EX-99.1 4 d48339dex991.htm EX-99.1 EX-99.1
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Exhibit 99.1

LOGO

[                    ], 2016

Dear Alcoa Inc. Shareholder:

In September 2015, we announced our plan to separate into two independent, publicly traded companies: a globally cost-competitive upstream company and an innovation and technology-driven value-add company. The upstream company will include the five business units that today make up Global Primary Products—Bauxite, Alumina, Aluminum, Cast Products and Energy—and a Rolled Products business unit consisting of the rolling mill operations in Warrick, Indiana, and Saudi Arabia (the “Warrick and Ma’aden Rolling Mills”) (collectively, the “Upstream Businesses”). The value-add company will include the Engineered Products and Solutions, Global Rolled Products (other than the Warrick and Ma’aden Rolling Mills), and Transportation and Construction Solutions business segments (collectively, the “Value-Add Businesses”).

The separation will create two industry-leading, independent public companies with distinct product portfolios and corporate strategies. We believe that the upstream company will be a cost-competitive industry leader in bauxite mining, alumina refining, aluminum production, and aluminum can packaging for the North America market, positioned for success throughout the market cycle. The value-add company will be a premier provider of high-performance multi-material products and solutions. The companies will have distinct value profiles, and the separation will allow each company to effectively allocate resources and deploy capital in line with each company’s growth priorities and cash-flow profiles. As independent entities, each company will be positioned to capture opportunities in increasingly competitive and rapidly evolving markets, and to pursue their own independent strategies, positioning each to push the performance envelope within distinct operating environments.

The separation will occur by means of a pro rata distribution by Alcoa Inc. (“ParentCo”) of at least 80.1% of the outstanding shares of a newly formed upstream company named Alcoa Upstream Corporation (“Alcoa Corporation”), which will own the Upstream Businesses. ParentCo, the existing publicly traded company, will continue to own the Value-Add Businesses, and will become the value-add company. In conjunction with the separation, ParentCo will change its name to “Arconic Inc.” (“Arconic”) and will change its stock symbol from “AA” to “ARNC”, and “Alcoa Upstream Corporation” will change its name to “Alcoa Corporation” and will apply for authorization to list its common stock on the New York Stock Exchange under the symbol “AA.”

Upon completion of the separation, each ParentCo shareholder as of the record date will continue to own shares of ParentCo (which, as a result of ParentCo’s name change to Arconic, will be Arconic shares) and will own a pro rata share of the outstanding common stock of Alcoa Corporation to be distributed. Each ParentCo shareholder will receive one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held as of the close of business on October 20, 2016, the record date for the distribution. The Alcoa Corporation common stock will be issued in book-entry form only, which means that no physical share certificates will be issued. It is intended that, for U.S. federal income tax purposes, the distribution generally will be tax-free to ParentCo shareholders. No vote of ParentCo shareholders is required for the distribution. You do not need to take any action to receive shares of Alcoa Corporation common stock to which you are entitled as a ParentCo shareholder, and you do not need to pay any consideration or surrender or exchange your ParentCo common stock.

We encourage you to read the attached information statement, which is being provided to all ParentCo shareholders that held shares on the record date for the distribution. The information statement describes the separation in detail and contains important business and financial information about Alcoa Corporation.


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We believe the separation provides tremendous opportunities for our businesses and our shareholders, as we work to continue to build long-term shareholder value. We appreciate your continuing support of Alcoa Inc., and look forward to your future support of Arconic Inc. and Alcoa Corporation.

Sincerely,

Klaus Kleinfeld

Chairman and Chief Executive Officer

Alcoa Inc.


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LOGO

[                    ], 2016

Dear Future Alcoa Upstream Corporation Stockholder:

I am excited to welcome you as a future stockholder of Alcoa Upstream Corporation (“Alcoa Corporation”). Alcoa Corporation is a cost-competitive large scale industry leader in global aluminum production. Our operations will comprise business units focused on Bauxite, Alumina, Aluminum, Cast Products, Rolled Products and Energy, which together will encompass all major production activities along the primary aluminum industry value chain, providing Alcoa Corporation an important position in each critical segment of the supply chain.

At the time of its separation from Alcoa Inc. (“ParentCo”), Alcoa Corporation’s first-class asset base will include the world’s largest bauxite mining portfolio and what we believe is the most attractive global alumina refining system, both with first quartile cost curve positions. Our leading bauxite and refining operations supply a strategic global aluminum smelting portfolio with a highly competitive second quartile cost curve position. Our smelter footprint is enhanced by a strategic network of co-located casthouse facilities producing value-added aluminum products for customers in key global markets, and rolling mill operations in Warrick, Indiana, and Saudi Arabia that will serve the North American aluminum can packaging market. Alcoa Corporation’s metal operations are complemented by a substantial portfolio of global energy assets offering third-party sales opportunities, and in some cases, the operational flexibility to consume electricity for metal production or capture earnings from power sales. Alcoa Corporation’s global footprint will include 27 facilities worldwide and approximately 16,000 employees.

Over the past few years, ParentCo has implemented a comprehensive strategy to secure our company as a cost-competitive industry leader in bauxite mining, alumina refining, aluminum production and value-added casting and rolling, positioned for success throughout the market cycle. We have accomplished this by strengthening each of our businesses for greater efficiency, profitability and value-creation. By reshaping our portfolio, we have made our company more resilient against market down-swings, while remaining prepared to capitalize on the upswings. We have developed new opportunities in establishing our bauxite and cast products businesses and our diverse sites offer close proximity to major markets, well situated to capture robust aluminum demand. We continue to enhance our competitiveness through rigorous portfolio management and strong cost controls and are committed to a philosophy of disciplined capital allocation and prudent return of capital to shareholders.

Upon completion of the separation, “Alcoa Upstream Corporation” will be renamed “Alcoa Corporation,” and we intend to list Alcoa Corporation’s common stock on the New York Stock Exchange under the symbol “AA.” ParentCo, to be renamed “Arconic Inc.,” will change its stock symbol from “AA” to “ARNC” in connection with the separation.

At Alcoa Corporation, our vision for the future is clear. We intend to deliver unparalleled value for our customers, working faster and smarter, enabling us to succeed in partnership with them. We will strive to ensure operational excellence within our strong foundation of assets, drive continuous improvement, harness innovation and creativity and maintain profitability through market troughs and peaks. We will adhere to a philosophy advocating prudent use of capital, and intend to carefully consider opportunities to generate superior outcomes for our investors. As an industry leader, we intend to attract and retain the best talent in metals and mining, treat our people with respect and dignity and embrace best-in-class ethical and sustainability standards. As we prepare to become a standalone company, we look to build upon our rich heritage, ready to seize the future and excel.

Sincerely,

Roy Harvey

Chief Executive Officer

Alcoa Upstream Corporation


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Information contained herein is subject to completion or amendment. A Registration Statement on Form 10 relating to these securities has been filed with the United States Securities and Exchange Commission under the United States Securities Exchange Act of 1934, as amended.

 

Preliminary and Subject to Completion, Dated October 11, 2016

INFORMATION STATEMENT

Alcoa Upstream Corporation

 

 

This information statement is being furnished in connection with the distribution by Alcoa Inc. (“ParentCo”) to its shareholders of outstanding shares of common stock of Alcoa Upstream Corporation (“Alcoa Corporation”), a wholly owned subsidiary of ParentCo that will hold the assets and liabilities associated with ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses, as well as a Rolled Products business consisting of ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia (collectively, the “Alcoa Corporation Business”). To implement the separation, ParentCo currently plans to distribute at least 80.1% of the outstanding shares of Alcoa Corporation common stock on a pro rata basis to ParentCo shareholders in a distribution that is intended to qualify as generally tax-free to the ParentCo shareholders for United States (“U.S.”) federal income tax purposes. Immediately after the distribution becomes effective, ParentCo will own no more than 19.9% of the outstanding shares of common stock of Alcoa Corporation. Prior to completing the separation, ParentCo may adjust the percentage of Alcoa Corporation shares to be distributed to ParentCo shareholders and retained by ParentCo in response to market and other factors, and it will amend this information statement to reflect any such adjustment.

For every three shares of common stock of ParentCo held of record by you as of the close of business on October 20, 2016, which is the record date for the distribution, you will receive one share of Alcoa Corporation common stock. You will receive cash in lieu of any fractional shares of Alcoa Corporation common stock that you would have received after application of the above ratio. As discussed under “The Separation and Distribution—Trading Between the Record Date and Distribution Date,” if you sell your shares of ParentCo common stock in the “regular-way” market after the record date and before the distribution date, you also will be selling your right to receive shares of Alcoa Corporation common stock in connection with the separation and distribution. We expect the shares of Alcoa Corporation common stock to be distributed by ParentCo to you at 12:01 a.m., Eastern Time, on November 1, 2016. We refer to the date of the distribution of the Alcoa Corporation common stock as the “distribution date.”

Until the separation occurs, Alcoa Corporation will be a wholly owned subsidiary of ParentCo and consequently, ParentCo will have the sole and absolute discretion to determine and change the terms of the separation, including the establishment of the record date for the distribution and the distribution date, as well as to reduce the amount of outstanding shares of common stock of Alcoa Corporation that it will retain, if any, following the distribution.

