AWCMY Alumina Limited (QX)

Alumina Limited Key Financials

AWAC Key Financials (US GAAP)

Alumina Limited Highlights

Results include AWAC’s restructuring charges

Balance sheet strengthened

Increase in AWAC receipts and contributions

Dividends have resumed with a final dividend declared

AWAC Highlights (US GAAP)

EBITDA growth

Continued progress to spot based pricing for alumina

Alumina Limited Key Financials

AWAC Key Financials

AWAC Business Review (US GAAP)

Mining

AWAC owns or partly owns, bauxite mines operating in five countries that meet the production needs of the AWAC refineries. During 2014, AWAC consumed 40 million bone dry tonnes (BDT) of bauxite from its own resources and 7 million BDT from entities in which equity interests are held. AWAC also sold 1.6 million BDT of bauxite to the third parties.

Interests in mining operations in Jamalco were sold on 1 December 2014 along with the refinery operations.

Average mine costs per tonne were lower than 2013 levels, primarily due to the strengthening of the US dollar against the Australia dollar and the Brazilian Real.

Refining

Production of alumina was 15.9 million tonnes in 2014, compared to 15.8 million tonnes in 2013. Increased production at the Australian refineries, Sao Luis and Point Comfort more than offset lower production at San Ciprian and Jamalco. The interest in Jamalco was sold on 1 December 2014.

Alumina shipments were 15.9 million tonnes in 2014, 0.2 million tonnes lower than 2013.

Approximately 68% of third party smelter grade alumina (SGA) shipments were priced on spot or alumina indexed basis compared to 54% in 2013. For 2015, SGA shipments on a spot or alumina indexed basis are expected to be 75% of the total third party shipments.

Revenue per tonne from SGA sales priced by reference to indices and spot continued to be higher than the legacy LME-linked contracts.

The average three-month LME aluminium price, determined on a two-month lag basis, declined by 3.3% in 2014 compared to 2013, whereas average alumina price index FOB Australia (one month lag) increased by 0.3%.

The net result was that 2014 average realised alumina prices increased by 0.6% to $310 per tonne.

The average 2014 cash cost of alumina per tonne produced decreased by 3.5% over 2013, to $249 per tonne. The decrease was predominately due to the weaker Australian dollar and Brazilian Real against the US dollar. Production costs were also aided by lower caustic consumption and prices, and continued productivity initiatives in energy, labour, contractors and maintenance. However, excluding currency impact, energy costs were higher than 2013 levels mainly due to increased prices and the loss of carbon tax credits in Australia.

The EBITDA margin was $54 per tonne produced in 2014, an increase of $9 per tonne compared to 2013. Increased margins were largely the result of the lower production costs and marginally higher average realised alumina price. The EBITDA margin is calculated as AWAC’s EBITDA excluding significant items, smelters’ EBITDA and equity accounted income/(losses) divided by tonnes produced.

AWAC Production and Shipments

AWAC Profit and Loss (US GAAP)

Smelting

Excluding significant items, the smelters contributed $47.6 million in EBITDA.

Production of approximately 269,000 tonnes in 2014 was lower than 2013 due to the closure of the Point Henry smelter on 1 August 2014. The Portland smelter is the remaining smelting operation in the AWAC portfolio.

Portland’s 2014 average cash cost of aluminium per tonne produced decreased by 1.4% compared to 2013, whilst the average realised price increased by 5.9%.

Changes in Taxation

In December 2011, AWA Brazil applied for a tax holiday related to its expanded mining and refining operations. The tax holiday took effect on 12 July 2014. As a result, the tax rate for this subsidiary will decrease (from 34% to 15.25%) over the 10-year holiday period (retroactively effective as of 1 January 2013).

On 28 November 2014, the Spanish Government approved broad based tax reform, which will become effective on 1 January 2015. One of the major changes is a change of the income tax rate from current rate of 30% to 28% in 2015 and 25% for the years 2016 onward. Therefore, a charge of $27 million was recorded in relation to deferred tax assets revaluation.

On 17 July 2014, the Australian Government abolished the carbon tax, with effect from 1 July 2014. The impact of this was immaterial on the AWAC results for the year.

Portfolio Restructuring and Repositioning

During 2014, there were a number of events related to the restructuring and repositioning of AWAC’s portfolio in order to improve the quality of returns.

On 18 February 2014 Alcoa of Australia Limited, an AWAC entity, decided to permanently close the Point Henry aluminium smelter, which was done on 1 August 2014.

