Alcoa Inc. (AA)

Senior Analyst: SteveJunior Analyst: Raza Khan,

Mohammed Shammasi, Alex Blackard

Company Information

• Location: New York, New York• Ticker Symbol: AA• Beta: 1.03• Traded on: NYSE• Current Share Price: $8.93/share• Market Cap: $11.70 Billion

Business Segments

• Upstream Operation• Includes mining, refining, smelting, and energy production• Mining Bauxite – bauxite is refined to alumina – alumina is

processed to aluminum• Prone to aluminum price change

• Midstream Operation• Converts aluminum into aluminum sheet plates and rolls

• Downstream Operation / Fabrication• Fall in Al. Prices & premium is good for the fabricators

• Al. premium is the delivery prices

• AA is making acquisition on the fabrication space

Key Operations

of Alcoa

Global Primary Products

(Upstream Operations)

Engineered Products

(Downstream Operations)

Global Rolled Products

(Midstream Operations)

Constant Innovation• Created world’s lightest heavy duty wheel

• 47% lighter than steel wheel of same size• Can Help Save Up To 1,400 Pounds Per Rig

• Created high-strength aerospace-grade aluminum• Alco is a major supplier to Samsung – Galaxy S6 and S6 Edge• Smartphone metal frames are expected to grow at 250% by

2016.

• Developed an aluminum foil that’s 1/3rd of the thickness of human hair – aseptic foil.

• Used by the milk packaging industry in Brazil.

Porters 5 forces

Competitiv Rivalry

Threat of Substitute

Threat of New EntrantsBargaining Power of Supplier

Bargaining Power of Customer

0

5

10

Porter's 5 ForcesPorter's 5 Forces

Corporate GovernanceC Level Executives

Years with Company Shares Owned

CEO Klaus Kleinfeld

8 3.5M

CFO William Oplinger

15 285k

CLO Audrey Strauss

3 150k

Executive VP Olivier Jarrault

13 445k

Executive VP Robert Wilt

16 163k

Board of Directors• 11 out of 12 are independent• Board member Ratan Tata

• Indian steel magnate

Financial Statements Analysis

Financial Statement Analysis

Ratio Comparisons

Growth through Acquisitions & Joint Ventures• Joint Venture in Saudi Arabia with Ma’aden

• 30 year venture• Mining, refining and smelting

• RTI Metals• Global supplier of titanium and specialty metal products and services• Expected to contribute 1.2 billion in revenue by 2019• EBITDA margin expected to increase by 25% by 2019

• TITAL• leader in titanium and aluminum structural castings for aircraft engines

• Firth Rixson• Leading jet engine component manufacturer• $2.85 B acquisition• Expected to add $350 Million to EBITDA in 2016.

Industry Report/Competitive Position• Falling Aluminum

Prices

2008 2009 2010 2011 2012 2013 20140.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

9.60% 9.20%10.60%

9.50%

7.80% 7.70% 7.40%

China's GDP GrowthWorld Aluminum Production 2014

Africa Asia (ex.China)GCC ChinaN. America S. AmericaW. Europe OceaniaRow Est. Un-reported

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

-6.00%-5.00%-4.00%-3.00%-2.00%-1.00%0.00%1.00%2.00%3.00%4.00%

China's Aluminum Production YoY Growth

2014 2015 2016 2017 2018 2019 20201500

1550

1600

1650

1700

1750

1800

Global Aluminum Demand

COMPANY HAS REDUCED SMELTING CAPACITY

A 29% decrease since 2011.Due to High Unit Production costs – electricity costs, labor costs or maintenance expenses.

In 2014, AA closed: - Portovesme plant (Italy) 150 Tonnes- Point Henry Plant (Australia) 190

tonnes- Surinam refinery by 74 KMT

Company Transition

•Increasing use of Aluminum in automobile production

•US govt. standards mandate that by 2025, automakers must increase corporate average fuel economy (CAFÉ) to 54.5 miles from 35.5 by 2025.

•Using aluminum body reduces vehicle’s weight by 30% increasing the fuel economy.

2014 - $ 1B Multi-year Contracts with Boeing – aluminum sheets and plate products 2014 -$1.1B 10 Year Pratt & Whitney – more than $2Billion – Jet engine components 2015 - $1.1 B 9 Year Titanium Contract for Lockheed’s F-35 Fighter Jets2015 - $1 Billion Parts deal with Airbus – Fastener contract

Aerospace Industry

Automobile Industry

Source: Deloitte

Source: KPMG

Commercial Aircraft orders and production

Global Demand: No. of Passengers Forecast

Source: Fed. Aviation Admin.