No vote of ParentCo shareholders is required for the distribution. Therefore, you are not being asked for a proxy, and you are requested not to send ParentCo a proxy, in connection with the distribution. You do not need to pay any consideration, exchange or surrender your existing shares of ParentCo common stock or take any other action to receive your shares of Alcoa Corporation common stock.

There is no current trading market for Alcoa Corporation common stock, although we expect that a limited market, commonly known as a “when-issued” trading market, will develop on or shortly before the record date for the distribution, and we expect “regular-way” trading of Alcoa Corporation common stock to begin on the first trading day following the completion of the distribution. “Alcoa Upstream Corporation” will change its name to “Alcoa Corporation” and intends to have its common stock authorized for listing on the New York Stock Exchange (the “NYSE”) under the symbol “AA.” ParentCo will be renamed “Arconic Inc.” (“Arconic”) and will change its stock symbol from “AA” to “ARNC” in connection with the separation.

 

 

In reviewing this information statement, you should carefully consider the matters described under the caption “Risk Factors” beginning on page 23.

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities or determined if this information statement is truthful or complete. Any representation to the contrary is a criminal offense.

This information statement does not constitute an offer to sell or the solicitation of an offer to buy any securities.

 

 

The date of this information statement is [                    ], 2016.

This information statement was first mailed to ParentCo shareholders on or about [                    ], 2016.


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TABLE OF CONTENTS

 

     Page  

Questions and Answers About The Separation and Distribution

     1   

Information Statement Summary

     9   

Summary of Risk Factors

     16   

Summary Historical and Unaudited Pro Forma Combined Financial Data

     22   

Risk Factors

     23   

Cautionary Statement Concerning Forward-Looking Statements

     45   

The Separation and Distribution

     47   

Dividend Policy

     56   

Capitalization

     57   

Selected Historical Combined Financial Data of Alcoa Corporation

     58   

Unaudited Pro Forma Combined Condensed Financial Statements

     59   

Business

     65   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     105   

Management

     149   

Directors

     150   

Director Compensation

     162   

Compensation Discussion and Analysis

     163   

Executive Compensation

     178   

Certain Relationships and Related Party Transactions

     192   

Material U.S. Federal Income Tax Consequences

     201   

Description of Material Indebtedness

     205   

Security Ownership of Certain Beneficial Owners and Management

     209   

Description of Alcoa Corporation Capital Stock

     212   

Where You Can Find More Information

     216   

Index to Financial Statements

     F-1   

 

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Presentation of Information

Unless the context otherwise requires:

 

  The information included in this information statement about Alcoa Corporation, including the Combined Financial Statements of Alcoa Corporation, which primarily comprise the assets and liabilities of ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses, as well as ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia, assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution.

 

  References in this information statement to “Alcoa Corporation,” “we,” “us,” “our,” “our company” and “the company” refer to Alcoa Upstream Corporation, a Delaware corporation, and its subsidiaries.

 

  References in this information statement to “ParentCo” refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries, including the Alcoa Corporation Business prior to completion of the separation.

 

  References in this information statement to the “Alcoa Corporation Business” refer to ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses, as well as a Rolled Products business consisting of ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia.

 

  References in this information statement to “Arconic” refer to ParentCo after the completion of the separation and the distribution, following which ParentCo will change its name to “Arconic Inc.” and its business will comprise the Engineered Products and Solutions, Global Rolled Products (other than the rolling mill operations in Warrick, Indiana, and the 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia) and Transportation and Construction Solutions businesses.

 

  References in this information statement to the “Arconic Business” refer to ParentCo’s Engineered Products and Solutions, Global Rolled Products (other than the rolling mill operations in Warrick, Indiana, and the 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia) and Transportation and Construction Solutions businesses, collectively.

 

  References in this information statement to the “separation” refer to the separation of the Alcoa Corporation Business from ParentCo’s other businesses and the creation, as a result of the distribution, of an independent, publicly traded company, Alcoa Corporation, to hold the assets and liabilities associated with the Alcoa Corporation Business after the distribution.

 

  References in this information statement to the “distribution” refer to the distribution of at least 80.1% of Alcoa Corporation’s issued and outstanding shares of common stock to ParentCo shareholders as of the close of business on the record date for the distribution.

 

  References in this information statement to Alcoa Corporation’s per share data assume a distribution ratio of one share of Alcoa Corporation common stock for every three shares of ParentCo common stock and a distribution of approximately 80.1% of the outstanding shares of Alcoa Corporation common stock.

 

  References in this information statement to Alcoa Corporation’s historical assets, liabilities, products, businesses or activities generally refer to the historical assets, liabilities, products, businesses or activities of the Alcoa Corporation Business as the business was conducted as part of ParentCo prior to the completion of the separation.

Trademarks and Trade Names

Alcoa Corporation owns or has rights to use the trademarks and trade names that we use in conjunction with the operation of our business. Among the trademarks that Alcoa Corporation owns or has rights to use that appear in this information statement are the name “Alcoa” and the Alcoa symbol for aluminum products. Solely for

 

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convenience, we only use the TM or ® symbols the first time any trademark or trade name is mentioned. Each trademark or trade name of any other company appearing in this information statement is, to our knowledge, owned by such other company.

Industry Information

Unless indicated otherwise, the information concerning our industry contained in this information statement is based on Alcoa Corporation’s general knowledge of and expectations concerning the industry. Alcoa Corporation’s market position, market share and industry market size are based on estimates using Alcoa Corporation’s internal data and estimates, based on data from various industry analyses, our internal research and adjustments and assumptions that we believe to be reasonable. Alcoa Corporation has not independently verified data from industry analyses and cannot guarantee their accuracy or completeness. In addition, Alcoa Corporation believes that data regarding the industry, market size and its market position and market share within such industry provide general guidance but are inherently imprecise. Further, Alcoa Corporation’s estimates and assumptions involve risks and uncertainties and are subject to change based on various factors, including those discussed in the “Risk Factors” section. These and other factors could cause results to differ materially from those expressed in the estimates and assumptions.

 

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QUESTIONS AND ANSWERS ABOUT THE SEPARATION AND DISTRIBUTION

 

What is Alcoa Corporation and why is ParentCo separating Alcoa Corporation’s business and distributing Alcoa Corporation stock?   

Alcoa Corporation, which is currently a wholly owned subsidiary of ParentCo, was formed to own and operate ParentCo’s Alcoa Corporation Business. The separation of Alcoa Corporation from ParentCo and the distribution of Alcoa Corporation common stock are intended, among other things, to enable the management of both companies to pursue opportunities for long-term growth and profitability unique to each company’s business and allow each business to more effectively implement its own distinct capital structure and capital allocation strategies. ParentCo expects that the separation will result in enhanced long-term performance of each business for the reasons discussed in the sections entitled “The Separation and Distribution—Reasons for the Separation.”

 

Why am I receiving this document?   

ParentCo is delivering this document to you because you are a holder of shares of ParentCo common stock. If you are a holder of shares of ParentCo common stock as of the close of business on October 20, 2016, the record date of the distribution, you will be entitled to receive one share of Alcoa Corporation common stock for every three shares of ParentCo common stock that you hold at the close of business on such date, assuming a distribution of approximately 80.1% of the outstanding shares of Alcoa Corporation common stock and applying the distribution ratio without accounting for cash to be issued in lieu of fractional shares. This document will help you understand how the separation and distribution will affect your post-separation ownership in Arconic and Alcoa Corporation.

 

How will the separation of Alcoa Corporation from ParentCo work?   

As part of the separation, and prior to the distribution, ParentCo and its subsidiaries expect to complete an internal restructuring in order to transfer to Alcoa Corporation the Alcoa Corporation Business that Alcoa Corporation will own following the separation. To accomplish the separation, ParentCo will distribute at least 80.1% of the outstanding shares of Alcoa Corporation common stock to ParentCo shareholders on a pro rata basis in a distribution intended to be generally tax-free to ParentCo shareholders for U.S. federal income tax purposes. Following the distribution, ParentCo shareholders will own directly at least 80.1% of the outstanding shares of common stock of Alcoa Corporation, and Alcoa Corporation will be a separate company from ParentCo. ParentCo will retain no more than 19.9% of the outstanding shares of common stock of Alcoa Corporation following the distribution. Following the separation, the number of shares of ParentCo common stock (which, as a result of ParentCo’s name change to Arconic, will be Arconic shares) you own will not change as a result of the separation.

 

What is the record date for the distribution?   

The record date for the distribution will be October 20, 2016.

 

 

 

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When will the distribution occur?   

We expect that at least 80.1% of the outstanding shares of Alcoa Corporation common stock will be distributed by ParentCo at 12:01 a.m., Eastern Time, on November 1, 2016, to holders of record of shares of ParentCo common stock at the close of business on October 20, 2016, the record date for the distribution.

 

What do shareholders need to do to participate in the distribution?   