Total restructuring charges associated with the closure of the Point Henry smelter were $230.6 million, after tax in 2014 ($227.0 million on an IFRS basis). Total further charges of approximately $30.0 million after tax are expected for 2015 and thereafter ($9.0 million on an IFRS basis). The related after tax cash net outflow was $37.9 million in 2014, with a further $74.0 million expected thereafter.

After the closure of the Point Henry smelter, Alcoa of Australia Limited‘s Anglesea coal mine and power station operates as a standalone facility and sells electricity into the National Electricity Market after successfully being registered as a scheduled market generator in August 2014. Alcoa of Australia Limited is seeking a buyer for the Anglesea coal mine and power station.

Under a Memorandum of Understanding, a strategic review of the Suralco mining and refining operations commenced with the Government of Suriname in the second half of 2014. That review is continuing. The refinery has approximately 876,000 tonnes per annum of idle capacity and the capacity that is operating is producing at an approximately 85% output level. The refinery’s current sources of bauxite will likely, at current production rates, be exhausted in the near future. AWAC will now not develop a mine at the Nassau Plateau, given current refinery costs and market conditions. AWAC also owns and operates hydro-electric facilities at Afobaka Lake in Suriname, which supply electricity to the refinery and electricity for sale to the Government of Suriname.

AWA LLC, an AWAC entity, sold its 55% ownership stake in the Jamalco bauxite mining and alumina refining joint venture

to Noble Group Ltd on 1 December 2014. The contract price was $140.0 million, including working capital. AWA LLC received $130.1 million and retained the alumina inventory for sale. The loss on sale was $266.3 million, after tax.

Earlier in 2014 AWAC sold its interest in a Suriname gold mine. The gain on sale was $17.9 million, after tax.

During December 2014, the Ma’aden joint venture refinery became fully operational using bauxite from its own mine. The refinery is expected to produce approximately 1.0 million tonnes (AWAC’s share is 251,000 tonnes) of alumina in 2015 and should be one of the lowest cash production cost per tonne refineries in the world. The 2014 result included $33.9 million of equity losses related to Ma’aden start up activities.

The conversion from oil to natural gas as the energy source for the San Ciprian refinery in Spain was completed in February 2015. As a result of the conversion, San Ciprian’s production costs are expected to be $20 per tonne lower, compared to historic levels.

AWAC Cash Flow (US GAAP)

The 2014 and 2013 cash from operations include cash flows relating to significant items. Included are after-tax payments for the Anglesea statutory maintenance (2014: nil; 2013: $22.4 million), Alba settlements (2014: $88.0 million; 2013: $42.5 million) and Point Henry closure costs (2014: $37.9 million; 2013: nil). Cash from operations does not include the 2014 receipts of $130.1 million sale proceeds of the interest in Jamalco and the $53.4 million settlement with Alcoa Inc. in relation to the Alba matter. Refer to Note 11 on page 9 for additional information.

Comparatives are also affected by advanced payments received from customers during 2013 for sales of inventory in the first half of 2014, which contributed to the more favourable movement in working capital in 2013, the loss of the Australian carbon tax credits in 2014 and that tax payments in 2013 were significantly less than in 2014.

Adjusting for all of the above, there would have been an increase in cash from operations in line with the improvement in EBITDA, excluding the significant items.

Capital expenditure totalled $237.9 million, which is $84.7 million lower than 2013.

Sustaining capital expenditure was $234.9 million compared to $293.1 million in 2013. The largest decrease in expenditure was in Australia as the Huntly mine’s crusher move nears completion. Expenditure at the San Ciprian refinery increased by $9.7 million, predominately due to the natural gas conversion which was completed in February 2015.

Growth capital expenditure was $3.0 million.

AWAC Balance Sheet (US GAAP)

AWAC’s borrowings, including capital lease obligations, declined by $102.5 million to $73.4 million.

During the year, AWAC’s debt that related to the payment of Alba settlements and costs peaked at $156.0 million. This debt was fully repaid following the sale of the interest in Jamalco and the settlement with Alcoa Inc. of its allocation of an extra 25% equity share of the Alba costs that were paid by AWAC up to 31 December 2014.

In accordance with the allocation agreement with Alcoa Inc., AWAC will cash fund $2.9 million of the remaining Alba settlement payments which total $296.0 million. The balance will be funded by Alcoa Inc. The result of this and the above settlement of costs is that Alcoa Inc. will have assumed an extra 25% equity share of the Alba settlement payments and costs. Refer to Note 11 on page 9 for additional information.

The decline in property, plant and equipment, and other assets and liabilities is predominately due to the closure of the Point Henry smelter, the sale of the interest in the Jamalco mine and refinery and the effect of the stronger US dollar against the Australia dollar and the Brazilian Real when revaluing the balance sheet.

