NORTH
STANLEY
RESEARCH
AMERICA
Morgan MORGAN Stanley & Co. Incorporated
Mark Liinamaa
[e-mail] [phone]
Paretosh Misra, Ph.D
[e-mail] [phone]
February 2, 2010
Stock Rating Overweight Industry View In-Line
Alcoa Inc.
Sell-Off an Opportunity for Long-Term Investors
We are more optimistic than the market as previous concerns resurface post 4Q09 earnings miss. Investors question whether cost-cutting initiatives will accrue to shareholders, and Alcoa's ability to deliver leverage to the aluminum price. We think 4Q was better than perceived. Further, we think that cost cutting has been effective and that leverage to aluminum will become more visible as operating rates at downstream assets recover from recession levels. Why we remain Overweight: 1) Aluminum fundamentals stable. Aluminum has recently declined 11%, but this is in line with other metals. The physical market is tight and continued improvement in OECD PMI data leaves us constructive. We forecast aluminum will average 98c/lb for 2010. 2) AA's downstream assets are more levered to recovery since the recent sale of non-core businesses. Early signs suggest improvement in key end market demand, enhancing leverage to the aluminum price. 3) Alcoa should deliver improved earnings as a result. Where we differ: 1) The 4Q miss was closer to consensus than meets the eye. The quarter was poor, but it needs to be put in perspective. A sequential increase in DD&A and SG&A adversely affected earnings and was not in consensus. 2) We believe cost cutting has been effective. The market has been skeptical toward Alcoa's cost-cutting initiative. We estimate ~60% of cuts have reached the bottom line. Additional reductions could be accretive by $0.25 per share if the yield is similar. AA shares are down ~22% since reporting 4Q09 earnings, and the market may take a wait-and-see approach. Before investors broadly consider the longer-term investment case, the company may be required to deliver a strong 1Q10. Based on recent trends in the aluminum price and cost drivers, we estimate EPS of $0.15 is possible, versus our current estimate of $0.12. Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.
Key Ratios and Statistics
Reuters: AA.N Bloomberg: AA US
Nonferrous Metals & Mining / United States of America Price target Shr price, close (Feb 2, 2010) Mkt cap, curr (mm) 52-Week Range Fiscal Year ending ModelWare EPS ($) Prior ModelWare EPS ($) P/E Consensus EPS ($) Div yld (%) 12/08 12/09
$22.00 $13.67 $14,542 $17.60-4.98
12/10e 12/11e
1.02 11.0 1.16 6.0
(0.80) NM (0.78) 1.6
1.00 1.00 13.7 0.85 0.9
1.40 1.40 9.7 1.19 0.9
Unless otherwise noted, all metrics are based on Morgan Stanley ModelWare framework (please see explanation later in this note). = Consensus data is provided by FactSet Estimates. e = Morgan Stanley Research estimates
Quarterly ModelWare EPS
2009
Quarter Q1 Q2 Q3 Q4 2008
2009 (0.59) (0.32) 0.04 0.01
2010e 0.12 0.22 0.30 0.36
2010e 0.12 0.22 0.30 0.36
Prior Current
Prior Current
0.44 0.66 0.33 (0.28)
-
e = Morgan Stanley Research estimates
For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Risk-Reward Snapshot: Alcoa (AA.N, $14, Overweight, Target $22)
Risk-Reward View
$35
30
$30 (+119%)
25 $22.00 (+61%) 20
15
$ 13.67
10
$10 (-27%)
5
0 Nov-08
Feb-09
May-09
Aug-09
Nov-09
Feb-10
May-10 Current Stock Price
Aug-10
Price Target (Sep-10)
Historical Stock Performance
Source: FactSet, Morgan Stanley Research
Price Target $22
Based on 13x our normalized EPS estimate of $1.70, implying a 4.7% RoA, 50bp higher than the last 15-year average to give credit for restructuring, capital spending and cost cutting. Economic recovery continues through 2010. Stronger than expected economic growth drives a V-shaped recovery for aluminum demand. Global economy grows by 5.8% in 2010 and 5.9% in 2011. Prices remain above $1.00 in 201011. 2009 recovery in prices proves sustainable, but high inventories and over-capacity keep a lid on prices. LME inventory continue to decline in 1H10 allowing prices to stabilize neat the marginal cost of production. Demand from key-markets improves as global GDP grows 4% in 2010 and 3.9% in 2011. Chinese over-production and unwinding of financing deals leads to over-supply in the market. Prices come under pressure as market surplus grows. Premiums decline as materials comes off the financing contracts.
Bull Case $30
12x Bull Case 2011 EPS of $2.50 13x mid-cycle earnings at $1.70 1.2x Tangible Book Value per share
Base Case $22
Investment Thesis Our Overweight rating reflects our view that 1) The worst for aluminum fundamentals is behind us, 2) AA's downstream assets are more levered to recovery post the sale of non-core businesses, and 3) Alcoa can deliver improved earnings as a result. Key Value Drivers Cost cutting. Despite weak prices, Alcoa's upstream segments earned a total ATOI of $57 mn in 3Q09, benefitting from the cost cutting. The aluminum price. We believe aluminum prices are well supported near current levels based on energy prices and FX movements. Higher alumina linkage rates. We think Alcoa can increase alumina pricing as recent spot transactions suggest the company has room to increase linkage rate. LT mid-stream and downstream earnings potential. Operating margins should improve when key end-markets recover. Potential Catalysts Western smelters lose access to cheap hydro-power as demand for "green power" increases. Physical tightness continues and premiums remain strong. Pick up in key end-markets demand. RMB appreciation. State of Play and Potential Risks Aluminum prices have recovered from February bottom of 0.58/lb to current $0.96 while inventories have stabilized. Risk to aluminum prices due to (1) risk of unwinding of financing contracts that have kept physical availability limited and (2) increase in Chinese exports, (3) restarts or capacity growth outside China.
Bear Case $10
Upside Linked to Macro Data, Aluminum Price and Company-Specific Restructuring
40 35 30 25 20 15 10 5 0 $8 $7 $5 $22 $30
$10 Bear Case Mid-stream & Costs remain Downstream low, despite pick turnaround with up in energy and higher volumes USD weakness Base Case US Demand recovers, Global supply ex China remains idled; China not a significant net exporter Bull Case
Source: Company reports, Morgan Stanley Research
2
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Sell-Off an Opportunity for Long-Term Investors; Remain Overweight
Alcoa has become a `show-me' story again as 4Q09 earnings failed to provide expected leverage to the rising aluminum price. While little is gained by defending the quarter at this point, we believe the 4Q result understated the underlying performance. Higher SG&A hurt sequential quarterly comparison by $0.04 per share, and higher depreciation by $0.02 per share. The key drivers for an improved 1Q10 result will be higher realized aluminum and alumina prices, normalization of SG&A, favorable FX, and further cost cutting, in our view (see Exhibit 1).