Shareholders of ParentCo as of the record date for the distribution will not be required to take any action to receive Alcoa Corporation common stock in the distribution, but you are urged to read this entire information statement carefully. No shareholder approval of the distribution is required. You are not being asked for a proxy. You do not need to pay any consideration, exchange or surrender your existing shares of ParentCo common stock, or take any other action to receive your shares of Alcoa Corporation common stock. Please do not send in your ParentCo stock certificates. The distribution will not affect the number of outstanding shares of ParentCo common stock or any rights of ParentCo shareholders, although it will affect the market value of each outstanding share of ParentCo common stock (which, as a result of ParentCo’s name change to Arconic, will be Arconic common stock after the separation).

 

How will shares of Alcoa Corporation common stock be issued?   

You will receive shares of Alcoa Corporation common stock through the same channels that you currently use to hold or trade shares of ParentCo common stock, whether through a brokerage account, 401(k) plan or other channel. Receipt of Alcoa Corporation shares will be documented for you in the same manner that you typically receive shareholder updates, such as monthly broker statements and 401(k) statements.

 

  

If you own shares of ParentCo common stock as of the close of business on the record date for the distribution, including shares owned in certificate form, ParentCo, with the assistance of Computershare Trust Company, N.A. (“Computershare”), the distribution agent, will electronically distribute shares of Alcoa Corporation common stock to you or to your brokerage firm on your behalf in book-entry form. Computershare will mail you a book-entry account statement that reflects your shares of Alcoa Corporation common stock, or your bank or brokerage firm will credit your account for the shares.

 

How many shares of Alcoa Corporation common stock will I receive in the distribution?    ParentCo will distribute to you one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held by you as of close of business on the record date for the distribution. Based on approximately 438,470,031 shares of ParentCo common stock outstanding as of September 30, 2016 (as adjusted for ParentCo’s one-for-three reverse stock split effective October 5, 2016), and assuming a distribution of approximately 80.1% of the outstanding shares of Alcoa Corporation common stock and applying the distribution ratio (without accounting for cash to be issued in lieu of fractional shares), a total of approximately 146,156,677 shares of Alcoa Corporation common stock will be distributed to ParentCo’s shareholders and approximately 36,311,084 shares of Alcoa Corporation common

 

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stock will continue to be owned by ParentCo. For additional information on the distribution, see “The Separation and Distribution.”

 

Will Alcoa Corporation issue fractional shares of its common stock in the distribution?   

No. Alcoa Corporation will not issue fractional shares of its common stock in the distribution. Fractional shares that ParentCo shareholders would otherwise have been entitled to receive will be aggregated and sold in the public market by the distribution agent. The net cash proceeds of these sales will be distributed pro rata (based on the fractional share such holder would otherwise be entitled to receive) to those shareholders who would otherwise have been entitled to receive fractional shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

 

What are the conditions to the distribution?   

The distribution is subject to the satisfaction (or waiver by ParentCo in its sole discretion) of the following conditions:

 

•       the U.S. Securities and Exchange Commission (the “SEC”) declaring effective the registration statement of which this information statement forms a part; there being no order suspending the effectiveness of the registration statement in effect; and no proceedings for such purposes having been instituted or threatened by the SEC;

 

•       the mailing of this information statement to ParentCo shareholders;

 

•       (i) the private letter ruling from the Internal Revenue Service (the “IRS”) regarding certain U.S. federal income tax matters relating to the separation and distribution received by ParentCo continuing to be valid and being satisfactory to the ParentCo Board of Directors and (ii) the receipt of by ParentCo and continuing validity of an opinion of its outside counsel, satisfactory to the ParentCo Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Internal Revenue Code of 1986, as amended (the “Code”);

 

•       the internal reorganization having been completed and the transfer of assets and liabilities of the Alcoa Corporation Business from ParentCo to Alcoa Corporation, and the transfer of assets and liabilities of the Arconic Business from Alcoa Corporation to ParentCo, having been completed in accordance with the separation and distribution agreement;

 

•       the receipt of one or more opinions from an independent appraisal firm to the ParentCo Board of Directors as to the solvency of ParentCo and Alcoa Corporation after the completion of the distribution, in each case in a form and substance acceptable to the ParentCo Board of Directors in its sole and absolute discretion;

 

 

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•       all actions necessary or appropriate under applicable U.S. federal, state or other securities or blue sky laws and the rules and regulations thereunder having been taken or made and, where applicable, having become effective or been accepted;

 

•       the execution of certain agreements contemplated by the separation and distribution agreement;

 

•       no order, injunction or decree issued by any government authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, the distribution or any of the related transactions being in effect;

 

•       the shares of Alcoa Corporation common stock to be distributed having been accepted for listing on the NYSE, subject to official notice of distribution;

 

•       ParentCo having received certain proceeds from the financing arrangements described under “Description of Material Indebtedness” and being satisfied in its sole and absolute discretion that, as of the effective time of the distribution, it will have no further liability under such arrangements; and

 

•       no other event or development existing or having occurred that, in the judgment of ParentCo’s Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and the other related transactions.

 

ParentCo and Alcoa Corporation cannot assure you that any or all of these conditions will be met, or that the separation will be consummated even if all of the conditions are met. ParentCo can decline at any time to go forward with the separation. In addition, ParentCo may waive any of the conditions to the distribution. For a complete discussion of all of the conditions to the distribution, see “The Separation and Distribution—Conditions to the Distribution.”

 

What is the expected date of completion of the separation?   

The completion and timing of the separation are dependent upon a number of conditions. We expect that the shares of Alcoa Corporation common stock will be distributed by ParentCo at 12:01 a.m., Eastern Time, on November 1, 2016, to the holders of record of shares of ParentCo common stock at the close of business on October 20, 2016, the record date for the distribution. However, no assurance can be provided as to the timing of the separation or that all conditions to the distribution will be met, by November 1, 2016 or at all.

 

Will ParentCo and Alcoa Corporation be renamed in conjunction with the Separation?   

Yes. In conjunction with the separation, ParentCo will change its name to “Arconic Inc.” and will change its stock symbol from “AA” to “ARNC,” and “Alcoa Upstream Corporation” will change its name to “Alcoa Corporation” and will apply for authorization to list its common stock on the NYSE under the symbol “AA.”

 

 

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Can ParentCo decide to cancel the distribution of Alcoa Corporation common stock even if all the conditions have been met?   

Yes. Until the distribution has occurred, ParentCo has the right to terminate the distribution, even if all of the conditions are satisfied.

 

What if I want to sell my ParentCo common stock or my Alcoa Corporation common stock?

 

  

You should consult with your financial advisors, such as your stock broker, bank or tax advisor.

 

What is “regular-way” and “ex-distribution” trading of ParentCo common stock?   

Beginning on or shortly before the record date for the distribution and continuing up to and through the distribution date, we expect that there will be two markets in ParentCo common stock: a “regular-way” market and an “ex-distribution” market. ParentCo common stock that trades in the “regular-way” market will trade with an entitlement to shares of Alcoa Corporation common stock distributed pursuant to the distribution. Shares that trade in the “ex-distribution” market will trade without an entitlement to Alcoa Corporation common stock distributed pursuant to the distribution. If you decide to sell any shares of ParentCo common stock before the distribution date, you should make sure your stockbroker, bank or other nominee understands whether you want to sell your ParentCo common stock with or without your entitlement to Alcoa Corporation common stock pursuant to the distribution.

 

Where will I be able to trade shares of Alcoa Corporation common stock?   

Alcoa Corporation intends to apply for authorization to list its common stock on the NYSE under the symbol “AA.” ParentCo will change its name to Arconic and will change its stock symbol from “AA” to “ARNC” upon completion of the separation. Alcoa Corporation anticipates that trading in shares of its common stock will begin on a “when-issued” basis on or shortly before the record date for the distribution and will continue up to and through the distribution date, and that “regular-way” trading in Alcoa Corporation common stock will begin on the first trading day following the completion of the distribution. If trading begins on a “when-issued” basis, you may purchase or sell Alcoa Corporation common stock up to and through the distribution date, but your transaction will not settle until after the distribution date. Alcoa Corporation cannot predict the trading prices for its common stock before, on or after the distribution date.

 

What will happen to the listing of ParentCo common stock?   

ParentCo common stock will continue to trade on the NYSE after the distribution but will be traded as Arconic common stock due to ParentCo’s name change to Arconic and under the stock symbol “ARNC” instead of “AA.”

 

Will the number of shares of ParentCo common stock that I own change as a result of the distribution?   

No. The number of shares of ParentCo common stock that you own will not change as a result of the distribution. Following the separation, ParentCo common stock will be referred to as Arconic common stock as a result of ParentCo’s name change to Arconic.

 

Will the distribution affect the market price of my ParentCo common stock?    Yes. As a result of the distribution, ParentCo expects the trading price of shares of ParentCo common stock (which, as a result of ParentCo’s name change to Arconic, will be referred to as Arconic common stock) immediately following the distribution to be

 

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different from the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the Alcoa Corporation Business. There can be no assurance whether the aggregate market value of the Arconic common stock and the Alcoa Corporation common stock following the separation will be higher or lower than the market value of ParentCo common stock if the separation did not occur. This means, for example, that the combined trading prices of one share of Arconic common stock and one-third of a share of Alcoa Corporation common stock after the distribution may be equal to, greater than or less than the trading price of a share of ParentCo common stock before the distribution.

