ValuationValuation ofof AlcoaAlcoa IncInc..

Advanced Corporate FinanceAdvanced Corporate FinanceTeodora SpasovaTeodora Spasova04/25/0604/25/06

OutlineOutline

Industry ProfileCompany ProfileBusiness EnvironmentStrategic PlansFinancial PerformanceValuation

Industry ProfileIndustry Profile

A procyclical industry- follows the overall performance of the economy

Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily based on market supply and demand

Serves a number of growing markets-alumina, aluminum, aerospace, packaging and consumer, industrial products, automotive, building and construction, commercial transportation

Very high barriers to entry

Industry PerformanceIndustry Performance

Aluminum production depends on factors like energy and raw material costs, demand, price of aluminum/ alumina, seasonal fluctuations in markets, fluctuation in foreign currency exchange rates, R&D, technology, and the overall state of the economy

Industry PerformanceSource: SmartMoney.com

Company ProfileCompany Profile

Sector: Basic MaterialsIndustry: Aluminum (6 segments):

– Alumina-the mining of bauxite – Primary Metals-aluminum ingot– Flat Rolled Products – Engineered Products– Extruded and End Products– Packaging and Consumer

Full time employees: 129,000 in 42 countries

Key StatisticsKey Statistics

Market Cap- 30.79 B Total Revenue-26.2 B Total Assets-33,696,000 Source: Yahoo!Finance

Quote: AAIndex membership: DJIA, DJComposite,

S&P500, S&P100, S&P1500 SuperComp Exchange: NYSE

Company Profile – Cont.Company Profile – Cont.

Trademarks (Packaging & Consumer): Alcoa® wheels, Reynolds Wrap®, Baco® household wrap, Howmet® metal, Huck® fasteners

During 2005, it acquired remaining 30% minority interest in Alcoa Closure Systems International (Tianjin) Co and remaining 40% interest in the Alcoa (Shanghai) Aluminum Producs 2005

During 2005 it discontinued the business of Southern Graphic Systems Inc

Business EnvironmentBusiness Environment

Alcoa is the world’s leading producer of aluminum, fabricated aluminum, and alumina

The company is active in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling

Aluminum and alumina represent app. ¾ of Alcoa’s revenues

The price of aluminum influences the operating results of Alcoa

Business Environment-Cont.Business Environment-Cont.

A global company with largest market in North America (61% of 2005 Revenues), followed by Europe (23%)

Investments in China, Russia, Brazil, Australia - opportunities for growth

Factors that affect its revenue from these countries include: governmental policies and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates – hedging through int. rate swaps and currency exchange contracts

Some industry trends in 2005Some industry trends in 2005

Continued strong demand for aluminumPressure on prices driven by tight aluminum

marketsHigh material and energy costs

Financial Performance 2005Financial Performance 2005

Revenue growth of $2,923, or 13%over 2004 Income from continuing operations of $1.23 B Debt-capital ratio of 30.8%, within the target

range of 25%-35% Mitigation of cost inflation through structural

cost savings Continued execution of an aggressive growth

strategy

Portfolio Management HighlightsPortfolio Management Highlights

Divested/Restructured Smelting

HAWEastalco

Elkem Equity

Aluminum DownstreamAutomotive CastingCast Auto Wheels

Non-aluminumIntegrisSouthern GraphicsAFL-Telecommunications

Other restructuring7% headcount reduction

Acquired/Invested Refining

SurinamePinjarra

EnergyThree Oaks Mine, Friendsville mineU.S. hydro, Latin America hydroWarrick power plant

SmeltingIceland, Alumar stublineGhana restartEuropean modernization

RollingRussia, Bohai. Shanghai,

Aerospace

Financial Performance- Cont.Financial Performance- Cont.

Positive factors- Higher realized prices for

aluminum and alumina- Higher demand in

downstream markets- The sale of Alcoa’s stake in

Elkem ASA- Income tax benefit resulting

from tax reviews and audits - Sale of railroad assets

Challenges- Higher than expected costs

for energy and raw materials- Restructuring costs driven by

a new global business structure

- Integration of the acquired Russian facilities

- Gulf Coast hurricanes impact- Business interruptions due to

unplanned outages and labor strikes in Europe

Industry ComparisonIndustry Comparison

Source: The WSJ

Five-year price performance of stock, its DJ Industry group and the DJ U.S. Total Market Index, reindexed to zero.

Industry Comparison-Cont.Industry Comparison-Cont.

