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Alcoa splitting into two companies; expecting 2.4x increase in automotive revenues to $1.8B in 2018

The Board of Directors of Alcoa has unanimously approved a plan to split the lightweight metals leader into two independent, publicly-traded companies. The globally competitive Upstream Company will comprise five business units that today make up 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 US federal income tax purposes.

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After the separation, the Upstream Company, with its strong history in the aluminum and alumina markets, will operate under the Alcoa name. The Value-Add Company will be named prior to closing.

Upon completion of the transaction, Klaus Kleinfeld, Chairman and Chief Executive Officer, will lead the Value-Add Company as Chairman and Chief Executive Officer. He will also serve as Chairman of the Upstream Company for the initial phase to provide a smooth transition. 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. The company’s footprint will include 64 facilities worldwide, and approximately 17,000 employees. Revenues for the 12 months through 30 June 2015 totaled $13.2 billion, with $2.8 billion in EBITDA.

Global aluminum demand is expected to grow 6.5% in 2015 and double between 2010 and 2020; so far this decade, global demand growth is tracking ahead of this projection. The Upstream Company will be well-positioned to meet this demand.

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. It will have a value-add casthouse network in close proximity to customers, and a substantial portfolio of energy assets with power production capacity of approximately 1,550 megawatts with operational flexibility to profit from market cyclicality.

Alcoa has reshaped its Alumina and Primary Metals segments, closing, divesting or curtailing 1.4 million metric tons, or 33%, 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% of smelter power needs through 2022.

Alcoa has grown total value-add product shipments from its smelters from 57% in 2010 to 65% in 2014, delivering $1.3 billion in total incremental margin. In 2015, value-add products are projected to represent approximately 70% of smelter shipments. Alcoa has also invested in what it says is the most advanced, low-cost integrated aluminum complex in the world in Saudi Arabia, with the refinery and smelter now fully operational.

In 2010, Alcoa introduced the Alumina Price Index (API) to sell smelter-grade alumina based on alumina market fundamentals rather than London Metal Exchange pricing. In 2014, 68% 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% 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 provide high-performance multi-material products and solutions with 157 globally diverse operating locations and approximately 43,000 employees. Pro-forma revenues for the Value-Add Company for the 12 months through 30 June 2015 totaled $14.5 billion, with $2.2 billion in pro-forma EBITDA.

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

The Value-Add Company will be a differentiated supplier to the high-growth aerospace industry with leading positions on every major aircraft and jet engine platform, underpinned by market leadership in jet engine and industrial gas turbine airfoils, and aerospace fasteners. Approximately 40% of the company’s pro-forma revenues for the 12 months through 30 June 2015 came from the aerospace market.

The company also intends to be at the forefront of capturing demand for aluminum-intensive vehicles through Alcoa’s recent rolling mill capacity expansions and the commercialization of breakthrough technologies such as the Micromill. Automotive revenues are expected to increase 2.4 times from 2014 to $1.8 billion in 2018.

Additionally, the Value-Add Company will be a leader in aluminum commercial truck wheels and will hold the number one market position in North American architectural systems.

Conditions and Timing to Close. Alcoa is currently targeting to complete the separation in the second half of 2016. The transaction is subject to certain conditions, including, among others, obtaining final approval by Alcoa’s Board of Directors, receipt of a favorable opinion of legal counsel with respect to the tax-free nature of the transaction for US federal income tax purposes, and effectiveness of a Form 10 registration statement to be filed with the US Securities and Exchange Commission. Alcoa may, at any time and for any reason until the proposed transaction is complete, abandon the separation or modify or change its terms.

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