 

What are the material U.S. federal income tax consequences of the separation and the distribution?   

It is a condition to the distribution that (i) the private letter ruling from the IRS regarding certain U.S. federal income tax matters relating to the separation and distribution received by ParentCo remain valid and be satisfactory to the ParentCo Board of Directors, and (ii) ParentCo receive an opinion of its outside counsel, satisfactory to the ParentCo Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as transactions that are generally tax-free under Sections 355 and 368(a)(1)(D) of the Code. Assuming the distribution, together with certain related transactions, so qualifies, for U.S. federal income tax purposes, you will not recognize any gain or loss, and no amount will be included in your income, upon your receipt of Alcoa Corporation common stock pursuant to the distribution. You will, however, recognize gain or loss for U.S. federal income tax purposes with respect to cash received in lieu of a fractional share of Alcoa Corporation common stock.

 

You should consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state and local tax laws, as well as any foreign tax laws. For more information regarding the material U.S. federal income tax consequences of the distribution, see the section entitled “Material U.S. Federal Income Tax Consequences.”

 

What will Alcoa Corporation’s relationship be with Arconic following the separation?    Following the distribution, ParentCo shareholders (or Arconic shareholders after ParentCo’s name change to Arconic) will own directly at least 80.1% of the outstanding shares of common stock of Alcoa Corporation, and Alcoa Corporation will be a separate company from ParentCo. ParentCo will retain no more than 19.9% of the outstanding shares of Alcoa Corporation following the distribution. Alcoa Corporation will enter into a separation and distribution agreement with ParentCo to effect the separation and to provide a framework for Alcoa Corporation’s relationship with Arconic after the separation and will enter into certain other agreements, including a transition services agreement, a tax matters agreement, an employee matters agreement, a stockholder and registration rights agreement with respect to Arconic’s continuing ownership of Alcoa Corporation common stock, intellectual property license agreements, a metal supply agreement, real estate and office leases, a spare parts loan agreement and an agreement

 

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relating to the North American packaging business. These agreements will provide for the allocation between Alcoa Corporation and Arconic of the assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) of ParentCo and its subsidiaries attributable to periods prior to, at and after Alcoa Corporation’s separation from ParentCo and will govern the relationship between Alcoa Corporation and Arconic subsequent to the completion of the separation. For additional information regarding the separation and distribution agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.”

 

How will Arconic vote any shares of Alcoa Corporation common stock it retains?   

Arconic will agree to vote any shares of Alcoa Corporation common stock that it retains in proportion to the votes cast by Alcoa Corporation’s other stockholders and is expected to grant Alcoa Corporation a proxy to vote its shares of Alcoa Corporation common stock in such proportion. For additional information on these voting arrangements, see “Certain Relationships and Related Person Transactions—Stockholder and Registration Rights Agreement.”

 

What does Arconic intend to do with any shares of Alcoa Corporation common stock it retains?   

Arconic currently plans to dispose of all of the Alcoa Corporation common stock that it retains after the distribution, which may include dispositions through one or more subsequent exchanges for debt or equity or a sale of its shares for cash, following a 60-day lock-up period and within the 18-month period following the distribution, subject to market conditions. Any shares not disposed of by Arconic during such 18-month period will be sold or otherwise disposed of by Arconic consistent with the business reasons for the retention of those shares, but in no event later than five years after the distribution.

 

Who will manage Alcoa Corporation after the separation?   

Alcoa Corporation will benefit from a management team with an extensive background in the Alcoa Corporation Business. Led by Roy C. Harvey, who will be Alcoa Corporation’s Chief Executive Officer, and William F. Oplinger, who will be Alcoa Corporation’s Executive Vice President and Chief Financial Officer, Alcoa Corporation’s management team will possess deep knowledge of, and extensive experience in, its industry. For more information regarding Alcoa Corporation’s directors and management, see “Management” and “Directors.”

 

Are there risks associated with owning Alcoa Corporation common stock?   

Yes. Ownership of Alcoa Corporation common stock is subject to both general and specific risks relating to Alcoa Corporation’s business, the industry in which it operates, its ongoing contractual relationships with Arconic and its status as a separate, publicly traded company. Ownership of Alcoa Corporation common stock is also subject to risks relating to the separation. Certain of these risks are described in the “Risk Factors” section of this information statement, beginning on page 23. We encourage you to read that section carefully.

 

 

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Does Alcoa Corporation plan to pay dividends?   

The declaration and payment of any dividends in the future by Alcoa Corporation will be subject to the sole discretion of its Board of Directors and will depend upon many factors. See “Dividend Policy.”

 

Will Alcoa Corporation incur any indebtedness prior to or at the time of the distribution?   

A subsidiary of Alcoa Corporation has incurred certain indebtedness in connection with the separation, including (i) a secured revolving credit agreement providing for revolving loans in an aggregate principal amount of up to $1.5 billion and (ii) $1.25 billion of senior notes. Upon release of the senior notes from escrow, Alcoa Corporation intends to pay a substantial portion of the proceeds of the senior notes to Arconic. ParentCo’s existing senior notes are expected to remain an obligation of Arconic after the separation, except to the extent that Arconic uses funds received by it from Alcoa Corporation to repay such existing indebtedness.

 

See “Description of Material Indebtedness” and “Risk Factors—Risks Related to Our Business.”

 

Who will be the distribution agent for the distribution and transfer agent and registrar for Alcoa Corporation common stock?   

The distribution agent, transfer agent and registrar for the Alcoa Corporation common stock will be Computershare Trust Company, N.A. For questions relating to the transfer or mechanics of the stock distribution, you should contact Computershare toll free at 1-888-985-2058.

 

Where can I find more information about ParentCo and Alcoa Corporation?   

Before the distribution, if you have any questions relating to ParentCo’s business performance, you should contact:

 

Alcoa Inc.

390 Park Avenue

New York, New York 10022-4608

Attention: Investor Relations

 

After the distribution, Alcoa Corporation shareholders who have any questions relating to Alcoa Corporation’s business performance should contact Alcoa Corporation at:

 

Alcoa Corporation

390 Park Avenue

New York, New York 10022-4608

Attention: Investor Relations

 

The Alcoa Corporation investor website (investors.alcoa.com) will be operational on or around October 20, 2016. The Alcoa Corporation website and the information contained therein or connected thereto are not incorporated into this information statement or the registration statement of which this information statement forms a part, or in any other filings with, or any information furnished or submitted to, the SEC.

 

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INFORMATION STATEMENT SUMMARY

The following is a summary of selected information discussed in this information statement. This summary may not contain all of the details concerning the separation or other information that may be important to you. To better understand the separation and our business and financial position, you should carefully review this entire information statement. Unless the context otherwise requires, the information included in this information statement about Alcoa Corporation, including the Combined Financial Statements of Alcoa Corporation, assumes the completion of all of the transactions referred to in this information statement in connection with the separation and distribution. Unless the context otherwise requires, references in this information statement to “Alcoa Corporation,” “we,” “us,” “our,” “our company” and “the company” refer to Alcoa Upstream Corporation, a Delaware corporation, and its subsidiaries. Unless the context otherwise requires, references in this information statement to “ParentCo” refer to Alcoa Inc., a Pennsylvania corporation, and its consolidated subsidiaries, including the Alcoa Corporation Business prior to completion of the separation.

Unless the context otherwise requires, references in this information statement to our historical assets, liabilities, products, businesses or activities of our businesses are generally intended to refer to the historical assets, liabilities, products, businesses or activities of ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses, ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia, as such operations were conducted as part of ParentCo prior to completion of the separation.

Our Company

Alcoa Corporation is a global industry leader in the production of bauxite, alumina and aluminum, enhanced by a strong portfolio of value-added cast and rolled products and substantial energy assets. Alcoa Corporation draws on the innovation culture, customer relationships and strong brand of ParentCo. Previously known as the Aluminum Company of America, ParentCo pioneered the aluminum industry 128 years ago with the discovery of the first commercial process for the affordable production of aluminum. Since the discovery, Alcoa aluminum was used in the Wright brothers’ first flight (1903), and ParentCo helped produce the first aluminum-sheathed skyscraper (1952), the first all-aluminum vehicle frame (1994) and the first aluminum beer bottle (2004). Today, Alcoa Corporation extends this heritage of product and process innovation as it strives to continuously redefine world-class operational performance at its locations, while partnering with its customers across its range of global products. We believe that the lightweight capabilities and enhanced performance attributes that aluminum offers across a number of end markets are in increasingly high demand and underpin strong growth prospects for Alcoa Corporation.

 



 

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Alcoa Corporation’s operations encompass all major production processes in the primary aluminum industry value chain, which we believe provides Alcoa Corporation with a strong platform from which to serve our customers in each critical segment. Our portfolio is well-positioned to take advantage of a projected 5% growth in global aluminum demand in 2016 and to be globally cost competitive throughout all phases of the aluminum commodity price cycle.

 

LOGO

Our Strengths

Alcoa Corporation’s significant competitive advantages distinguish us from our peers.