Exhibit 1
Quarter Reignited Longstanding Debates Debate 1: Will cost cutting get to the bottom line, Our view: Using 3Q08 costs as base, we estimate approximately 60% of cuts have been delivered as earnings enhancement of ~$800 million. Additional reductions could be accretive by $0.25 per share if the yield is similar. Debate 2: Does Alcoa provide leverage to the aluminum price? Our view: We believe the company will provide exposure to the aluminum price. The benefit of rising aluminum and cost cutting has been offset by restructuring costs, and still low utilization rates at downstream facilities. Low utilization of downstream assets has dampened early leverage to aluminum. We think this will reverse as recovery takes hold. Further, AA's downstream assets are more levered to recovery since the recent sale of non-core businesses. Alcoa's 4Q09 revenues) should lead to sequential improvement in Alcoa's downstream business through the year. Morgan Stanley aerospace team expects global large commercial aircraft deliveries to bottom in 2010 and rise 4% in 2011 which suggests de-stocking pressure in the supply chain could ease. Aluminum fundamentals stable. Three-month forward aluminum price has declined 11%, to $0.96 from its January peak of $1.08. Nonetheless, physical market tightness, one of the premise of our favorable view on aluminum, still persists and global spot premiums remain at multi-year highs. We believe the recent correction in aluminum is primarily due to the investor concerns about tightening in China and not due to any commodity-specific reasons.
Exhibit 2
Further Cost Cutting and Favorable FX Could Offset Increase in Energy And Aluminum-Linked Costs
Pr ic in Po w er nk ed g C os ts Pr ic in g in a in um ut tin En er gy os tC A lu m A
0.02 0.02 0.05 0.06 0.01
4Q09 EPS
0.01
(0.01)
LM Eli
lu m
FX
SG
& A
C
C os ts
g
(0.01)
0.15
1Q10e EPS
Source: Company data, Morgan Stanley Research
Improvement in key end markets would enhance apparent leverage to metal prices... Weak demand in the 2009 economic environment has hampered Alcoa, as well as de-stocking in key end markets, notably aerospace and industrial gas turbines. The management noted that in 2009 investment casting facilities bottomed at ~50% of capability and its largest North American mill in Davenport was running below 70%. Similar to what we have seen in the steel industry, poor fixed cost absorption has resulted in some over-estimation of the rate of improvement as prices recover. We see early indicators of improvement. General Electric reported a 62% QoQ increase in equipment orders in 4Q09 in its turbine business. January PMI data from the US and Europe also show continued sequential improvement. We believe improvement in aerospace and IGT markets (15% of
Aluminum Price Decline Has Been In Line With Other Metals With Lower Reported Inventory
Inventory, T Inventory, wks of Consumption Last 52-week peak price Current Price Decline in Price Copper Aluminum 541,050 4,611,975 1.6 6.8 3.47 1.08 3.09 0.96 -11% -11% Zinc 496,700 2.5 1.23 0.98 -20% Nickel 164,808 6.8 9.35 8.30 -11%
Source: Bloomberg, Morgan Stanley Research
3
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Debate 1: Cost Cutting
We estimate about 60% of the cost cutting is getting to the bottom line.
The company reported it has achieved $2 bn in pre-tax run rate cost savings. The market view is that these savings will not result in improved earnings but be passed through in lower prices. We are more constructive on the potential benefit. Using peak 3Q08 costs as base, we have adjusted earnings for changes in the aluminum price, LME linked costs, energy and FX. In absence of cost cutting measures we estimate that AA would have lost about 20c/share in 4Q09, suggesting $0.8 bn in after-tax savings have made it to the earnings. The company has announced an additional $0.5 bn of savings in procurement for 2010 and $100 mn in overhead reduction. If 60% of further cuts reaches the bottom line, it will improve earnings by about 25c/share. In Exhibit 4 and 5, we have broken down the decline in alumina and smelting costs by allocating it into decline in cost components, using average spot price with the appropriate lag. Some of the cost cutting likely required changing vendors, getting out of unfavorable price contracts or fine-tuning the process to use cheaper material, and are included under the respective raw material. As a result, we think estimated productivity contribution, which also includes the impact of FX, might be understated in our analysis.
Exhibit 3
Exhibit 4
Alumina Costs Declined 23% From 3Q08 Peak
Caustic Fuel Oil Nautral Gas Conversion Costs
302
($11)
($21)
($8) ($29) $234
3Q08 Alumina Costs/T Source: Company data, Morgan Stanley Research
2009 Alumina Costs/T
Exhibit 5
Smelting Costs Declined 26% From 3Q08 Peak
Alumina Power Carbon Conversion Costs
1.05 (0.11) (0.04) (0.06) (0.06) 0.78
3Q08 Smelting Cost/lb Source: Company data, Morgan Stanley Research
2009 Smelting Cost
We Estimate ~$800 mn of Cost Savings Have Ended Up In Alcoa's Bottom Line
(after adjusting for aluminum, FX, LME-linked power and energy) 3Q08 EPS (annualized) 1) Adjustment for aluminum price Chg in aluminum (4Q09 vs. 3Q08) Impact on EPS 2) Adjustment for LME-linked power Chg in 3m lag aluminum Chg in power costs (40% linked to LME), $/lb Impact on EPS 3) Adjustment for FX Chg in FX (4Q09 vs. 3Q08) Impact on EPS 4) Adjustment for energy prices Chg in 2m lag Oil (4Q09 vs. 3Q08) Impact on EPS Expected EPS in 4Q09 Actual 4Q09 EPS (annualized) $ $ $ $ $ $ 1.10 (0.46) (2.75) (0.53) 0.04 0.24 1.4% 0.03 (59) 0.61 (0.78) 0.04 0.82 796
Exhibit 6
2 Month Lagged Oil Price Has Been A Measure Of Alcoa's Energy Related Costs
200 Net loss due to energy prices, (Base:2Q07=0), $ mn y = 2.4262x - 143.48 R2 = 0.956 2Q 08 4Q 08 100 4Q 07 1Q 08 50 3Q 07 2Q 07 0 1Q 09 3Q 09 2Q 09 -50 40 50 60 70 80 90 100 110 120 130 140 150 4Q 09 3Q 08
150
$
$ $
2 m onth lag Oil Price, $/bbl
Difference (attributed to cost cutting) $ Cost Savings (after-tax), $ mn
Source: Company data, Morgan Stanley Research
Note: 1Q09 and 2Q09 data were interpolated. Source: Company data, Morgan Stanley Research
4
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Debate 2: Leverage to Aluminum Price
We expect leverage to aluminum become more visible over the next 12-months
Investors were disappointed with sequential decline in 4Q earnings despite aluminum rising 6c/lb QoQ. We believe 4Q09 results understate earnings power as sequential improvement in aluminum was offset by higher SG&A (4 c/share) and depreciation (2 c/share) than previous quarter. A strong performance in 3Q09, when the difference between actual earnings and leverage-based expectations peaked, reset the expectations at higher level and contributed to the disappointment.
Exhibit 7
FX headwinds should abate through the year. Strong USD led to increase in non-USD denominated costs and about -4c/share sequential impact on 4Q09 earnings. Our FX team is calling for a USD recovery in 2010 and in their view 4Q09 should be the near-term peak for the currencies relevant to Alcoa's costs (A$, C$, BRL and Euro). Based on their forecast for the year-end 2010, we estimate an average 6.7% recovery in USD from 4Q09 levels against key currencies, which should reduce costs and improve leverage through the year. Every 1% recovery in USD is +3c/share improvement in Alcoa's earnings.