AWAC Cash Flow (US GAAP)

AWAC Balance Sheet (US GAAP)

AWAC Cash Disbursements

Alumina Limited Reported (Loss)/Profit

Alumina Limited recorded a net loss after tax of $98.3 million for 2014 compared to a net profit of $0.5 million in 2013.

The net loss includes the equity share of AWAC’s significant items. The 2014 significant items were largely the result of restructuring activities to improve the portfolio mix of AWAC. These activities were the closure of the Point Henry smelter, and the sale of interests in the Jamalco refinery and bauxite mine and a gold mine in Suriname. For further details refer to the reconciliation on page 19.

Excluding significant items, there would have been a net profit improvement of $61.5 million to $91.1 million (2013: $29.6 million). This improvement is in line with the better operating performance of AWAC.

Most of Alumina Limited’s general and administrative costs are incurred in Australian dollars. The decrease in costs is largely due to the weaker Australian dollar against the US dollar and lower expenses. Costs in 2013 include CEO retirement expenses.

Finance costs include interest expense, commitment fees paid, amortised upfront fees and bank charges. Finance costs decreased to $13.6 million in 2014 from $25.3 million in 2013. Finance costs in 2013 included the write-off of unamortised establishment fees which related to the restructuring of Alumina Limited’s bank facilities which was substantially in place during that year and completed in early 2014. In addition, average net borrowings were lower in 2014.

Alumina Limited Balance Sheet

As at 31 December 2014, Alumina Limited’s net debt declined by $48.6 million to $86.6 million. This decline reflected the level of free cash flow for the year.

Debt repayments resulted in Alumina Limited’s gearing decreasing to 3.4% although there was a decline in net assets, in particular, investments in associates. This decline was mainly due to AWAC’s restructuring charges and the loss on foreign currency balance sheet revaluations that more than offset the improved operating performance of AWAC.

On 12 November 2014, Alumina Limited issued an A$125 million 5.5% fixed rate note which matures on 19 November 2019. The proceeds from the note were swapped into US dollars and used to repay the higher cost BNDES loan. As a result of this issuance, Alumina Limited also extended the maturity profile of its borrowings.

In addition to the note, Alumina Limited had $300 million of committed bank facilities as at 31 December 2014, which expire as follows:

Following the completion of the restructuring of Alumina Limited’s banking arrangements and the issuance of the note, the Company achieved significant improvement in its debt terms, such as borrowing margins, maturity and less financial undertakings.

Alumina Limited Reported Profit

Alumina Limited Balance Sheet

Notes for the Alumina Limited reported Profit and Balance sheet

Alumina Limited Cash Flows

Alumina Limited’s free cash from operations principally comprise the net capital and income distributions received from the AWAC entities offset by the Company’s general, administrative and finance costs.

The $13.0 million reduction in finance costs paid is largely due to lower net debt balances during 2014 and the costs associated with the restructuring of the bank facilities which were substantially incurred and paid in 2013.

During 2014, Alumina Limited received $4.3 million of income distributions, $16.0 million of international dividends and capital returns of $98.9 million from AWAC entities compared to income distributions of $7.3 million and $100.0 million of fully franked dividends in 2013.

The $16.0 million international dividend is as a result of the sale of the interest in the Jamalco mine and refinery, after debt repayment by the AWAC entity.

The receipt of $98.9 million of capital returns exceeded the investments in AWAC by $57.4 million. Investments were comprised of $27.9 million as equity contributions to the Ma’aden mine and refinery joint venture, the reimbursement to Alcoa Inc of $5.4 million being the Ma’aden joint venture entry fee and the $8.2 million investment in the San Ciprian refinery in Spain to fund its cash flow shortfalls.

As a result, free cash flow was $8.7 million lower in 2014 compared to 2013.

Investments in AWAC entities are expected to decline in 2015, particularly following the completion of the construction of the Ma’aden joint venture mine and refinery which became fully operational in December 2014.

Alumina Limited Cash Flow

Reconciliations

AWAC’s significant items (US GAAP)

The AWAC’s net loss was negatively affected by individually significant items. These items are disclosed in the table to enhance an understanding of AWAC’s operational performance during the year.

AWAC’s EBITDA and EBITDA excluding significant items (US GAAP)

AWAC’s EBITDA is defined as earnings before interest, tax, depreciation and amortisation.

Alumina Limited’s significant items (IFRS)

Alumina Limited’s share of net (loss)/profit of associates was negatively affected by its equity share of individually significant items incurred by AWAC. These items are disclosed in the table to enhance an understanding of Company’s operational performance during the year.