Past Performance

Alcoa Inc Aluminum DJ U.S. Total

Market Index

3 Months 20.73% 20.73% 4.46%

6 Months 48.84% 48.84% 12.84%Year-to-Date 17.59% 17.59% 5.94% 12 Months 20.31% 20.31% 17.79% 2 Years 5.11% 5.68% 20.94% 5 Years -13.83% -13.38% 11.66% Performance data reflects previous day's closing price, updated by 12 a.m. ET. Data is based on price appreciation only. Calculations do not include returns from dividend reinvestment. Historical data is displayed for the selected stock and its specified DJ U.S. Industry Index. The DJ U.S. Total Market Index measures the performance of the broad U.S. equity market and includes over 1800 company stocks.

Alcoa Stock Performance vs. S&P Alcoa Stock Performance vs. S&P 500 500

Source: Yahoo! Finance

Outlook for 1Q 2006Outlook for 1Q 2006

Positives Continued strong demand

for aluminum Aluminum prices

strengthened for 15 yrs highs

Strong aerospace markets Continued operating

development Continued progress on

growth projects: Russia, China, and Upstream

Negatives Seasonal declines in

consumer products, building and construction

Strategic Goals and Priorities 2006Strategic Goals and Priorities 2006

Managerial Excellence- Focus on volume and cost savings via the Alcoa

Business System (ABS), centralized purchasing, consolidation, LCC

- Increase overhead productivity while managing overhead expenses through ABS and low-cost country sourcing (by 2009, more than 40% of the production will originate from low-cost countries)

- Focus on product mix, pricing and new product application

- Successfully manage capital expenditures and projects

Strategic goals-Cont.Strategic goals-Cont.

Portfolio Management- Monitor the progress of underperforming assets

and make appropriate adjustments to strengthen the portfolio

Profitable Growth- Capitalize on strong markets where the

company is well located- Use technology as an advantage- Continue to integrate investments in Russia and

China- Continue to focus on value-creating organic

growth projects

Major Markets TrendsMajor Markets Trends

Aluminum and alumina– The world’s largest

producer of alumina– Alumina production in ’05

rose 2% to 14.6 M mtpy– In ’05 54% of Alcoa’s

refinery production was supplied to outside customers

– Alcoa has app. 9% of the worldwide aluminum capacity

Trends in Major Markets

$6.80 26%

$6.20 24%

$3.40 13%

$2.70 10%

$2.70 10%

$2.60 10%

$1.80 7%

Aluminum and aluminaPackaging and ConsumerIndustrial ProductsAutomotiveAerospaceBuilding and ConstructionCommercial Transportation

Major Market Trends-Cont.Major Market Trends-Cont.

Packaging and Consumer

– Alcoa segments: Flat-Rolled Products, Packaging and Consumer

– The Reynolds Wrap® brand placed #1 in the U.S. Harris EquiTrend® as the greatest brand equity for the second straight year

Industrial Products

– Alcoa segments: Flat-Rolled products, Engineered Solutions, Extruded and End Products

– Heavy-duty gas turbine build rates start to increase due to increased power demand in the Asian and Middle Eastern markets

– Growth opportunities for the supply of spare parts

Valuation- DCF ModelValuation- DCF Model

Assumptions:CAPM

Risk-free rate: 4.86%Market Risk premium: 6.40%Beta: 1.91Tax Rate: 22.8%

WACC: 15.18% Projection

5-year non-constant growth: 10%Constant growth: 3%

Valuation-Cont.Valuation-Cont.

Results:Price per share: $34.80

Current Price (as of 04/21/06): $35.39Recommendation: hold

Comparative AnalysisComparative Analysis

CompetitorsStrengths / comparative advantageWeaknesses

Main CompetitorsMain Competitors

Alcoa Inc Alcan Inc Century Aluminum Company

Aluminum Corporation of China

Market Cap $30.79B $19.47B $1.61B $11.41B

Current Price $35.39 $52.09 $49.93 $103.22

5-year CAGR Revenues

2.7% 10.40% 12.08% N/A

P/E 19.60 160.20 n/a 14.24

PEG 0.91 1.29 0.93 0.63

Price/Sales 1.06 0.96 1.37 n/a

Current Ratio

1.18 1.10 0.63 n/a

Quick Ratio 0.71 0.63 0.39 n/a

Competitive AdvantageCompetitive Advantage

Most aggressive growth strategy in the industry (builds on high competency and technology)

In alumina – low-cost brownfield projects (refining projects will increase the existing base with 40%, and will lower the refining cost by 15%)

In aluminum – global system of smelters; strategic raw materials, construction costs, best-in-class manufacturing

Investments in Russia and China- opportunities to capture growth in Eastern Europe and Asia

Large project management capabilities Experience in dealing with governments around the

world The Alcoa brand

WeaknessesWeaknesses

Not sufficient use of underperforming assets Need better control of cost savings and increase of

productivity Better focus on product mix, pricing and new product

application

And Finally…And Finally…

Thank you!