Exhibit 8
Weaker USD Created Headwinds For 4Q09 Costs, But These Should Alleviate, Based on Our FX Team's Forecast Of A 2010 USD Recovery
C$ A$ Euro Brazilian Real 3Q09 0.91 0.83 1.43 0.54 4Q09 Chg Vs 3Q09 MS Dec-2010e Chg Vs 4Q09 0.95 4.1% 0.91 -4.1% 0.91 9.2% 0.78 -14.2% 1.48 3.6% 1.32 -10.7% 0.58 7.3% 0.59 2.3% Avg. 6.1% Avg. -6.7%
4Q09 EPS Disappointed Sequentially, But Overall Earnings Have Kept Pace With Leverage-Based Expectations Since Cost Cutting Was Announced
0.4 0.2 Earnings Per Share
Source: FactSet, Morgan Stanley Research
3Q09 earnings were well above leverage-based expectations
0
-0.2
-0.4 Expected EPS, using 3Q08 as baseline Actual EPS -0.8 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09
-0.6
4Q earnings were also ahead of leverage-based expectations, but variance fell relative to 3Q
Source: Company data, Morgan Stanley Research
A weak USD and high energy prices, the same factors that are often co-incident to high aluminum prices, are headwinds to Alcoa's costs and reduce leverage. A 6% QoQ decline in USD and 12% increase in energy prices caused costs to rise despite the cost cutting initiatives taken by the company. Incremental cost savings declined from $0.52/share in 3Q to $0.30/share in 4Q and was possibly not enough to offset these headwinds. Over the next 12-months, we expect leverage to aluminum become more visible due to improvement in downstream segments, favorable impact of stronger USD, further cost cutting, and higher alumina linkage rates.
Flat-rolled Products profitability should improve as the economy recovers, helping leverage. Alcoa no longer has any price caps in its can sheet business that prevented passing through of high metal prices to customers. Assuming 20% of the can sheet volume was affected by these price ceilings, we estimate earnings would improve by 5 c/share. In addition, Flat-rolled Products margins are still impacted by loss making Russian and Chinese mills that lost 16 c/share in 2009. We think as economy improves, the company will be able to get better profitability in all its downstream segments by reducing fixed costs, better process optimization and pricing power.
We acknowledge the contributions of Piyush Sood to this report.
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MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Valuation and Ratings
We have an Overweight rating on Alcoa shares with a price target of $22 per share. Our price target is based on 13x normalized earnings potential at $1.70. We see higher linkage rate for Alumina and long-term earnings potential in midstream and downstream assets not reflected in the current stock price.
Exhibit 9 Exhibit 11
AA: Historical 1-Year Forward EV/EBITDA
12.0x EV/EBITDA 11.0x 10.0x 9.0x 8.0x
AA Capital Structure and current multiple
In $ mn, except per share data
Average 7.6x
Total number of basic shares Share price Market capitalization Preferred Stock Cash Total debt Net debt Minority Interest Pensions EV
974.4 13.67
13,320 55 1,481 9,859 8,378 3,100 5,809 30,662
7.0x 6.0x 5.0x 4.0x Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
Source: FactSet, Morgan Stanley Research
Exhibit 12
MS Estimates (at current stock price & $0.98 aluminum for 2010) Year EPS EBITDA EV/EBITDA P/E 2010 $ 1.00 4,191 7.3x 13.7x 2011 $ 1.40 4,564 6.7x 9.7x
Source: Company data, Morgan Stanley Research
AA : Historical RoA
10.0% RoA 8.0% 6.0% 4.0% 2.0% Average
Exhibit 10
0.0% -2.0% -4.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
AA: Historical 1-Year Forward P/E
45.0x Forward PE 40.0x 35.0x 30.0x 25.0x 20.0x
Source: Company data, Morgan Stanley Research
Average 14.6x
15.0x 10.0x 5.0x 0.0x Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09
Key risks include the rate of US and global economic growth, potential aluminum price weakness, continued cost inflation, a weak USD, idled capacity restarts, and greater-than-expected aluminum production in China.
Source: FactSet, Morgan Stanley Research
6
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Exhibit 13
Exhibit 16
AA: Historical RoE
20.0% RoE 15.0% 10.0% Average
AA shares: Impact of USD
110 105 100 35 95 30 25 20 15 80 10 50 45 40
5.0% 0.0% -5.0% -10.0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
90 85
75 70 May-05 May-09 Nov-03 Nov-07 Mar-03 Mar-07 Jul-03 Oct-04 Jul-07 Aug-02 Sep-05 Aug-06 Oct-08 Apr-06 Sep-09 Feb-04 Feb-08 Jun-04 Jan-05 Jun-08 Dec-02 Dec-05 Dec-06 Jan-09 Dec-09
5 0
DXY
AA
Source: Company data, Morgan Stanley Research
Source: Company data, FactSet, Morgan Stanley Research
Exhibit 14
Exhibit 17
EV/EBITDA Comparison With Peers
Alcoa Inc Century Aluminium Co. Kaiser Aluminium Corp. Norsk Hydro ASA (Adr) Aluminium Corporation Of China (Class H) Hindalco Industries (IN Listing) National Aluminium Elval Average 2009 NM NM 10.4 NM 20.4 8.7 15.0 11.9 13.3 2010 7.0 8.4 9.5 8.0 7.6 7.0 11.3 7.0 8.2 2011 6.2 7.9 7.3 5.7 6.3 5.8 9.5 NM 7.0
Alcoa's Cost Cutting
800 700 600 Cost Savings, $mn 500 400 300 200 100 1Q09 2Q09 3Q09 4Q09 2010 Target Procurement savings Overheads
Source: Company data, FactSet, Morgan Stanley Research
Exhibit 15
Alcoa Has Gained Market Share In The Western World During The Downturn
55% Alcoa's Share of Western World Demand
Source: Company data, Morgan Stanley Research
45%
35%
25% 2004 2005 2006 2007 2008 2009
Note: Market Share calculated as ratio of Alcoa's total shipments to total Western World (North America, Western Europe and Japan) demand. Source: CRU, Company data, Morgan Stanley Research
7
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Financials
Capital Expenditure: In 4Q09, Alcoa raised its 2010 Capex estimate to $1250m from $850m. Liquidity: At the end of `09, Alcoa had $1.48b of cash available. AA also had $1.9b of undrawn revolving credit facility, and a fully undrawn $3.3b revolving credit facility. The $1.9b revolving credit facility was supposed to mature on Oct 12, 2009 and the $3.3b revolving credit facility matures on Oct 2, 2012. Debt Maturity: At the end of `09, Alcoa's total debt liability was $9.9b and approx $850m of this was due within one year. With an improving aluminum market, we do not see risk to meeting all debt obligations. Common Dividends: In March '09, Alcoa reduced its quarterly common stock dividend from $0.17 to $0.03 per share. The company has paid a quarterly dividend on its common stock for more than 60 years. Pension benefits: At December 31, 2008, AA had a Projected Benefit obligation of $10.77b and fair value of plan assets at $7.9b. Postretirement and other benefits: At December 31, 2008, AA had a Projected Benefit obligation of $3.12b and fair value of plan assets at $0.16b. Last Capital Raising: In March '09, Alcoa issued 172.5m shares of common stock and $575m in convertible notes for net proceeds of $1.44b. The 5.25% convertible notes are due 2014 and the conversion price is $6.43
Recent Acquisitions/ Divestitures: In July 2009, AWAC, 60% owned by Alcoa, completed a transaction to acquire BHP Billiton's 45% stake in Suralco for an undisclosed amount. In June 2009, Alcoa completed the divestiture of the wire harness and electrical portion of the EES business to Platinum Equity. Alcoa paid $193m upon consummation of the transaction and recognized a loss of $120. In March 2009, Alcoa completed the non-cash exchange of its 45.45% stake in the Sapa AB joint venture for Orkla ASA's (Orkla) 50% stake in the Elkem Aluminium ANS joint venture (Elkem). Alcoa now owns 100% of Elkem and Orkla now owns 100% of Sapa AB.
