Rio Tinto Alcan & The Aluminum Mining Industry

Alexis Haynes I Kelly McAndrew I Nicolas Murcia I Fernando Rivera I Alexis Skrobek

Agenda

1. Introduction

2. External Environment

3. Internal Environment

4. Strategy Formulation

5. Implementation Plan

Introduction

Introduction I External Environment I Internal Environment I Strategy I Implementation

Why Aluminum?

‣Merger between Alcan and Rio Tinto

‣Key input material in several industries

Methodology‣Interview with Ulf Quellmman, VP Investor Relations for Rio Tinto Alcan

‣Secondary sources (databases)

External Environment

Introduction I External Environment I Internal Environment I Strategy I Implementation

North American Aluminum Industry Overview

Totaled a value of $5.9 billionTotal market volume was 2.284 million metric tones

Increase to 2.7 million metric tonesDecrease market value

2006

2006 - 2011

Introduction I External Environment I Internal Environment I Strategy I Implementation

North American Aluminum Industry Overview (cont)

Highly concentrated

‣Domestic industry 4C=75.1%

Smallest regional contributor to global production (8.5%)

‣Behind Asia-Pacific, Europe, Rest of World

Introduction I External Environment I Internal Environment I Strategy I Implementation

Aluminum Price

2006-07: increase of 9.6% = $1.25 a pound

No effect on margins:

1. Overall increase in demand

2. Increasing costs, specifically with regards to raw materials

Introduction I External Environment I Internal Environment I Strategy I Implementation

Macro-environment

‣GDP’s largest driver : private consumption (70%)

‣Sub-prime mortgage credit crisis: decrease in consumption

-Possible recession

‣Slowing economy: increased unemployment

Result: Industry’s end product markets negatively affected housing and motor vehicles

US economy

Introduction I External Environment I Internal Environment I Strategy I Implementation

Result: Negative effects on end product markets

‣Positive performance over the last decade

‣Macro-economic level policy changes are expected to decrease private cosumption

‣Slow in housing sales

Canadian economy

Macro-environment

Introduction I External Environment I Internal Environment I Strategy I Implementation

Result: Positive effects on end products markets

‣Forecasted increase in housing sales

‣Baby boomers moving into retirement

Canadian economy

Macro-environment

Introduction I External Environment I Internal Environment I Strategy I Implementation

Socio-Cultural & Political Trends

“Green Trend” / Environmental sustainability

‣Laws and preferences for lighter more fuel efficient cars

‣Possible changes in end products, production processes, and increased cost structures

Introduction I External Environment I Internal Environment I Strategy I Implementation

Factors Shaping Long-Term Performance

1. Consolidation

2. Foreign competition

3. Manufacturing technology

Introduction I External Environment I Internal Environment I Strategy I Implementation

Consolidation

Examples:‣United Company Rusal: largest aluminum company‣Rio Tinto Alcan: largest aluminum producer

Causes:‣Volatile raw material prices‣Efficient cost management in an industry‣Decreasing competition for “scarce transportation assets”

Decreased exposure to market volatility as firms have more control over aggregate output and therefore can lessen overcapacity’s downward pressure on price

Factors Shaping Long-Term Performance

Introduction I External Environment I Internal Environment I Strategy I Implementation

Foreign competition: emergence of China

China increased aluminum production

Market surplus Downward pressure industry’s price

China’s year end production levels Domestic market surplus/deficit

1

2

Factors Shaping Long-Term Performance

Introduction I External Environment I Internal Environment I Strategy I Implementation

Key Success Factors

1. Size of operations

2. Managerial practices

3. Research and Development

4. Access to production inputs

Introduction I External Environment I Internal Environment I Strategy I Implementation

Competitors in North America

Alcoa Inc.

‣Production of primary aluminum

‣Revenues (2007): $447.7 million

‣Subsidiaries in US and Iceland

Century Aluminum Company

‣Production of primary aluminum, fabricated aluminum and aluminia

‣Revenues (2007): $30,748 million

‣US accounts for >50% of revenues

‣Presence in China and Russia

Internal Environment

Organizational Vision & Governance

Introduction I External Environment I Internal Environment I Strategy I Implementation

“Good governance in areas such as environmental performance, community relations, human rights, and

employee well-being are just as important as the technical and economic aspects of mining and processing.”

Source: Rio Tinto Corporate Website (2008)

Infrastructure & Stakeholder Management

Introduction I External Environment I Internal Environment I Strategy I Implementation

Infrastructure

Stakeholder

Monthly reviews of sustainability performance relative to their 1 and 5 year targets

“Quick and Efficient”

Competitive Advantage

Introduction I External Environment I Internal Environment I Strategy I Implementation

1. Ability to secure new bauxite mine

2. Access to financial support and resources

3. Proprietary knowledge of smelters technology

4. Unique energy supply

Introduction I External Environment I Internal Environment I Strategy I Implementation

1. Ability to secure new bauxite mines

Competitive Advantage (cont.)