World-class aluminum assets. Alcoa Corporation has an industry-leading, cost-competitive portfolio comprising six businesses—Bauxite, Alumina, Aluminum, Cast Products, Rolled Products and Energy. These assets include the largest bauxite mining portfolio in the world; a first quartile low cost, globally diverse alumina refining system; and a newly optimized aluminum smelting portfolio. With our innovative network of casthouses, we can customize the majority of our primary aluminum production to the precise specifications of our customers and we believe that our rolling mills provide us with a cost competitive and efficient platform to serve the North American packaging market. Our portfolio of energy assets provides third-party sales opportunities, and in some cases, has the operational flexibility to either support metal production or capture earnings through third-party power sales. In addition, the expertise within each business supports the next step in our value chain by providing optimized products and process knowledge.

Our fully integrated Saudi Arabian joint venture, formed in 2009 with the Saudi Arabian Mining Company (Ma’aden), showcases those synergies. Through our Ma’aden joint venture, we have developed the lowest cost aluminum production complex within the worldwide Alcoa Corporation system. The complex includes a bauxite mine, an alumina refinery, an aluminum smelter and a rolling mill. The complex, which relies on low-cost and clean power generation, is an integral part of Alcoa Corporation’s strategy to lower its overall production cost base. By establishing a strong footprint in the growing Middle East region, Alcoa Corporation is also well-positioned to capitalize on growth and new market opportunities in the region. Ma’aden owns a 74.9% interest in the joint venture. Alcoa Corporation owns a 25.1% interest in the smelter and rolling mill; and Alcoa World Alumina and Chemicals (which is owned 60% by Alcoa Corporation) holds a 25.1% interest in the mine and refinery.

Customer relationships across the industry spectrum and around the world. As a well-established world leader in the production of bauxite, alumina and aluminum products, Alcoa Corporation has the scale, global reach and proximity to major markets to deliver our products to our customers and their supply chains all over the world. We believe Alcoa Corporation’s global network, broad product portfolio and extensive technical expertise position us to be the supplier of choice for a range of customers across the entire aluminum value chain. Our global reach also provides portfolio diversity that can enable us to benefit from local or regional economic cycles. Every Alcoa Corporation business segment operates in multiple countries and both hemispheres.

 



 

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Alcoa Corporation Global Footprint

 

LOGO

Access to key strategic markets. As illustrated by our bauxite mining operations in the Brazilian Amazon rainforest, and our participation in the first fully integrated aluminum complex in Saudi Arabia, our ability to operate successfully and sustainably has allowed us to forge partnerships in new markets, enter markets more efficiently, gain local knowledge, develop local capacity and reduce risk. We believe that these attributes also make us a preferred strategic partner of our current host countries and of those looking to evaluate and build future opportunities in our industry.

Experienced management team with substantial industry expertise. Our management team has a strong track record of performance and execution. Roy C. Harvey, who has served as President of ParentCo’s Global Primary Products business, will be Alcoa Corporation’s Chief Executive Officer. Mr. Harvey has served more than 14 years in various capacities at ParentCo, including as ParentCo’s Executive Vice President of Human Resources and Environment, Health, Safety and Sustainability and Vice President of Investor Relations. In addition, William F. Oplinger, ParentCo’s Executive Vice President and Chief Financial Officer, will become Alcoa Corporation’s Executive Vice President and Chief Financial Officer. Tómas Már Sigurdsson, the Chief Operating Officer of ParentCo’s Global Primary Products business, will become Alcoa Corporation’s Executive Vice President and Chief Operating Officer. Our senior management team collectively has more than 110 years of experience in the metals and mining, commodities and aluminum industries.

History of operational excellence and continuous productivity improvements. Alcoa Corporation’s dedication to operational excellence has enabled us to withstand unfavorable market conditions. In addition, our productivity program has allowed us to capture cost savings and, by focusing on continuously improving our manufacturing and procurement processes, we seek to produce ongoing cost benefits through the efficient use of raw materials, resources and other inputs. We believe that Alcoa Corporation is positioned to be resilient against market down-swings and to capitalize on the upswings throughout the market cycle.

 



 

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Positioned for future market scenarios. Since 2010, we have reshaped our portfolio and implemented other changes to our business model in order to make Alcoa Corporation more resilient in times of market volatility. We believe these changes will continue to drive value-creation opportunities in the years ahead. Among other disciplined actions, we have:

 

    closed, divested or curtailed 35% of total smelting operating capacity and 25% of total operating refining capacity, enabling us to become more cost competitive;

 

    enhanced our portfolio through our 25.1% investment in the Alcoa Corporation-Ma’aden joint venture in Saudi Arabia, the lowest-cost integrated aluminum complex within the worldwide Alcoa Corporation system, which is now fully operational;

 

    revolutionized the way we sell smelter-grade alumina by shifting our pricing model to an Alumina Price Index (API) or spot pricing, which reflects alumina supply and demand fundamentals;

 

    grown our portfolio of value-added cast product offerings, and increased the percentage of value-added products we sell;

 

    transitioned our non-rolling assets from a regional operating structure to five separate business units focused on Bauxite, Alumina, Aluminum, Cast Products and Energy, and taken significant steps to position each business unit for greater efficiency, profitability and value-creation at each stage of the value chain; and

 

    reduced costs in our Rolled Products operations, and intensified our focus on innovation and value-added products, including aluminum bottle and specialty coatings.

Through our actions, we have improved the position of our alumina refining system on the global alumina cost curve from the 30th percentile in 2010 to the 17th percentile as of the date of this information statement, 4 points better than our 2016 target of the 21st percentile. We have also improved 13 points on the global aluminum cost curve since 2010, to the 38th percentile as of the date of this information statement, achieving our 2016 target. In addition, we have maintained a first quartile 19th percentile position on the global bauxite cost curve.

The combined effect of these actions has been to enhance our business position in a recovering macroeconomic environment for bauxite, alumina, aluminum and aluminum products, which we believe will allow us to weather the market downturns today while preparing to capitalize on upswings in the future.

Dedication to environmental excellence and safety. We regularly review our strategy and performance with a view toward maximizing our efficient use of resources and our effective control of emissions, waste and land use, and to improve our environmental performance. For example, in order to lessen the impact of our mining activities, we have targeted minimum environmental footprints for each mine to achieve by 2020. Three of our mines that were active in 2015 have already achieved their minimum environmental footprint. During 2015, we disturbed a total of 2,988 acres of mine lands worldwide and rehabilitated 3,233 acres. Alcoa Corporation’s business lowered its carbon dioxide (CO2) intensity by more than 12% between 2010 and 2015, achieving its target of 30% reduction in CO2 intensity from a 2005 baseline, a full five years ahead of target. Alcoa Corporation is also committed to a world-class health and safety culture that has consistently delivered incident rates below industry averages. As part of ParentCo, the Alcoa Corporation business improved its Days Away, Restricted, and Transfer (DART) rate—a measure of days away from work or job transfer due to injury or illnesses—by 62% between 2010 and 2015. Alcoa Corporation intends to continue to intensify our fatality prevention efforts and the safety and well-being of our employees will remain the top priority for Alcoa Corporation.

Our Strategies

As Alcoa Corporation, we intend to continue to be an industry leader in the production of bauxite, alumina, primary aluminum and aluminum cast and rolled products. We will remain focused on cost efficiency and

 



 

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profitability, while also seeking to develop operational and commercial innovations that will sharpen our competitive edge. Our management team has considerable experience in managing through tough market cycles, which we believe will enable us to profit through commodity down-swings. In upswings, we believe our low cost assets will be well positioned to deliver strong returns.

Alcoa Corporation will also remain focused on our core values. We will continue to hold ourselves to the highest standards of environmental and ethical practices, support our communities through Alcoa Foundation grants and employee volunteerism, and maintain transparency in our actions and ongoing dialogue with local stakeholders. We believe that this is essential to support our license to operate in the unique communities in which we do business, ensuring sustainability, and making us the partner of choice. Combined with our continued focus on operational excellence and rigorous management of our assets, we expect to create value for our shareholders and customers and attract and retain highly-qualified talent.

We intend to remain true to our heritage by focusing on the following core principles:

Solution-Oriented Customer Relationships and Programs. We aim to succeed by helping our customers innovate and win in their markets. We will work to provide new and improved products and technical expertise that support our customers’ innovation, which we believe will help to strengthen the demand and consumption of aluminum across the globe for all segments of the value chain. We intend to continue prudently investing in our technical resources to both drive our own efficiencies and to help our customers develop solutions to their challenges.

Establishment of a Strong, Operator-Focused Culture. We are proud of the 128 year history of the Alcoa Corporation business and the culture of innovation and operational excellence upon which we are built. We intend to build a culture for Alcoa Corporation that is true to this heritage and focuses our management, operational processes and decision-making on the critical success of our mines and facilities. To support this effort, we will work to have an overhead structure that is appropriately scaled for our business, and will use our deep industry and operational expertise to navigate an ever-changing and volatile industry.