Exhibit 18
Historical Segment ATOI
4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0 (500) 1998 1999 2000 Alumina Primary Metals 2001 2002 2003 Flat Rolled Products 2004 2005 2006 2007 2008 Engineered Products and Solutions 2009 Others
Source: Company data, Morgan Stanley Research
Exhibit 19
Segment Revenue Breakup
Alumina 11% Others 3% Flat Rolled Products 35%
Engineered Products and Solutions 21%
Primary Metals 30%
2008 Revenue Breakup, Source: Company data, Morgan Stanley Research
Exhibit 20
Geographic Revenue Breakup
Others 6% Pacific 15% United States 53%
Europe 26%
2008 Revenue Breakup, Source: Company data, Morgan Stanley Research
8
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Alumina Segment and Bauxite Interests:
Alcoa's installed Alumina capacity is distributed as approximately 42% in Americas, 8% in Europe and the rest in Australia. In September '09, Alcoa announced the startup of low cost Juruti bauxite mine in Brazil. It owns 60% in this 2.6mtpy mine. In July 2009, AWAC, 60% owned by Alcoa, completed a transaction to acquire BHP Billiton's 45% stake in Suralco for an undisclosed amount. In 2008, Alcoa consumed 35.2 million metric tons (mt) of bauxite from its own resources, 6.0 million mt from related third parties and 3.3 million mt from unrelated third parties. In 2009, Alcoa produced 14.3mmt of alumina, of which it sold 8.7mmt to third parties.
Exhibit 21
Exhibit 23
Historical Profitability of Alumina Segment
120 120 100 100 80 80 60 60 40 40 20 20 0 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Company data, Morgan Stanley Research
EBITDA/ Tonne EBITDA/ Tonne
ATOI/ Tonne ATOI/ Tonne
Avg. EBITDA: $67/T Avg. EBITDA: $70/T
Avg. ATOI: $41/T $38/T
Exhibit 24
Alcoa's Historical Realized Alumina Linkage Rate
16.0% 15.0% 14.0% 13.0% 12.0% 11.0% 10.0% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Alcoa's Alumina Price Linkage, 2M lag on LME 3M Future 2006-09 Average = 13.6%
Alumina Capacity
Country Facility Australia Kwinana Pinjarra Wagerup Brazil Pocos de Caldas Sao Luis (Alumar) Jamaica Jamalco Spain San Ciprian Suriname Suralco USA Point Comfort, TX AA's Consolidated Share Ownership AA's Share, MTPY 100% 2,150 100% 4,234 100% 2,500 100% 390 54% 1,944 55% 784 100% 1,500 100% 2,200 100% 2,305 18,007
Source: Company data, Morgan Stanley Research
Source: Company data. Alcoa's ownership is either direct, or through AWAC, in which it owns 60%, but takes 100% of alumina production.
Exhibit 25
Alumina Refining Cost Breakup
Exhibit 22
Fuel Oil 14% Conversion 36% Nat Gas 15%
Active Bauxite Interests
Country Facility Australia Darling Ranges Brazil Pocos de Caldas Trombetas Juruti Guinea Boke Jamaica Clarendon Suriname Caramacca Coermotibo Kaimangrasi Klaverblad Ownership 100% 100% 100% 100% 100% 55% 55% 55% 55% 55% Mining/ Rights Expiration Date 2045 2020 2046 >2049 2038 2042 2012 2033 2033 2033
Caustic 10% Bauxite 25%
Source: Company data. Alcoa's ownership is either direct, or through AWAC, in which it owns 60%
Based on 3Q08 Costs Source: Company data, Morgan Stanley Research
9
MORGAN
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RESEARCH
February 2, 2010 Alcoa Inc.
Primary Metals Segment
Alcoa's installed aluminum capacity is distributed as approximately 66% in Americas, 26% in Europe and the rest in Australia. Upon completion of an asset swap with Elkem in 2009, Alcoa raised its ownership in the two Norwegian smelters, Lista and Mosjoen to 100% from 50%. Therefore, AA increased its smelting capacity from 4.5mmt at the end of '08 to ~4.8mmt at end of `09. Of this, ~3.3mmt is currently operational. In 2009, Alcoa produced 3.6mmt of aluminum, out of which it sold 3.0mmt to third parties. On Dec. 20, 2009, AA announced a new $10.8 bn JV with Saudi Arabian Mining Company (Ma'aden) to build an integrated 740 ktpy facility, expected to start production in 2013-14. Alcoa will own 40% of the project, which will include a 4 mm tonne bauxite mine in northeast Saudi Arabia and 1.8 mm tonne alumina refinery adjacent to the smelter in Ras Az Zawr on the Persian Gulf.
Exhibit 26
Exhibit 27
AA: Primary Metals Segment - EBITDA and ATOI
1,000
EBITDA/ Tonne ATOI/ Tonne
800 600
Avg. EBITDA: $406/T
400
Avg. ATOI: $229/T
200 -
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Company data, Morgan Stanley Research
Exhibit 28
Aluminum Smelting Cost Breakup
Materials 3% Conversion 22% Alumina 36%
AA: List of Smelters
Country Facility Australia Point Henry Portland Brazil Pocos de Caldas Sao Luis (Alumar) Canada Baie Comeau, Que Becancour, Que Deschambault, Que Iceland Fjardaal Italy Fusina Portovesme Norway Lista Mosjoen Spain Aviles La Coruna San Ciprian USA Evansville, IN (Warrick) Fredrick, MD (Eastalco) Badin, NC Massena West, NY Massena East, NY Mount Holly, SC Alcoa, TN Rockdale, TX Ferndale, WA (Intalco) Wentachee, WA AA's Consolidated Share Ownership AA's Share, MTPY 100% 190 55% 197 100% 96 60% 268 100% 385 75% 310 100% 260 100% 344 100% 44 100% 150 100% 94 100% 188 100% 93 100% 87 100% 228 100% 309 100% 195 100% 60 100% 130 100% 125 50% 115 100% 215 100% 267 100% 279 100% 184 4,813
Carbon 13%
Power 26%
Source: Company data, Morgan Stanley Research
Exhibit 29
AA: Idled Capacity
As of end of AA Capacity, ktpy Idled Capacity, kt Evansville, IN (Warrick) Badin, NC Frderick, MD (Eastalco) Ferndale, WA (Intalco) Wenatchee, WA Rockdale, TX Portland Tennessee Pocos de Caldas Baie Comeau Spain Massena East Italy Miscellaneous Total Idle, ktpy % Idled Running Capacity, kt 2006 2007 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 4,209 4,573 4,573 4,573 4,573 4,531 4,531 4,813 4,813 4,813 2006 2007 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 40 40 40 40 40 40 40 40 40 40 60 60 60 60 60 60 60 60 60 60 195 195 195 195 195 195 195 195 195 195 158 65 59 59 59 93 93 93 93 93 92 92 92 92 92 92 92 92 92 92 120 120 267 267 267 267 267 15 30 30 30 30 15 215 215 215 215 32 32 32 32 48 54 54 54 100 100 100 100 30 30 125 125 125 194 20 20 545 452 446 566 566 807 1,202 1,303 1,323 1,517 10% 10% 12% 12% 18% 27% 27% 27% 32% 3,664 4,121 4,127 4,007 4,007 3,724 3,329 3,510 3,490 3,296
Source: Company data, Morgan Stanley Research
Source: Company data, Morgan Stanley Research
10
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Flat Rolled Products Segment
Alcoa has 30 flat-rolled products facilities in 12 countries serving packaging and consumer, transportation, building & construction, distribution, aerospace and automotive markets. About 50% of the facilities have sheets & plates facilities, 20% have hard alloy extrusions, 10% have foil product capabilities and the remainder have multiple product capabilities Approximately one-third of the third-party sales in this segment consist of Rigid container sheet (RCS), which is used to produce aluminum beverage cans., while the remaining two-thirds of third-party sales are derived from sheet and plate, industrial foils, and hard alloy extrusions. RCS sales seasonally increase in the second and third quarters of the year.
