stakeholders. To increase this value, we manage our investment decisions and
portfolio actions on the basis of contribution to profitable growth.
Upstream Growth Initiatives
Near the end of 2009, we completed the world’s largest alumina refinery
expansion at the Alumar consortium plant in São Luís, Brazil. This investment
will increase production at the refinery from 1.4 million metric-tons-per-year
(mtpy) to 3.5 million mtpy.
In September 2009, we also completed the development of the bauxite mine,
port, and railway in Juruti, Brazil. 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.
Downstream Growth Initiatives
In September 2009, we completed the expansion project at our Bohai plant in
Qinhuangdao, China. The expansion includes a new hot mill, cold mill, and
finishing equipment, as well as a lithographic sheet line. With this new
capacity, we will be able to produce high-quality aluminum sheet products for
the packaging, printing, transportation, and electronics markets throughout
Asia.
We also completed the can sheet and end and tab coating line in Samara,
Russia, in June 2009. We are the only producer of this product in Russia.
Portfolio Management
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 combined revenues of US$1.8 billion and
employed a total of 22,600 employees at 38 locations in 2008.
During 2009, we successfully divested the Electrical and Electronic Solutions
business and two of the three plants that comprise the Global Foil business. We
continue to explore divestiture alternatives for the remaining Global Foils
plant and Transportation Products Europe business.
In February 2009, we entered into an agreement with the Aluminum Corporation
of China (Chinalco) in which Chinalco redeemed 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. Under
this agreement, we received US$1.021 billion in cash in three installments over
a six-month period ending July 31, 2009.
In March 2009, we completed a non-cash exchange of our 45.45% stake in the
Sapa AB joint venture for Orkla ASA’s (Orkla) 50% stake in the Elkem Aluminium
ANS joint venture (Elkem). As a result of this transaction, Elkem is now owned
100% by Alcoa and Sapa AB is now owned 100% by Orkla. Elkem includes aluminum
smelters in Lista and Mosjøen, Norway, that have a combined output of 282,000
mtpy and the anode plant in Mosjøen in which we already held an 82% stake. The
latter supports our Norway and Iceland smelter operations.
The Elkem transaction strengthened our leadership position within the
aluminum industry through increased smelting capacity. We gained full control of
two smelters with competitive hydropower contracts, and we divested a business
that we decided to exit in 2007.
In July 2009, Alcoa World Alumina LLC (AWA LLC), a majority-owned subsidiary
of Alcoa and part of Alcoa World Alumina and Chemicals, acquired a BHP Billiton
(BHP) subsidiary that holds interests in four bauxite mines and one refining
facility in Suriname. These interests were part of joint ventures between AWA
LLC’s wholly-owned subsidiary in Suriname (Suriname Aluminum Company LLC, also
known as Suralco) and BHP’s subsidiary in which Suralco held a 55% stake and
BHP’s subsidiary held a 45% stake. This acquisition strengthens our presence in
Suriname and supports our overall growth strategy.
In this transaction, AWA LLC received direct ownership of the BHP subsidiary
in exchange for relinquishing BHP of any further obligations, liabilities, and
responsibilities related to the joint ventures (certain of which could result in
the recognition of charges in future periods). This transaction resulted in the
addition of 993,000 mtpy of alumina refining capacity to Alcoa’s global refining
system (2.2 million mtpy is total refinery capacity, but approximately 870,000
mtpy was curtailed in the second quarter of 2009).
In December 2009, we entered into a 30-year joint venture shareholders’
agreement (automatic extension for an additional 20 years, unless the parties
agree otherwise or unless earlier terminated) with Saudi Arabian Mining Company
(known as Ma’aden). The agreement sets forth the terms for the development,
construction, ownership, and operation of a fully
integrated, world-class aluminium complex in Saudi Arabia.
In its initial phases, the joint venture will include:
A bauxite mine with an initial capacity of 4 million
metric-tons-per-year (mtpy);
An alumina refinery with an initial capacity of 1.8
million mtpy;
An aluminium smelter with an initial capacity of
740,000 mtpy of ingot, slab, and billet; and
A rolling mill with an initial hot-mill capacity of
between 250,000 and 460,000 mtpy.
The refinery, smelter, and rolling mill will be constructed in an
industrial area at Ras Az Zawr on the east coast of Saudi Arabia. The facilities
will use critical infrastructure, including power generation derived from
reserves of natural gas, as well as port and rail facilities developed by the
government of Saudi Arabia. First production from the smelter and rolling mill
is anticipated in 2013, and first production from the mine and refinery is
expected in 2014. Ma’aden will be the majority owner of the joint
venture, with Alcoa the minority partner.
Capital investment in the project is expected to total approximately
US$10.8 billion (SAR40.5 billion), subject to the completion of detailed
feasibility studies and environmental impact assessments. Of this amount, Alcoa
will invest approximately US$1.1 billion over a four-year period and is
responsible for its pro rata share of the joint venture’s project
financing.
Once complete, this project is expected to result in both the lowest-cost
aluminum production complex and the most efficient integrated aluminum complex
in the world. This project also will offer flexibility for expansion and
establishes a strategic footprint in a fast-growing region.