Operational reliability and excellence. We are committed to the development, maintenance and use of our reliability excellence program, which is designed to optimize the operational availability and integrity of our assets, while driving lower costs. We will also continue to build on our “Center of Excellence (COE)” model, which leverages central research and development and technical expertise within each business to facilitate the transfer of best practices, while also providing rapid response to plant level disruptions.

Aggressive asset portfolio management. Alcoa Corporation will continue to review our portfolio of assets and opportunities to maximize value creation. Having delinked the aluminum value chain by restructuring our upstream businesses into standalone units (Bauxite, Alumina, Aluminum, Cast Products, Rolled Products and Energy), we believe we are well-positioned to pursue opportunities to reduce costs and grow revenue and margins across our portfolio. Examples of these opportunities include the growth of our third party bauxite sales, the ability, in some cases, to flex energy between aluminum production and power sales, the increase in our value-added cast products as a percentage of aluminum sales and the combination of the state-of-the-art rolling mill in Saudi Arabia and our Warrick rolling mill’s current products and customer relationships. We will also continue to monitor our assets relative to market conditions, industry trends and the position of those assets in their life cycle, and we will curtail, sell or close assets that do not meet our value-generation standards.

Efficient use of available capital. In seeking to allocate our capital efficiently, we expect that our near-term priorities will be to sustain valuable assets in the most cost-effective manner while de-levering our balance sheet by managing debt and long term liabilities. We intend to effectively deploy excess cash to maximize long-term shareholder value, with incremental growth opportunities and other value-creating uses of capital evaluated against return of capital to shareholders. We expect that return on capital (ROC) will be the primary metric we use to drive capital allocation decisions.

 



 

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Disciplined Execution of High-Return Growth Projects. We expect to continue to look for and implement incremental growth projects that meet our rigorous ROC standards, while working to ensure that those projects are completed on time and within budget.

Continuous pursuit of improvements in productivity. A strong focus on productivity will remain a critical component of Alcoa Corporation’s continued success. We believe that our multi-phased approach, consisting of reliability excellence programs, strong procurement strategies across our businesses, and a continuous focus on technical efficiencies, will allow us to continue to drive productivity improvements.

Attracting and Retaining the Best Employees Globally. Our people-processes and career development programs are designed to attract and retain the best employees, whether it be as operators from the local communities in which we work, or senior management with experiences that can strengthen our ability to execute. We will strive to harness the collective creativity and diversity of thought of our workforce to drive better outcomes and to design, build and implement improvements to our processes and products.

Each of Alcoa Corporation’s six businesses provides a solid foundation upon which to grow.

Premier bauxite position. Alcoa Corporation is the world’s largest bauxite miner, with 45.3 million bone dry metric tons (bdmt) of production in 2015, enjoying a first-quartile cost curve position. We have access to large bauxite deposit areas with mining rights that extend in most cases more than 20 years. We have ownership in seven active bauxite mines globally, four of which we operate, that are strategically located near key Atlantic and Pacific markets, including the Huntly mine in Australia, the second largest bauxite mine in the world. In addition to supplying bauxite to our own alumina refining system, we are seeking to grow our newly developed third-party bauxite sales business. For example, during the third quarter of 2015, Alcoa Corporation’s affiliate, Alcoa of Australia Limited, received permission from the Government of Western Australia to export trial shipments from its Western Australia mines. In addition, we have secured multiple bauxite supply contracts valued at more than $410 million of revenue over 2016 and 2017. We intend to selectively grow our industry-leading assets, continue to build upon our solid operational strengths and develop new ore reserves. We intend to maintain our focus on mine reclamation and rehabilitation, which we believe not only benefits our current operations, but can facilitate access to new projects in diverse communities and ecosystems globally.

Attractive alumina portfolio. We are also the world’s largest alumina producer, with a highly competitive first-quartile cost curve position. Alcoa Corporation has nine refineries on five continents, including one of the world’s largest alumina production facilities, the Pinjarra refinery in Western Australia. In addition to supplying our aluminum smelters with high quality feedstock, we also have significant alumina sales to third parties, with almost 70% of 2015 production being sold externally. Our operations are strategically located for access to growing markets in Asia, the Middle East and Latin America. We are improving our alumina margins by continuing to shift the pricing of our third party smelter-grade alumina sales from the historical London Metal Exchange (LME) aluminum-based pricing to API pricing which better reflects alumina production cost and market fundamentals. In 2015, we grew the percentage of third-party smelter grade alumina shipments that were API or spot-priced to 75%, up from 68% in 2014 and up from 5% in 2010. In 2016, we expect that approximately 85% of our third-party alumina shipments will be based on API or spot pricing. We have also steadily increased our system-wide capacity over the past decade through a combination of operational improvements and incremental capacity projects, effectively adding capacity equivalent to a new refinery. We intend to maintain our first quartile global cost position for Alcoa Corporation’s Alumina business while incrementally growing capacity and continuously striving for sustained operational excellence.

Smelting portfolio positioned to benefit as aluminum demand increases. As a global aluminum producer with a second-quartile cost curve portfolio, we believe that Alcoa Corporation is well positioned to benefit from robust growth in aluminum demand. We estimate record global aluminum demand in 2016 of 59.7 million metric

 



 

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tons, up 5% over 2015. Global aluminum demand was expected to double between 2010 and 2020 and, through the first half of the decade, demand growth tracked ahead of the projection. We expect that our proximity to major markets—with over 50% of our capacity located in Canada, Iceland and Norway, close to the large North American and European markets—will give us a strategic advantage in capitalizing on growth in aluminum demand. In addition, our 25.1% ownership stake in the low-cost aluminum complex in Saudi Arabia, as well as our proven track record of taking actions to optimize our operations, makes us well-positioned to benefit from improved market conditions in the future. Furthermore, with approximately 75% of our smelter power needs contractually secured through 2022, we believe that Alcoa Corporation is well positioned to manage that important dimension of our cost base. Our Aluminum business intends to continue its pursuit of operating efficiencies and incremental capacity expansion projects. We intend to react quickly to market cycles to curtail unprofitable facilities, if necessary, but also maintain optionality to profit from higher metal price environments through the restart of idled capacity.

Global network of casthouses. Alcoa Corporation currently operates 15 casthouses providing value-added products to customers in growing markets. We also have three casthouses that are currently curtailed. In our Cast Products business, our aim is to partner with our customers to develop solutions that support their success by providing them with superior quality products, customer service and technical support. Our network of casthouses has enabled us to steadily grow our cast products business by offering differentiated, value-added aluminum products that are cast into specific shapes to meet customer demand. We intend to continue to improve the value of our installed capacity through productivity and technology gains, and will look for opportunities to add new capacity and develop new product lines in markets where we believe superior returns can be realized. Value-added products grew to 67% of total Cast Products shipments in 2015, compared to 65% in 2014 and 57% in 2010. Our value-added product portfolio has been profitable throughout the primary aluminum market cycle and, from 2010 to 2015, our casting business realized $1.6 billion in incremental margins through value-added sales when compared to selling unalloyed commodity grade ingot. We have also introduced EZCAST™, VERSACAST™, SUPRACAST™ and EVERCAST™ advanced alloys with improved thermal performance and corrosion resistance that have already been qualified with top-tier original equipment manufacturers. Additional trials are underway and more are planned in 2016.

 

LOGO

Efficient and focused rolling mills. Alcoa Corporation has rolling operations in Warrick, Indiana, and Saudi Arabia which, together, serve the North American aluminum can sheet market. The Warrick Rolling Mill is focused on packaging, producing can body stock, can end and tab stock, bottle stock and food can stock, and industrial sheet and lithographic sheet. The Ma’aden Rolling Mill currently produces can body stock, can end and tab stock, and hot-rolled strip for finishing into automotive sheet. Following the separation, it is anticipated that the facilities manufacturing products for the North American can packaging market will be located only at the Warrick and Ma’aden Rolling Mills, and that the Arconic rolling mills will not compete in this market. As the packaging market in North America has become highly commoditized, we believe that our experience in, and

 



 

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focus on, operational excellence and continuous productivity improvements will be key competitive advantages. We intend to lower costs through productivity improvements, improved capacity utilization and targeted capital deployment.

Substantial energy assets. Our Energy portfolio will continue to be focused on value creation by seeking to lower overall operational costs and maintaining flexibility to sell power or consume it internally. Alcoa Corporation has a valuable portfolio of energy assets with power production capacity of approximately 1,685 megawatts, of which approximately 61% is low-cost hydroelectric power. We believe that our energy assets provide us with operational flexibility to profit from market cyclicality. In continuously assessing the energy market environment, we strive to meet in-house energy requirements at the lowest possible cost and also sell power to external customers at attractive profit margins. With approximately 55% of Alcoa Corporation-generated power being sold externally in 2015, we achieved significant earnings from power sales globally. In addition, our team of Energy employees has considerable expertise in managing our external sourcing of energy for our operations, which has enabled us to achieve favorable commercial outcomes. For example, in 2015, we secured an attractive 12-year gas supply agreement (starting in 2020) to power our extensive alumina refinery operations in Western Australia.