Exhibit 30
Exhibit 32
RoA on Flat Rolled Products Segment
10% 8% 6%
Avg. ROA: 5.6%
4% 2% 0% -2%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Company data, Morgan Stanley Research
Flat Rolled Products, RoA
Summary of FRP Facilities
Country Facilities Products Australia 2 Can, Sheet, Plate Brazil 1 Foil, Sheet, Plate China 4 Foil, Sheet, Plate France 1 Sheet, Plate Germany 1 Hard Alloy Extrusions Hungary 1 Sheet, Plate Italy 1 Sheet, Plate Russia 2 Sheet, Plate, Aero/Auto, Hard Alloy Extrusions South Korea 1 Hard Alloy Extrusions Spain 3 Foil, Sheet, Plate UK 1 Sheet, Plate USA 12 Sheet, Plate, Hard Alloy Extrusions
Source: Company data, Morgan Stanley Research
Exhibit 33
Flat Rolled Products End Markets, 4Q08
Distribution 12% Comm Transport 4%
Industrial Prod 12%
Automotive 5% Building & Const 4% Aerospace 16% Packaging 47%
Exhibit 31
Segment ATOI v/s Third Party Sales
Source: Company data, Morgan Stanley Research
150 100 50 ATOI, $m 0
3.0 2.0 1.0 0.0 (1.0) (2.0) ATOI, $m Third Party Sales, $m (3.0) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Third Party Sales, $b
Corporate Facilities:
Latin American extrusion business, previously a component of the former Extruded and End Products Segment, is reported in Corporate. This includes four Brazilian facilities, which primarily serve the extrusion and architectural products markets.
(50) (100) (150)
Source: Company data, Morgan Stanley Research
11
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Engineered Products & Solutions
Alcoa has 82 Engineered Products & Solutions facilities in 19 countries serving aerospace, automotive, building & construction, commercial transportation and power generation markets. About 30% of the facilities have Automotive capabilities, 20% have Architectural products, 15% have Aerospace and Casting product capabilities and the remainder have other or multiple product capabilities.
Exhibit 34
Exhibit 36
RoA of Engineered Products & Solutions Segment
12% 10% 8% 6% 4% Avg. ROA: 5.4% Engineered Products and Solutions Engineered Products and Solutions, RoA
Summary of EP&S Facilities
Country Facilities Products Australia 2 Automotive, Fasteners Brazil 1 Automotive Canada 4 Aerospace, Castings, Architectural China 2 Automotive, Fasteners Czech Rep. 1 Automotive France 11 Aerospace, Castings, Architectural, Fasteners Germany 5 Aerospace, Automotive, Architectural, Fasteners Honduras 1 Automotive Hungary 3 Automotive, Fasteners Ireland 1 Automotive Italy 1 Automotive Japan 2 Automotive, Castings Mexico 5 Aerospace, Castings, Automotive, Fasteners Morocco 1 Architectural Netherlands 1 Architectural Romania 3 Automotive South Korea 1 Aerospace UK 3 Aerospace, Castings, Architectural, Fasteners USA 34 Aerospace, Automotive, Castings, Architectural, Fasteners
Source: Company data, Morgan Stanley Research
2% 0% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Company data, Morgan Stanley Research
Exhibit 37
Engineered Products & Solutions End Markets, 2007
Electrical & Electronic 22% Fastening Systems 18%
Bulding & Const 16%
Exhibit 35
Segment ATOI v/s Third Party Sales
180 160 140 120 ATOI, $m 100 80 60 40 20 0 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 0.0 0.5 1.5 ATOI, $m Third Party Sales, $m 2.0 Third Party Sales, $b 2.5
Wheel & Transport 13% Power & Propulsion 31%
Source: Company data, Morgan Stanley Research
New Products: The company feels that its new products in Aerospace/ Defense, Construction, Ground transportation, Oil and gas, etc will drive profitable growth in the future. For example, Alcoa recently purchased Noble's IPR for welded aluminum risers used in offshore exploration and development, and is collaborating with Cameron to commercialize aluminum drilling riser systems for offshore oil and gas exploration and development. The company sees a lot of potential in this product.
1.0
Source: Company data, Morgan Stanley Research
12
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Exhibit 38
AA: Financial Summary
Income Statement US$ Mn (Year End December) Operating Revenues Operating Expenses Depreciation and Amortization SG&A and Others Interest, R&D Others EBITDA Pre Tax Op Income Tax Post Tax Op Income Minority Interest Extraordinary and Others Reported Net Income Reported Diluted EPS ModelWare Net Income Modelware EPS Avg. Diluted shares out (mn) Quarterly Data Operating Revenues EBITDA Segment ATOI ($ mn) Alumina Primary Metals Flat Rolled Products Engineered Products & Solutions Packaging & Consumers Total ATOI ModelWare Net Income Modelware EPS Balance Sheet US$ Mn (Year End December) Cash and Equivalents Inventories Trade Receivables Goodwill and Intangibles Net PP&E Deferred Tax Assets Other Assets Total Assets Short term borrowings Long term borrowings Trade Payables Minority Interests Deferred Tax Liability Employee Benefits Other Liabilities Total shareholders equity Liabilities & Equity 4Q09 5,433 96 63 59 37 57 0 216 9 $0.01 1Q10e 5,586 832 104 129 48 87 0 367 130 $0.12 2Q10e 5,906 992 148 165 56 103 0 471 234 $0.22 3Q10e 6,179 1,119 160 223 56 115 0 554 317 $0.30 4Q10e 6,343 1,217 172 237 79 129 0 617 381 $0.36 2008 27,897 23,203 1,248 1,190 663 25 2,381 1,593 315 1,278 (221) (263) 794 (0.09) 840 1.02 822 2009 18,439 16,902 1,311 1,009 639 (165) 283 (1,422) (574) (848) (61) (166) (1,075) (1.23) (744) (0.80) 935 2010e 24,013 18,750 1,484 935 728 1 4,160 2,117 741 1,376 (314) 0 1,063 1.00 1,062 1.00 1,064 2011e 24,755 18,863 1,497 990 704 9 4,719 2,700 807 1,893 (390) 0 1,503 1.40 1,494 1.40 1,064 2012e 25,027 18,820 1,500 1,026 655 (2) 5,007 3,025 787 2,238 (432) 0 1,806 1.70 1,808 1.70 1,064 Cashflow Statement US$ Mn (Year End December) Net Income Depreciation and Amortization Pension funding, OPEB, others Chg in WC Chg in other current assets Net Cash from Operations Capex Acquisitions Sale of assets, etc. Net Cash (used in) Investing Common Dividends Dividends paid to minority int. Share buyback Proceeds from Equity Proceeds from Debt Debt payments (incl. Comm pape Contrib. from Minority Int., etc. Net cash (used in) Financing Change in FX