Financial Statements Forecast  Growth RateAlumina 2.04%Primary Metals 0.17%Global Roleld Products 3.94%Engineered Products & Solutions 6.99%

  Growth RateAlumina 5.69%Primary Metals 3.25%Global Roleld Products 3.89%Engineered Products & Solutions 11.64%

25 M Class B Convertible

Shares @ $1 Par value

Convertible end of 2017 @ 10 = 1 Common Shares

Total $70 M – Total Common Stocks = $1.4B

2016 2017 2018 20190

5000100001500020000250003000035000400004500050000

Balance Sheet Forecast

Total Asset Total Liabilities Total Equity

2016 2017 2018 20190.0

1000.02000.03000.04000.05000.06000.07000.08000.09000.0

10000.0

Revenue Forecast

Alumina (Upstream Operations)Primary Metals (Upstream Operations)Global Roleld Products (Midstream Operations)Engineered Products & Solutions (Downstream Operations)

2016 2017 2018 20190

200400600800

1000

Operating Income Forecast

Alumina (Upstream Operations)Primary Metals (Upstream Operations)Global Roleld Products (Midstream Operations)Engineered Products & Solutions (Downstream Operations)

RELATIVE VALUATIONS

  AA Norsk Hydro RUSALAlum. Co. of China RIO Tinto CENX

Price Range

P/E 14.95 12.01 4.36 13.13 62.36$7.16-21.57

Enterprise Value 29979.1 122949.9 19078.1 24025 107602.2 2264.6

EV/EBITDA 12.55 9.37 11.85 61.34 5.38 10.71$7.4-$16.3

Valuation

DIVIDEND DISCOUNT MODEL

Cost of Equity (ke) 6.68% (CAPM)

Short term Growth Rate 0.2% (ROE * Retention Ratio)

Long-term Growth Rate 0 – 4.8% (Rf + Inflation)

Current DPS $0.12 / Share

Intrinsic Value Range $6.19 - $10.81

Discounted Cash Flow2016 2017 2018 2019

Owner’s Earning

230 1251 1320 1392

WACC Weight Cost Equity 54.50% 9.76% 5.3%Debt 39.90% 3.25% 1.3%Preferred equity 5.60% 9.13% 0.5%  7.1%Effective Tax Rate 43.31%

Price Range: $ 9.7 – 24.5

Alcoa's Valuation- Football Field

Min Max Average WeightFinal Value

P/E 7.16 21.57 14.365 5% 0.71825DDM 6.19 10.81 8.5 10% 0.85EV/EBITDA 7.4 16.3 11.85 5% 0.5925DCF 9.7 24.5 17.1 80% 13.68

Final Intrinsic Value $ 15.84

P/E

DDM

EV/EBITDA

DCF

0 5 10 15 20 25 30

7.16

6.19

7.4

9.7

14.41

4.62

8.9

14.8

Final Value: $15.84

Final Recommendation

Summary:1.Efficient Management2.Big player in the Market3.Constant Innovation and Transition

to High Margin Segments

Business Strategy

• GROWTH BY SALES• Growth by Acquisitions

• Which ones?• Which ones?• Which ones?

• Excellent Management

Value Added Business

• Converts primary aluminum into sheets. • Used in packaging, automotive, and

aerospace industries.

Global Leader in Aerospace Industry

Developed more than 90% of all aerospace alloys.

Churn RateGrowth RateMarket Size

Du Pont Analysis

Industry Ratios & Competitors

Total Asset and CFO increasing

25 M Class B Convertible Shares

@ $1 Par value

Convertible end of 2017 @ 10 = 1

Common Shares

Total $70 M – Total Common Stocks =

$1.4B

Class B Convertible Shares

Building a Multi-Material Company• Alcoa introduced Aluminum foil in 1910.• Most Growth Capex towards Value added business• Still small market presence in emerging markets

such as India and Brazil.

Automotive Industry• Increasing use of Aluminum in automobile

production• US govt. standards mandate that by 2025,

automakers must increase corporate average fuel economy (CAFÉ) to 54.5 miles from 35.5 by 2025.

• Using aluminum body reduces vehicle’s weight by 30% increasing the fuel economy.

2014 - $ 1B Multi-year Contracts with Boeing – aluminum sheets and plate products 2014 -$1.1B 10 Year Pratt & Whitney – more than $2Billion – Jet engine components 2015 - $1.1 B 9 Year Titanium Contract for Lockheed’s F-35 Fighter Jets2015 - $1 Billion Parts deal with Airbus – Fastener contract

Contracts in Place

Upstream Company• World’s largest bauxite and alumina producer

• 4th largest aluminum producer with 3.4 million tons smelting capacity

• Major supplier in aerospace sector

• Leading supplier in brazing sheet and auto sheet

Innovation: Currently in talks with major automotive producers to adopt Micromill productsMicromill products:• 40% more formable and 30% stronger

than aluminum• 30% lighter than parts made from high

strength steel• Reduces time to transform molten

metal into aluminum coil from 20 days to 20 min.

Downstream Segment: Engineered Products Segment

• Fabricates aluminum into custom shapes and sizes for the end users• Divided into 5 groups1. Power and propulsion – It manufactures parts for jet engines and

industrial gas turbines2. Fastening systems – It manufactures fasteners for aerospace and

automotive3. Buildings and construction systems – It manufactures commercial

architectural systems4. Wheel and transportation products – It manufactures commercial vehicle

wheels5. Forgings and extrusions – It manufactures large and complex fabricated

parts for use in various end industries• World’s largest aluminum-lithium facility in Indiana that’ll produce an alloy

with increased strength ratio. Will be adopted mostly by aerospace companies.

• Alcoa contracted $100M in revenues for 2017.

Innovation: Invented World’s lightest wheel – Ultra ONE. 40lb or 47% lighter than traditional steel wheel.