Source: Information for Rio Tinto Alcan extracted from Rio Tinto alca Proforma 207 results release 12 March 2008; information for other major producers extracted from Brook Hunt 2006 (most recent data available)

Introduction I External Environment I Internal Environment I Strategy I Implementation

2. Access to critical resources

Competitive Advantage (cont.)

Source: CRU Jan 2008, Brook Hunt Nov 2007, Alcoa 2007, Rio Tinto Alcan 2008, Rio Tinto Alcan 2007, UC RUSAL Jan 2008

Introduction I External Environment I Internal Environment I Strategy I Implementation

3. AP technology leadership

Competitive Advantage (cont.)

Introduction I External Environment I Internal Environment I Strategy I Implementation

4. Renewable energy supply

Competitive Advantage (cont.)

Source: Financial community site visit (12-14 March 2008), Rio Tinto Alcan

Corporate Strategy

Introduction I External Environment I Internal Environment I Strategy I Implementation

Short-term focus

Long-term focus

Deliver on integration and synergies

Build a durable / sustainable business

Introduction I External Environment I Internal Environment I Strategy I Implementation

Cost Leadership

Commodity

Development of new processing technologies

Below average industry cost of production

Business Level Strategy

Introduction I External Environment I Internal Environment I Strategy I Implementation

Business Level Strategy

Source: CRU - Primary aluminum Smelting Costs 2007 Edition - Smelter Cost Profiles and the Benchmarking Model Version 2.0; Rio Tinto Alcan

Industry Value Chain

Introduction I External Environment I Internal Environment I Strategy I Implementation

Bauxite Mining

AluminaConversion

AluminumConversion

OpenMarket

Energy supply

Technology

Introduction I External Environment I Internal Environment I Strategy I Implementation

Bauxite Mining

AluminaConversion

AluminumConversion

OpenMarket

Energy supply

Technology

Original Industry Model

Industry Value Chain (cont.)

Introduction I External Environment I Internal Environment I Strategy I Implementation

Bauxite Mining

AluminaConversion

AluminumConversion

OpenMarket

Energy supply

Technology

Current Industry Model

Industry Value Chain (cont.)

Introduction I External Environment I Internal Environment I Strategy I Implementation

Bauxite Mining

AluminaConversion

AluminumConversion

OpenMarket

Energy supply - 48% generated

Technology

Rio Tinto Alcan unique quasi-fully integrated model

Industry Value Chain (cont.)

Summary of Competitive Position

Introduction I External Environment I Internal Environment I Strategy I Implementation

Resource leadership

Technology leadership

Reputation leadership

Operational excellence

High

High

High

High

Leading position High

Strategy Formulation

Introduction I External Environment I Internal Environment I Strategy I Implementation

1. Natural resource seeking activities

2. Market seeking activities

3. Efficiency seeking activities

4. Strategic assets or capability seeking activities

Determinants for global production investment

Selection Criteria

Introduction I External Environment I Internal Environment I Strategy I Implementation

Challenge Opportunity

Internal disruption

Rise of China

Competitors can catch up

Demand for sustainability

Manage acquisition

Source R&D in S.E. Asia

Process innovation of AP technology

Green innovation, develop standards

Alternatives

Introduction I External Environment I Internal Environment I Strategy I Implementation

Strategic Recommendations

Manage acquisition

Go more globalProcess

innovationGreen

innovation

Natural Resources

0 0 0 +

Market 0 0 + +

Efficiency + - + +

Strategic asset, capability

+ + + +

Decision Matrix

Implementation Plan

Introduction I External Environment I Internal Environment I Strategy I Implementation

Three phases for future growth

1. Manage acquisition‣Achieve synergies in HR, technological, physical resources‣Implement productivity measures to track change

2. Green innovation‣Focus on improvements at each level of value chain‣Ensure a shelter against potential non-green taxes

3. Process innovation‣Seek incremental innovation for AP technology‣Maintain market position by staying ahead of competitors

Competitive Advantage

Industry Leader

Competitive Advantage

Managerial Priorities

Introduction I External Environment I Internal Environment I Strategy I Implementation

Phase 1: Manage acquisition

Phase 2: Green innovation

Phase 3: Process innovation

Years0.5 1 [...]0

Phase 1

Phase 2

Phase 3

Timeline

15

Introduction I External Environment I Internal Environment I Strategy I Implementation

Strategic recommendations focused on internal activities, in the case external challenges arise

Exogenous variables

1. Delay progressive strategies‣Differentiation through innovation, green standards

2. Focus on core competencies‣Access to raw materials‣Cost cutting alternatives for extraction processes

Contingency Plan

Conclusion

Winning the zero-sum game

The preservation of Rio Tinto Alcan’s leadership position

in the increasingly global primary aluminum industry will

be dependent on strengthening its current competitive

advantages to stay ahead of its competitors

Q&A I Thank You