Market Outlook

Global demand for alumina grew by 4.9% in 2014 and remains strong. The average Western Australian spot alumina price increased from $322/t in the first half to $338/t in the second half, and ended the year on $354.50 per tonne. The increase in price in the second half was driven by increased demand, given higher aluminium production in China and the Middle East, bauxite availability concerns leading to higher alumina imports by China and higher aluminium prices. Over 2014, China imported approximately 5.27 million tonnes of alumina, up nearly 38% from 2013.

Historically, Indonesia has been China’s largest supplier of imported bauxite. China represents just over half of the global alumina refinery capacity, with approximately 30% of China’s refineries dependent upon imported bauxite. In January 2014, the Indonesia export ban of unprocessed ores came into effect. This completely stopped Indonesian bauxite exports to China. Leading up to the ban, China had built up significant stockpiles of bauxite. Imports of bauxite into China now come predominantly from Australia, Malaysia and India. China imported approximately 36.5 million tonnes of bauxite in 2014. In the second half of 2014, exports from Malaysia increased significantly, totalling around 3.3 million tonnes over 2014.

Over 2014, following the Indonesian export ban, the imported bauxite price (landed in China), for a variety of different qualities and sources, ranged from approximately $48 per tonne to $90 per tonne. When the prices are standardised and adjusted for quality on a value-in-use basis, the imported bauxite price into China averaged $68 per tonne over 2014, after ending 2013 at $55 per tonne.

The quality of China’s domestic bauxite has been decreasing, particularly in Henan and Shanxi provinces, which rely almost entirely on domestic bauxite for significant alumina production. Also, there has been high-grading of deposits in a number of cases that lead to premature mine closures. Bauxite allocations in China limit the ability of some alumina producers to access good quality bauxite. A drop in quality of bauxite increases the cost of producing alumina. This has led to higher Chinese prices for good quality domestic bauxite.

Physical fundamentals for aluminium remain positive, with LME aluminium inventories at around 4 million tonnes, after an aluminium production deficit in 2014 caused global stocks to fall more than 1 million tonnes, reducing the stock overhang and improving aluminium fundamentals.

Growth in China’s alumina capacity in 2014 started to slow, due to a number of factors such as concerns about bauxite availability and cost, tighter credit measures and the desire of the Chinese Government to stem the growth in over-supplied industries. This slowdown in Chinese alumina capacity growth is expected to continue.

Strong demand for aluminium from the aerospace, building and automotive industries is expected to continue and that will drive growth in alumina demand. Another aluminium production deficit is likely in 2015. This is expected to continue to drawdown on warehouse stocks and support regional premiums.

Lower aluminium prices and reduced seasonal demand for alumina in China has put slight downward pressure on alumina prices at the start of 2015. There is forecast to be an alumina surplus in 2015 however there may be re-starts of

aluminium production in Europe, USA and increased smelting production in India. Also, there may be increased Chinese buying of alumina depending on the availability of bauxite, as Chinese bauxite stockpiles are expected to run down in 2015 and 2016 (assuming the current rate of consumption and import).

Some analysts have speculated that Malaysia may be able to export around 10 million tonnes of bauxite annually. However, it is not clear how long that would be sustainable and at what overall cost. In any event, Malaysia’s capacity would be insufficient to supply the expected growth in Chinese imports of bauxite, after depletion of the bauxite stockpiles and the reduced availability of good quality domestic bauxite.

Global alumina demand is expected to grow by over 6% (CAGR) over the next five years.

Just as AWAC has been restructuring its asset portfolio over 2014, it is expected that there will be further rationalisation and consolidation in the alumina industry over the next few years, inside and outside China. There is expected to be continuing short to medium term diversification of bauxite suppliers to China, however in the longer term the world will need a number of further large-scale bauxite mines to meet expected growing demand.

As the world’s largest bauxite miner, AWAC is well-positioned to be able to take advantage of expected better market conditions due to rising demand and prices for bauxite, whether or not AWAC sells significant quantities of bauxite to the third party market. The ongoing delinking of alumina pricing from aluminium prices should mean that the favourable bauxite dynamics will flow through to higher world alumina prices.

Continuing depletions of Chinese domestic bauxite are expected to lead to significant imports into China of bauxite and/or alumina from 2018-2019 on.

There does not appear to be a sufficient corresponding supply growth for the long term. There are a number of refining projects outside China that have stalled or are facing serious timing, regulatory approval and political risks, funding or bauxite supply hurdles, including projects in India and Indonesia. Whilst the alumina price rose over the second half of 2014, it is currently at a price at which a reasonable return would not be made on a standard investment in greenfields capacity, given timing and construction costs. Without a sufficient and sustained price improvement, this may lead to alumina supply deficits outside China in the medium term.

Melbourne

26 February 2015