Net Cash Inflow ClosingCash Balance Operating Statistics 1 month lag Aluminum Price, $/lb Alumina cash costs, $/t Aluminum cash costs, $/lb Alumina production, kt Aluminum production, kt Ratios Book Value per Share Cash Flow/ Share DPS Valuation P/E EV/EBITDA Price to Book Value Div Yield (%) Profitability Ratios EBITDA Margin Net Profit Margin ROE ROC Growth(%) Net Sales EBITDA Net Profit ModelWare EPS Leverage Net Debt/Equity (x) 2008 14.27 1.5 0.68 11.0 11.8 0.8 6.0% 8.5% 3.0% 5.2% 1.5% -9% -50% -61% -59% 84% 2009 13.31 1.5 0.26 -20.3 NA 1.2 1.6% 1.5% -4.0% -6.3% -3.2% -34% -88% -189% -178% 67% 2010e 12.45 2.1 0.12 14.6 7.9 1.2 0.8% 17.3% 4.4% 8.5% 6.8% 30.2% NM NM NM 58% 2011e 13.75 2.8 0.12 10.4 6.6 1.1 0.8% 19.1% 6.0% 11.3% 8.7% 3.1% 13.4% 40.7% 40.7% 43% 2012e 15.34 3.2 0.12 8.6 5.9 1.0 0.8% 20.0% 7.2% 12.4% 10.1% 1.1% 6.1% 21.0% 21.0% 30% 2008 1.22 292 0.99 15,256 4,007 2009 0.75 232 0.80 14,265 3,564 2010e 0.98 231 0.85 15,627 3,387 2011e 1.01 221 0.85 16,456 3,455 2012e 1.05 217 0.83 16,456 3,464 2008 -74 1,234 613 (470) (69) 1,234 (276) (3,438) 1,304 -2,410 (556) (295) (905) 0 2,836 (204) 602 1,478 (23) 279 762 2009 -1,151 1,311 (79) 1,302 (18) 1,365 112 (1,622) 789 -721 (228) (140) 0 876 757 (1,691) 463 37 38 719 1,481 2010e 1,062 1,398 (209) (65) 0 2,186 0 (1,250) 0 -1,250 (117) (350) 0 0 0 (511) 200 -778 0 158 1,639 2011e 1,494 1,411 223 (152) 0 2,976 0 (1,000) 0 -1,000 (117) (464) 0 0 0 (584) 0 -1,165 0 811 2,450 2012e 1,808 1,414 269 (55) 0 3,435 0 (1,500) 0 -1,500 (117) (520) 0 0 0 (517) 0 -1,154 0 782 3,232
2008 762 3,238 2,591 4,981 17,455 2,688 6,107 37,822 2,069 8,509 2,518 2,597 699 6,537 3,158 11,735 37,822
2009 1,481 2,328 2,182 5,106 19,765 2,941 4,652 38,455 845 8,974 1,954 3,100 711 6,734 3,685 12,452 38,455
2010e 1,639 2,474 2,300 5,106 19,617 2,848 4,652 38,637 845 8,463 2,154 3,064 711 6,468 3,685 13,247 38,637
2011e 2,450 2,408 2,238 5,106 19,206 2,758 4,652 38,818 845 7,879 1,873 2,990 711 6,211 3,685 14,624 38,818
2012e 3,232 2,434 2,263 5,106 19,292 2,670 4,652 39,648 845 7,362 1,869 2,902 711 5,959 3,685 16,314 39,648
Source: Company data, Morgan Stanley Research
13
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Exhibit 39
AA: Income Statement
($ In millions except per share data)
2007 30,748 24,248 78.9% 1,472 4.8% 249 1,280 401 (1,913) 532 $26,269 4,491 1,555 $2,936 (365) 2,571 0 (7) 0 $2,564 $2.98 $2.95 $2.50
2008 27,897 23,203 83.2% 1,190 4.3% 255 1,248 408 25 $26,329 725 315 $410 (221) 189 0.0 (263) 0 ($74) ($0.09) ($0.09) $1.02
2009 Q1 2010 E Q2 2010 E Q3 2010 E Q4 2010 E 18,439 16,902 91.7% 1,009 5.5% 169 1,311 470 -165 19,696 (1498) (574) ($924) (61) (985) 0.0 (166) 0 ($1,151) ($1.23) ($1.23) ($0.80) 5,586 4,480 80.2% 235 4.2% 39 371 140 0 $5,265 321 112 $209 (78) 130 0 0 0 $130 $0.13 $0.12 $0.12 5,906 4,648 78.7% 224 3.8% 41 371 140 0 $5,425 481 168 $313 (78) 234 0 0 0 $234 $0.24 $0.22 $0.22 6,179 4,782 77.4% 235 3.8% 43 371 140 (1) $5,571 608 213 $395 (78) 317 0 0 0 $317 $0.33 $0.30 $0.30 6,343 4,839 76.3% 241 3.8% 44 371 140 1 $5,637 706 247 $459 (78) 381 0 0 0 $381 $0.39 $0.36 $0.36
2010e 24,013 18,750 78.1% 935 3.9% 168 1,484 560 1 $21,897 2116 741 $1,375 (314) 1062 0.0 0 0 $1,062 $1.09 $1.00 $1.00
2011e 24,755 18,863 76.2% 990 4.0% 173 1,497 531 9 $22,064 2691 807 $1,884 (390) 1494 0.0 0 0 $1,494 $1.53 $1.40 $1.40
2012e 25,027 18,820 75.2% 1,026 4.1% 175 1,500 480 (2) $22,000 3027 787 $2,240 (432) 1808 0.0 0 0 $1,808 $1.86 $1.70 $1.70
Sales and operating revenues COGS & operating expenses Selling, general & administrative Research & development expenses Depreciation and Amortization Interest expense Interest income Other income, net Special Items Total Expenses Income from operations b/f taxes Provision for taxes on income Income from operations Minority interests Net income before extra items Extraordinary loss/ (Gain) (Loss) from disc. Operations Cum. effect of accout.change for goodwill Net Income (loss) Net Earnings (loss) per share, basic Net Earnings (loss) per share, diluted Normalized Earnings
Tax benefit on special items Reversal of one-time tax benefits Net tax expense Dividends per share Common Dividends Avg. number of shares o/s (millions) Basic Diluted Period end shares outstanding Period end diluted shares outstanding
Source: Company data, Morgan Stanley Research
$939 ($20) $2,474 $0.68 586
$192 $507 $0.68 551
$0 ($574) $0.26 225
$0 $112 $0.03 29
$0 $168 $0.03 29
$0 $213 $0.03 29
$0 $247 $0.03 29
$0 $741 $0.12 117
$0 $807 $0.12 117
$0 $787 $0.12 117
860.8 869.5 827.4 835.8
813.9 822.1 800.3 800.3
935.5 935.5 974.4 974.4
974.4 1,063.8 974.4 1,063.8
974.4 1,063.8 974.4 1,063.8
974.4 1,063.8 974.4 1,063.8
974.4 1,063.8 974.4 1,063.8
974.4 1,063.8 974.4 1,063.8
974.4 1,063.8 974.4 1,063.8
974.4 1,063.8 974.4 1,063.8
14
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Exhibit 40
AA: Balance Sheet
($ In millions)
2007
2008
2009 Q1 2010 E Q2 2010 E Q3 2010 E Q4 2010 E
2010e
2011e
2012e
Assets Currrent Assets Cash and equivalents Receivables, net of allowances Inventories Deferred Income taxes Prepaid expenses and other assets Total current assets Property, plant and equipment, Gross Accumulated depreciation Property, plant and equipment, net Goodwill Investments - Equity and others Intangible assets Deferred Income taxes Prepaid pension benefits Deferred charges and other assets Assets held for sale Total assets Liabilities Current liabilities Short term borrowings Accounts payable, trade Accrued compensation and retirement costs Taxes Other current liabilities Current portion of long-term debt Total current liabilities Long-term debt, less current portion Accrued postretirement benefits Accrued pension benefit liability Other non-current liabilities Deferred taxes Liabilities of operations held for sale Total liabilities Minority interests Shareholdes equity Preferred stock Common Stock Additional paid in capital Retained earnings Treasury stock at cost Accumulated other comprehensive loss Total shareholders equity Total liabilities and shareholders equity
Source: Company data, Morgan Stanley Research
