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Alcoa Announces Major Cuts for Production, Personnel (posted 1/7/09)

January 7, 2009
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Alumina production will be reduced across the global refining system to a total of 1.5 million mtpy in response to market conditions.

Alcoa has detailed a series of specific actions to conserve cash, reduce costs and strengthen its competitiveness during the current economic downturn. Building on the company’s commitment from October, these actions address additional production curtailments, cost and procurement efficiencies, portfolio streamlining, and reduction of capital expenditures and other liquidity enhancements.

“These are extraordinary times, requiring speed and decisiveness to address the current economic downturn, and flexibility and foresight to be prepared for future uncertainties in our markets,” said Klaus Kleinfeld, president and chief executive officer of Alcoa Inc. “We are taking a wide-ranging set of aggressive, but prudent, measures to ensure that Alcoa maintains its competitive lead in today’s challenging markets while also emerging even stronger when the economy recovers.”

Further smelting reductions of more than 135,000 metric tons per year (mtpy) will be implemented, resulting in reduction of total primary aluminum output by more than 750,000 mtpy, or 18% of annualized output. Alumina production will also be reduced accordingly across the global refining system to a total of 1.5 million mtpy in response to market conditions. Curtailments will be fully implemented by the end of the first quarter of 2009.

Targeted reductions, curtailments, and plant closures and consolidations will reduce headcount by more than 13,500 employees or 13% of the company’s worldwide workforce by the end of 2009. An additional 1700 contractor positions also will be eliminated. The company has also instituted a global salary and hiring freeze.

Accelerated procurement actions to address major input costs, such as energy, coke, caustic soda and aluminum fluoride, will provide significant short-term cash benefits. Initiatives to secure raw materials from alternate suppliers globally are providing cost advantages for several key inputs. These actions are expected to yield savings of greater than 20% in each of the materials. Lower market oil and gas prices also are having a positive impact.

Alcoa continued to make progress on its re-powering strategy and has finalized and signed agreements to supply power through 2040 to three smelters in Quebec that will benefit approximately 25% of the company’s smelting production. Nearly 80% of the company’s capacity is now covered by re-powering agreements and self generation through 2025, and the company is aggressively pursuing other efforts across its portfolio.

As previously announced, Alcoa and ORKLA ASA (Orkla) have agreed to exchange their stakes in a Norwegian smelting partnership and a Swedish extrusion joint venture in order to focus on their respective areas of expertise and best practices. Alcoa will receive Orkla’s 50% stake in Elkem Aluminum and Orkla will receive Alcoa’s 45% stake in the SAPA extrusion profiles business.

Elkem Aluminum, which will be 100% owned by Alcoa following the transaction, includes aluminum smelters in Lista and Mosjoen, Norway, with a combined output of 282,000 mtpy. Included in the transaction is Elkem’s stake in a newly opened anode plant in Mosjoen, in which Alcoa already holds an approximate 82% stake.

Alcoa also intends to divest four non-core downstream businesses: Electrical and Electronic Systems; Global Foil; Cast Auto Wheels; and Transportation Products Europe. The businesses to be sold had 2008 combined revenues of $1.8 billion and an estimated after-tax operating loss of approximately $105 million. The businesses employ a combined 22,600 people at 38 locations. Expected net proceeds for the divestitures are estimated to be approximately $100 million.

Building on the previously announced initiative to conserve cash and suspend the company’s share repurchase program, the company is stopping all non-critical capital investment. Capital expenditures in 2009 are projected to be down to $1.8 billion, a 50% decrease from 2008, and will be $1.5 billion after partner contributions. Capital spending includes approximately $750 million for the completion of key Brazilian growth projects. The Sao Luis refinery expansion and the greenfield Juruti bauxite mine are scheduled to be finished in the first half of 2009.

Total charges for the fourth quarter of 2008 due to restructuring, impairment and other special charges are expected to be between $900 and $950 million after tax, or $1.13 to $1.19 per share, of which approximately 80% is non-cash. The restructuring and divestiture program is expected to save approximately $450 million before taxes on an annualized basis.

“Because we recently completed an extensive competitive analysis, including a strategic review of each business, we have been able to quickly identify and implement effective responses that strengthen our market competitiveness and financial staying power in the economic downturn,” said Kleinfeld. “We will continue to monitor the dynamic market situation to ensure that we adjust capacity to meet any future changes in demand and seize new opportunities that emerge. These are extraordinary times requiring extraordinary actions.”

Detailed actions for Primary Metals and Alumina include:
  • As stated previously, further smelting reductions of 135,000 mtpy will be implemented, resulting in reduction of total primary aluminum output by more than 750,000 mtpy, or 18% of annualized output. The combined curtailments include all smelting at the company’s Alcoa, Tennessee Operations (rigid packaging division operations there are not impacted). Alumina production will also be reduced accordingly across the global refining system to a total of 1.5 million mtpy in response to market conditions. Curtailments will be fully implemented by the end of the first quarter of 2009.
  • Cost reductions across the global primary metals and alumina operations, including those associated with curtailments, will affect approximately 2600 employee and contractor positions.
  • To help further reduce Alcoa’s cost position, the company finalized new power agreements in Quebec through 2040. The agreements will supply clean, renewable energy to all three of the company’s aluminum smelters in the province (Baie Comeau, Becancour (ABI) and Deschambault) and enable Alcoa to upgrade and expand Baie Comeau production. The agreements cover approximately 1.1 million mtpy, or more than 25% of the company’s production.
  • Significant progress has been made on the Alumar alumina refinery expansion and the greenfield Juruti bauxite mine in Brazil, and both are nearing completion. When finished, Juruti and Alumar will contribute to Alcoa’s world-class mining and refining system, moving Alcoa into the lowest-cost quartile of the global cost curve. Expenditures on the projects have been reduced by approximately $150 million through efficiencies and a strengthened U.S. dollar.
  • To further reduce costs, Alcoa has accelerated procurement actions to address major input costs, such as energy, coke, caustic soda and aluminum fluoride, which will provide significant short-term cash benefits. These initiatives to secure raw materials from alternate suppliers globally are providing cost advantages for several key inputs and include developing new supply chains, primarily originating in China, to lower its input costs for strategic raw materials. These actions have generated savings of greater than 20% in each of the materials. Lower market oil and gas prices also are having a positive impact.
  • Actions taken and positioning by the Alumina and Primary businesses over the last 90 days are expected to reduce operating costs by approximately 25%.
Visit www.alcoa.com for additional details.

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