Summary of Risk Factors

An investment in our company is subject to a number of risks, including risks relating to our business, risks related to the separation, risks related to our common stock and risks related to our indebtedness. Set forth below is a high-level summary of some, but not all, of these risks. Please read the information in the section captioned “Risk Factors,” beginning on page 23 of this information statement, for a more thorough description of these and other risks.

Risks Related to Our Business

 

    The aluminum industry and aluminum end-use markets are highly cyclical and are influenced by a number of factors, including global economic conditions.

 

    We could be materially adversely affected by declines in aluminum prices, including global, regional and product-specific prices.

 

    We may not be able to realize the expected benefits from our strategy of creating a lower cost, competitive commodity business by optimizing our portfolio.

 

    Our operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted.

 

    Our business is capital intensive, and if there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.

 

    Deterioration in our credit profile could increase our costs of borrowing money and limit our access to the capital markets and commercial credit.

 

    Our profitability could be adversely affected by increases in the cost of raw materials or by significant lag effects of decreases in commodity or LME-linked costs.

 

    We may be exposed to significant legal proceedings, investigations or changes in U.S. federal, state or foreign law, regulation or policy.

 



 

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Risks Related to the Separation

 

    We have no recent history of operating as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

 

    We may not achieve some or all of the expected benefits of the separation, and the separation may materially adversely affect our business.

 

    Our plan to separate into two independent publicly traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.

 

    The combined post-separation value of one share of Arconic common stock and one-third of a share of Alcoa Corporation common stock may not equal or exceed the pre-distribution value of one share of ParentCo common stock.

 

    In connection with our separation from ParentCo, ParentCo will indemnify us for certain liabilities and we will indemnify ParentCo for certain liabilities. If we are required to pay under these indemnities to ParentCo, our financial results could be negatively impacted. The ParentCo indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which ParentCo will be allocated responsibility, and ParentCo may not be able to satisfy its indemnification obligations in the future.

 

    If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, ParentCo, Alcoa Corporation and ParentCo shareholders could be subject to significant tax liabilities and, in certain circumstances, Alcoa Corporation could be required to indemnify ParentCo for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

 

    The transfer to us of certain contracts and other assets may require the consents of, or provide other rights to, third parties. If such consents are not obtained, we may not be entitled to the benefit of such contracts and other assets, which could increase our expenses or otherwise harm our business and financial performance.

Risks Related to Our Common Stock

 

    We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and, following the separation, our stock price may fluctuate significantly.

 

    A significant number of shares of our common stock may be sold following the distribution, including the sale by Arconic of the shares of our common stock that it may retain after the distribution, which may cause our stock price to decline.

 

    We cannot guarantee the timing, amount or payment of dividends on our common stock.

Risks Related to Our Indebtedness

 

    Our indebtedness, including the notes, restricts our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.

 

    Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our business, financial condition, results of operations or cash flows.

 



 

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The Separation and Distribution

On September 28, 2015, ParentCo announced its intent to separate its Alcoa Corporation Business from its Arconic Business. The separation will occur by means of a pro rata distribution to the ParentCo shareholders of at least 80.1% of the outstanding shares of common stock of Alcoa Corporation. Alcoa Corporation was formed to hold ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses, ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia. Following the separation, Alcoa Corporation will hold the assets and liabilities of ParentCo relating to those businesses and the direct and indirect subsidiary entities that currently operate the Alcoa Corporation Business, subject to certain exceptions. After the separation, Arconic will hold ParentCo’s Engineered Products and Solutions, Global Rolled Products (other than the rolling mill operations in Warrick, Indiana, and the 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia) and Transportation and Construction Solutions businesses, including those assets and liabilities of ParentCo and its direct and indirect subsidiary entities that currently operate the Arconic Business, subject to certain exceptions.

Following the distribution, ParentCo shareholders will own directly at least 80.1% of the outstanding shares of common stock of Alcoa Corporation, and Alcoa Corporation will be a separate company from Arconic. Arconic will retain no more than 19.9% of the outstanding shares of common stock of Alcoa Corporation following the distribution. Arconic intends to dispose of any Alcoa Corporation common stock that it retains after the distribution, which may include dispositions through one or more subsequent exchanges for debt or equity or a sale of its shares for cash, following a 60-day lock-up period and within the 18-month period following the distribution, subject to market conditions. Any shares not disposed of by Arconic during such 18-month period will be sold or otherwise disposed of by Arconic consistent with the business reasons for the retention of those shares, but in no event later than five years after the distribution.

On September 29, 2016, the ParentCo Board of Directors approved the distribution of Alcoa Corporation’s issued and outstanding shares of common stock on the basis of one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held as of the close of business on October 20, 2016, the record date for the distribution.

Alcoa Corporation’s Post-Separation Relationship with Arconic

Alcoa Corporation will enter into a separation and distribution agreement with ParentCo (the “separation agreement”). In connection with the separation, we will also enter into various other agreements to effect the separation and provide a framework for our relationship with Arconic after the separation, including a transition services agreement, a tax matters agreement, an employee matters agreement, a stockholder and registration rights agreement with respect to Arconic’s continuing ownership of Alcoa Corporation common stock, intellectual property license agreements, a metal supply agreement, real estate and office leases, a spare parts loan agreement and an agreement relating to North American packaging business. These agreements will provide for the allocation between Alcoa Corporation and Arconic of ParentCo’s assets, employees, liabilities and obligations (including investments, property and employee benefits and tax-related assets and liabilities) attributable to periods prior to, at and after our separation from ParentCo and will govern certain relationships between us and Arconic after the separation. For additional information regarding the separation agreement and other transaction agreements, see the sections entitled “Risk Factors—Risks Related to the Separation” and “Certain Relationships and Related Party Transactions.” For additional information regarding the internal reorganization, see the section entitled, “The Separation and Distribution—Internal Reorganization.”

 



 

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Reasons for the Separation

The ParentCo Board of Directors believes that separating its Alcoa Corporation Business from its Arconic Business is in the best interests of ParentCo and its shareholders for a number of reasons, including:

 

    Management Focus on Core Business and Distinct Opportunities. The separation will permit each company to more effectively pursue its own distinct operating priorities and strategies, and will enable the management teams of each company to focus on strengthening its core business, unique operating and other needs, and pursue distinct and targeted opportunities for long-term growth and profitability.

 

    Allocation of Financial Resources and Separate Capital Structures. The separation will permit each company to allocate its financial resources to meet the unique needs of its own business, which will allow each company to intensify its focus on its distinct strategic priorities. The separation will also allow each business to more effectively pursue its own distinct capital structures and capital allocation strategies.

 

    Targeted Investment Opportunity. The separation will allow each company to more effectively articulate a clear investment thesis to attract a long-term investor base suited to its business, and will facilitate each company’s access to capital by providing investors with two distinct and targeted investment opportunities.

 

    Creation of Independent Equity Currencies. The separation will create two independent equity securities, affording Alcoa Corporation and Arconic direct access to the capital markets and enabling each company to use its own industry-focused stock to consummate future acquisitions or other restructuring transactions. As a result, each company will have more flexibility to capitalize on its unique strategic opportunities.

 

    Employee Incentives, Recruitment and Retention. The separation will allow each company to more effectively recruit, retain and motivate employees through the use of stock-based compensation that more closely reflects and aligns management and employee incentives with specific growth objectives, financial goals and business performance. In addition, the separation will allow incentive structures and targets at each company to be better aligned with each underlying business. Similarly, recruitment and retention will be enhanced by more consistent talent requirements across the businesses, allowing both recruiters and applicants greater clarity and understanding of talent needs and opportunities associated with the core business activities, principles and risks of each company.

 

    Other Business Rationale. The separation will separate and simplify the structures currently required to manage two distinct and differing underlying businesses. These differences include exposure to industry cycles, manufacturing and procurement methods, customer base, research and development activities, and overhead structures.

The ParentCo Board of Directors also considered a number of potentially negative factors in evaluating the separation, including:

 

    Risk of Failure to Achieve Anticipated Benefits of the Separation. We may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating our business; and following the separation, we may be more susceptible to market fluctuations, including fluctuations in commodities prices, and other adverse events than if we were still a part of ParentCo because our business will be less diversified than ParentCo’s business prior to the completion of the separation.

 

   

Loss of Scale and Increased Administrative Costs. As a current part of ParentCo, Alcoa Corporation takes advantage of ParentCo’s size and purchasing power in procuring certain goods and services.

 



 

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After the separation, as a standalone company, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable as those ParentCo obtained prior to completion of the separation. In addition, as a part of ParentCo, Alcoa Corporation benefits from certain functions performed by ParentCo, such as accounting, tax, legal, human resources and other general and administrative functions. After the separation, Arconic will not perform these functions for us, other than certain functions that will be provided for a limited time pursuant to the transition services agreement, and, because of our smaller scale as a standalone company, our cost of performing such functions could be higher than the amounts reflected in our historical financial statements, which would cause our profitability to decrease.

 

    Disruptions and Costs Related to the Separation. The actions required to separate Arconic’s and Alcoa Corporation’s respective businesses could disrupt our operations. In addition, we will incur substantial costs in connection with the separation and the transition to being a standalone public company, which may include accounting, tax, legal and other professional services costs, recruiting and relocation costs associated with hiring key senior management personnel who are new to Alcoa Corporation, tax costs and costs to separate information systems.