483 2,602 3,326 0 1,675 8,086 31,601 (14,722) 16,879 4,806 2,038 994 1,583 142 1,327 2,948 38,803
762 2,591 3,238 0 1,559 8,150 0 31,301 (13,846) 17,455 4,981 1,915 0 2,688 0 2,386 247 37,822
1,481 2,182 2,328 0 1,031 7,022 35,462 (15,697) 19,765 5,106 1,061 0 2,941 0 2,427 133 38,455
1,305 2,241 2,394 0 1,031 6,971 35,775 (16,046) 19,728 5,106 1,061 0 2,918 0 2,427 133 38,343
1,528 2,272 2,434 0 1,031 7,264 36,087 (16,396) 19,691 5,106 1,061 0 2,895 0 2,427 133 38,577
1,779 2,309 2,478 0 1,031 7,597 36,400 (16,745) 19,654 5,106 1,061 0 2,871 0 2,427 133 38,849
1,639 2,300 2,474 0 1,031 7,445 36,712 (17,095) 19,617 5,106 1,061 0 2,848 0 2,427 133 38,637
1,639 2,300 2,474 0 1,031 7,445 36,712 (17,095) 19,617 5,106 1,061 0 2,848 0 2,427 133 38,637
2,450 2,238 2,408 0 1,031 8,127 37,712 (18,506) 19,206 5,106 1,061 0 2,758 0 2,427 133 38,818
3,232 2,263 2,434 0 1,031 8,960 39,212 (19,921) 19,292 5,106 1,061 0 2,670 0 2,427 133 39,648
1,425 2,787 943 644 1,165 202 7,166 6,371 1,098 2,753 1,943 545 451 20,327 2,460
55 925 5,774 13,039 (3,440) (337) 16,016 38,803
2,013 2,518 866 378 1,448 56 7,279 0 8,509 2,730 2,941 1,580 321 130 23,490 2,597 0 0 55 925 5,850 12,400 (4,326) (3,169) 11,735 0 37,822
176 1,954 925 345 1,345 669 5,414 8,974 2,696 3,113 2,280 366 60 22,903 3,100
176 2,117 925 345 1,345 669 5,577 8,974 2,658 3,085 2,280 366 60 23,000 3,091
176 2,171 925 345 1,345 669 5,631 8,974 2,620 3,056 2,280 366 60 22,987 3,082
176 2,181 925 345 1,345 669 5,641 8,974 2,582 3,028 2,280 366 60 22,931 3,073
176 2,154 925 345 1,345 669 5,614 8,463 2,544 2,999 2,280 366 60 22,326 3,064
176 2,154 925 345 1,345 669 5,614 8,463 2,544 2,999 2,280 366 60 22,326 3,064
176 1,873 925 345 1,345 669 5,333 7,879 2,390 2,896 2,280 366 60 21,204 2,990
176 1,869 925 345 1,345 669 5,329 7,362 2,237 2,797 2,280 366 60 20,432 2,902
55 1,097 6,608 11,020 (4,268) (2,060) 12,452 38,455
55 1,097 6,608 11,121 (4,268) (2,360) 12,253 38,343
55 1,097 6,608 11,326 (4,268) (2,310) 12,508 38,577
55 1,097 6,608 11,613 (4,268) (2,260) 12,845 38,849
55 1,097 6,608 11,965 (4,268) (2,210) 13,247 38,637
55 1,097 6,608 11,965 (4,268) (2,210) 13,247 38,637
55 1,097 6,608 13,342 (4,268) (2,210) 14,624 38,818
55 1,097 6,608 15,032 (4,268) (2,210) 16,314 39,648
15
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Exhibit 41
AA: Cash Flow Statement
($ In millions)
2007 2,564 1,269 0 133 248 (116) 399 0 (1,800) 15 7 0 365 (385) 517 186 (129) 79 (169) 93 (172) 8 3,112 (1) 3,111
2008 (74) 1,234 0 0 (261) (48) 939 (50) 31 303 0 221 (806) 150 (353) (97) (267) 28 0 135 16 1,101 133 1,234
2009 Q1 2010 E Q2 2010 E Q3 2010 E Q4 2010 E (1,151) 1,311 0 (596) 39 0 (106) 16 166 0 61 527 676 1,258 126 (632) (144) (229) 30 27 1,379 (14) 1,365 130 349 0 0 0 0 0 0 0 (350) 0 78 (43) (59) (66) 0 163 0 0 0 0 203 203 234 349 0 0 0 0 0 0 0 0 0 78 (43) (31) (40) 0 54 0 0 0 0 602 602 317 349 0 0 0 0 0 0 0 0 0 78 (43) (37) (44) 0 10 0 0 0 0 630 630 381 349 0 0 0 0 0 0 0 0 0 78 (43) 8 4 0 (27) 0 0 0 0 751 751
2010e 1,062 1,398 0 0 0 0 0 0 0 (350) 0 314 (173) (118) (146) 0 200 0 0 0 0 2,186 0 2,186
2011e 1,494 1,411 0 0 0 0 0 0 0 0 390 (167) 62 67 0 (280) 0 0 0 0 2,976 0 2,976
2012e 1,808 1,414 0 0 0 0 0 0 0 0 432 (163) (25) (26) 0 (4) 0 0 0 0 3,435 0 3,435
Cash flow from operations Net Income Adjustments Depreciation and depletion Amortization Impairment of goodwill Change in deferred income taxes Equity income, net of dividends Non-cash special items Gains from early retairment of debt Gains from investing activities - sale of assets Provision for doubtful accounts Loss (income) from discontinued operations Accounting changes Minority interests Other (Restructuring, other charges, Stock-based compensation P Changes in assets and liabilities: (Increase) decrease in receivables (Increase) decrease in inventories (Increase) decrease in prepaid expenses and other current assets Reduction in accounts payable and other current liabilities Increase (Reduction) in taxes Cash paid on early retairement of debt Cash received on long-term aluminum supply contract/ Others Net change in non-current assets and liabilities Reduction in net assets held for sale Cash provided from continuing operations Cash provided by discontinued operations Cash from operations Financing activities Net changes to short-term borrowings Common stock issued/ Common Stock for compensation plans Repurchase of common stock Dividends paid to shareholders Dividends paid to minority interests Net change in commercial paper Additions to long-term debt Payments on long-term debt Other (contrib from noncontrolling interests) Cash (used for) provided by financing activities Investing activities Capital expenditures Capex for discontinued operations Acquisitions, net of cash acquired Proceeds from the sale of assets Additions to investments Sale of investments Changes in short-term investments Changes in minority interests Other Cash (used for) provided by investing activities Effect of exchange rate changes on cash Net change in cash Cash at beginning of year Cash at end of year
Source: Company data, Morgan Stanley Research
94 835 (2,496) (590) (368) (617) 2,050 (999) 553 (1,538)
(96) 177 (1,082) (556) (295) 679 2,253 (204) 602 1,478
(292) 876 0 (228) (140) (1,535) 1,049 (156) 463 37
0 0 0 (29) (88) 0 0 0 50 (67)
0 0 0 (29) (88) 0 0 0 50 (67)
0 0 0 (29) (88) 0 0 0 50 (67)
0 0 0 (29) (88) 0 0 (511) 50 (578)
0 0 0 (117) (350) 0 0 (511) 200 (778)
0 0 0 (117) (464) 0 0 (584) (1,165)
0 0 0 (117) (520) 0 0 (517) (1,154)
(3,636) 0 0 183 (131) 2,011 3 (55) 0 (1,625) 29 (23) 506 483
(3,413) (25) (276) 2,710 (1,303) 72 0 (141) (34) (2,410) (23) 279 483 762
(1,617) (5) 112 (65) (181) 1,031 0 0 4 (721) 38 719 762 1,481
(313) 0 0 0 0 0 0 0 0 (313)
(313) 0 0 0 0 0 0 0 0 (313)
(313) 0 0 0 0 0 0 0 0 (313)
(313) 0 0 0 0 0 0 0 0 (313)
(1,250) 0 0 0 0 0 0 0 0 (1,250) 0 158 1,481 1,639
(1,000) 0 0 0 0 0 0 0 0 (1,000) 0 811 1,639 2,450
(1,500) 0 0 0 0 0 0 0 0 (1,500) 0 782 2,450 3,232
(176) 1,481 1,305
223 1,305 1,528
251 1,528 1,779
(140) 1,779 1,639
16
MORGAN
STANLEY
RESEARCH
February 2, 2010 Alcoa Inc.
Morgan Stanley ModelWare is a proprietary analytic framework that helps clients uncover value, adjusting for distortions and ambiguities created by local accounting regulations. For example, ModelWare EPS adjusts for one-time events, capitalizes operating leases (where their use is significant), and converts inventory from LIFO costing to a FIFO basis. ModelWare also emphasizes the separation of operating performance of a company from its financing for a more complete view of how a company generates earnings.
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Important US Regulatory Disclosures on Subject Companies
As of December 31, 2009, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: Alcoa Inc., Cliffs Natural Resources, Freeport-McMoRan. As of January 29, 2010, Morgan Stanley held a net long or short position of US$1 million or more of the debt securities of the following issuers covered in Morgan Stanley Research (including where guarantor of the securities): Alcoa Inc., Freeport-McMoRan. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Alcoa Inc., Century Aluminum. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Alcoa Inc., Century Aluminum, Freeport-McMoRan. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Alcoa Inc., Century Aluminum, Cliffs Natural Resources, Freeport-McMoRan. Within the last 12 months, Morgan Stanley & Co. Incorporated has received compensation for products and services other than investment banking services from Alcoa Inc., Century Aluminum. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Alcoa Inc., Century Aluminum, Cliffs Natural Resources, Freeport-McMoRan. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Alcoa Inc., Century Aluminum, Cliffs Natural Resources, Freeport-McMoRan. Morgan Stanley & Co. Incorporated makes a market in the securities of Alcoa Inc., Century Aluminum, Cliffs Natural Resources, Freeport-McMoRan. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. The fixed income research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality, accuracy and value of research, firm profitability or revenues (which include fixed income trading and capital markets profitability or revenues), client feedback and competitive factors. Fixed Income Research analysts' or strategists' compensation is not linked to investment banking or capital markets transactions performed by Morgan Stanley or the profitability or revenues of particular trading desks. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.
STOCK RATINGS
Morgan Stanley uses a relative rating system using terms such as Overweight, Equal-weight, Not-Rated or Underweight (see definitions below). Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold and sell. Investors should carefully read the definitions of all ratings used in Morgan Stanley Research. In addition, since Morgan Stanley Research contains more complete information concerning the analyst's views, investors should carefully read Morgan Stanley Research, in its entirety, and not infer the contents from the rating alone. In any case, ratings (or research) should not be used or relied upon as investment advice. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations.
Global Stock Ratings Distribution
(as of January 31, 2010)
For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.
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Stock Rating Category
Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Total Count Count Total IBC Category
Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell Total
999 1088 21 396 2,504
40% 43% 1% 16%
296 333 4 90 723
41% 46% 1% 12%
30% 31% 19% 23%
Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley or an affiliate received investment banking compensation in the last 12 months.
Analyst Stock Ratings
Overweight (O). The stock's total return is expected to exceed the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Equal-weight (E). The stock's total return is expected to be in line with the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Not-Rated (NR). Currently the analyst does not have adequate conviction about the stock's total return relative to the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Underweight (U). The stock's total return is expected to be below the average total return of the analyst's industry (or industry team's) coverage universe, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.
Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.
Stock Price, Price Target and Rating History (See Rating Definitions)
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Citi Investment Research & Analysis (CIRA) research reports may be available about the companies or topics that are the subject of Morgan Stanley Research. Ask your Financial Advisor or use Research Center to view any available CIRA research reports in addition to Morgan Stanley research reports. Important disclosures regarding the relationship between the companies that are the subject of Morgan Stanley Research and Morgan Stanley Smith Barney LLC, Morgan Stanley and Citigroup Global Markets Inc. or any of their affiliates, are available on the Morgan Stanley Smith Barney disclosure website at www.morganstanleysmithbarney.com/researchdisclosures. For Morgan Stanley and Citigroup Global Markets, Inc. specific disclosures, you may refer to www.morganstanley.com/researchdisclosures and https://www.citigroupgeo.com/geopublic/Disclosures/index_a.html. Each Morgan Stanley Equity Research report is reviewed and approved on behalf of Morgan Stanley Smith Barney LLC. This review and approval is conducted by the same person who reviews the Equity Research report on behalf of Morgan Stanley. This could create a conflict of interest.
Other Important Disclosures
Morgan Stanley produces an equity research product called a "Tactical Idea." Views contained in a "Tactical Idea" on a particular stock may be contrary to the recommendations or views expressed in research on the same stock. This may be the result of differing time horizons, methodologies, market events, or other factors. For all research available on a particular stock, please contact your sales representative or go to Client Link at www.morganstanley.com. For a discussion, if applicable, of the valuation methods and the risks related to any price targets, please refer to the latest relevant published research on these stocks. Morgan Stanley Research does not provide individually tailored investment advice. Morgan Stanley Research has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. 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The Americas 1585 Broadway New York, NY 10036-8293 United States Tel: [phone]
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Industry Coverage:Nonferrous Metals & Mining
Company (Ticker) Mark Liinamaa Alcoa Inc. (AA.N) Century Aluminum (CENX.O) Cliffs Natural Resources (CLF.N) Freeport-McMoRan (FCX.N) Rating (as of) Price* (02/01/2010)
O (12/21/2009) E (01/21/2009) E (07/12/2007) E (01/21/2009)
$13.36 $12.27 $43.07 $71.59
Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.
2010 Morgan Stanley