 

    Limitations on Strategic Transactions. Under the terms of the tax matters agreement that we will enter into with ParentCo, we will be restricted from taking certain actions that could cause the distribution or certain related transactions to fail to qualify as tax-free transactions under applicable law. These restrictions may limit for a period of time our ability to pursue certain strategic transactions and equity issuances or engage in other transactions that might increase the value of our business.

 

    Uncertainty Regarding Stock Prices. We cannot predict the effect of the separation on the trading prices of Alcoa Corporation or Arconic common stock or know with certainty whether the combined market value of one-third of a share of our common stock and one share of Arconic common stock will be less than, equal to or greater than the market value of one share of ParentCo common stock prior to the distribution.

In determining to pursue the separation, the ParentCo Board of Directors concluded the potential benefits of the separation outweighed the foregoing factors. See the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors” included elsewhere in this information statement.

Reasons for Arconic’s Retention of Up to 19.9% of Alcoa Corporation Shares

In considering the appropriate structure for the separation, ParentCo determined that, immediately after the distribution becomes effective, Arconic will own no more than 19.9% of the outstanding shares of common stock of Alcoa Corporation. In light of recent volatile commodity market conditions and conditions in the high-yield debt market, Arconic’s retention of Alcoa Corporation shares positions both companies with appropriate capital structures, liquidity, and financial flexibility and resources that support their individual business strategies. The retention enables Alcoa Corporation to be separated with low leverage, and thus significant flexibility to manage through future market cycles. At the same time, the retention reduces Arconic’s reliance on Alcoa Corporation raising debt in the current high-yield market environment to fund payments to Arconic to optimize its own capital structure. The retention of Alcoa Corporation shares strengthens Arconic’s balance sheet by providing Arconic a liquid security that can be monetized or exchanged to accelerate debt reduction and/or fund future growth initiatives, thereby facilitating an appropriate capital structure and financial flexibility necessary for Arconic to execute its growth strategy. Arconic’s retained interest shows confidence in the future of Alcoa Corporation and will allow Arconic’s balance sheet to benefit from any near-term improvements in commodity markets. Arconic intends to responsibly dispose of any Alcoa Corporation common stock that it retains after the distribution, which may include dispositions through one or more subsequent exchanges for debt or equity or a sale of its shares for cash, after a 60-day lock-up period and within the 18-month period following the

 



 

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distribution, subject to market conditions. Any shares not disposed of by Arconic during such 18-month period will be sold or otherwise disposed of by Arconic consistent with the business reasons for the retention of those shares, but in no event later than five years after the distribution. ParentCo intends to continue to monitor market conditions in the commodity and high-yield debt market, and to assess the impact of each on the ultimate structure of the separation.

Corporate Information

Alcoa Corporation was incorporated in Delaware for the purpose of holding ParentCo’s Alcoa Corporation Business in connection with the separation and distribution described herein. Prior to the transfer of these businesses to us by ParentCo, which will occur prior to the distribution, Alcoa Corporation will have no operations. The address of our principal executive offices will be 390 Park Avenue, New York, New York 10022-4608. Our telephone number after the distribution will be (212) 518-5400. We will maintain an Internet site at www.alcoa.comOur website and the information contained therein or connected thereto are not incorporated into this information statement or the registration statement of which this information statement forms a part, or in any other filings with, or any information furnished or submitted to, the SEC.

Reason for Furnishing this Information Statement

This information statement is being furnished solely to provide information to ParentCo shareholders who will receive shares of Alcoa Corporation common stock in the distribution. It is not and is not to be construed as an inducement or encouragement to buy or sell any of Alcoa Corporation’s securities. The information contained in this information statement is believed by Alcoa Corporation to be accurate as of the date set forth on its cover. Changes may occur after that date and neither ParentCo nor Alcoa Corporation will update the information except as may be required in the normal course of their respective disclosure obligations and practices.

 



 

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SUMMARY HISTORICAL AND UNAUDITED PRO FORMA

COMBINED FINANCIAL DATA

The following summary financial data reflects the combined operations of Alcoa Corporation. We derived the summary combined income statement data for the years ended December 31, 2015, 2014, and 2013, and summary combined balance sheet data as of December 31, 2015 and 2014, as set forth below, from our audited Combined Financial Statements, which are included in the “Index to Financial Statements” section of this information statement. We derived the summary combined income statement data for the six months ended June 30, 2016 and 2015, and summary combined balance sheet data as of June 30, 2016, as set forth below, from our unaudited Combined Financial Statements, included elsewhere in this information statement. The historical results do not necessarily indicate the results expected for any future period.

The summary unaudited pro forma combined financial data for the year ended December 31, 2015, and for the six months ended June 30, 2016 has been prepared to reflect the separation, including the incurrence by a subsidiary of Alcoa Corporation of indebtedness of approximately $1,250 million. The outstanding indebtedness of Alcoa Corporation and its combined subsidiaries is expected to total $1,463 million. The Unaudited Pro Forma Statement of Combined Operations Data presented for the year ended December 31, 2015 and the six months ended June 30, 2016, assumes the separation occurred on January 1, 2015. The Unaudited Pro Forma Combined Balance Sheet as of June 30, 2016, assumes the separation occurred on June 30, 2016. The assumptions used and pro forma adjustments derived from such assumptions are based on currently available information and we believe such assumptions are reasonable under the circumstances.

The Unaudited Pro Forma Combined Condensed Financial Statements are not necessarily indicative of our results of operations or financial condition had the distribution and its anticipated post-separation capital structure been completed on the dates assumed. They may not reflect the results of operations or financial condition that would have resulted had we been operating as a standalone, publicly traded company during such periods. In addition, they are not necessarily indicative of our future results of operations or financial condition.

You should read this summary financial data together with “Unaudited Pro Forma Combined Condensed Financial Statements,” “Capitalization,” “Selected Historical Combined Financial Data of Alcoa Corporation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the Combined Financial Statements and accompanying notes included elsewhere in this information statement.

 

    As of and for the six months
ended June 30,
    As of and for the year ended December 31,  
    Pro forma
2016
    2016     2015     Pro forma
2015
    2015     2014     2013  
(dollars in millions, except realized prices;
shipments in thousands of metric tons (kmt))
                                         

Sales

  $ 4,452      $ 4,452      $ 6,069      $ 11,199      $ 11,199      $ 13,147      $ 12,573   

Amounts attributable to Alcoa Corporation:

             

Net (loss) income

  $ (147   $ (265   $ 69      $ (600   $ (863   $ (256   $ (2,909
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shipments of alumina (kmt)

    4,434        4,434        5,244        10,755        10,755        10,652        9,966   

Shipments of aluminum (kmt)

    1,534        1,534        1,612        3,227        3,227        3,518        3,742   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alcoa Corporation’s average realized price per metric ton of primary aluminum

  $ 1,835      $ 1,835      $ 2,331      $ 2,092      $ 2,092      $ 2,396      $ 2,280   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 16,674      $ 16,374      $ 17,969        N/A      $ 16,413      $ 18,680      $ 21,126   

Total debt

  $ 1,463      $ 255      $ 282        N/A      $ 225      $ 342      $ 420   

 



 

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RISK FACTORS

You should carefully consider the following risks and other information in this information statement in evaluating Alcoa Corporation and its common stock. Any of the following risks and uncertainties could materially adversely affect our business, financial condition or results of operations. The risk factors generally have been separated into four groups: risks related to our business, risks related to the separation, risks related to our common stock and risks related to our indebtedness.

Risks Related to Our Business

The aluminum industry and aluminum end-use markets are highly cyclical and are influenced by a number of factors, including global economic conditions.

The aluminum industry generally is highly cyclical, and we are subject to cyclical fluctuations in global economic conditions and aluminum end-use markets. The demand for aluminum is sensitive to, and quickly impacted by, demand for the finished goods manufactured by our customers in industries that are cyclical, such as the commercial construction and transportation, automotive, and aerospace industries, which may change as a result of changes in the global economy, currency exchange rates, energy prices or other factors beyond our control. The demand for aluminum is highly correlated to economic growth. For example, the European sovereign debt crisis that began in late 2009 had an adverse effect on European demand for aluminum and aluminum products. The Chinese market is a significant source of global demand for, and supply of, commodities, including aluminum. A sustained slowdown in China’s economic growth and aluminum demand, or a significant slowdown in other markets, that is not offset by decreases in supply of aluminum or increased aluminum demand in emerging economies, such as India, Brazil, and several South East Asian countries, could have an adverse effect on the global supply and demand for aluminum and aluminum prices.

While we believe the long-term prospects for aluminum and aluminum products are positive, we are unable to predict the future course of industry variables or the strength of the global economy and the effects of government intervention. Negative economic conditions, such as a major economic downturn, a prolonged recovery period, a downturn in the commodity sector, or disruptions in the financial markets, could have a material adverse effect on our business, financial condition or results of operations.

While the aluminum market is often the leading cause of changes in the alumina and bauxite markets, those markets also have industry-specific risks including, but not limited to, global freight markets, energy markets, and regional supply-demand imbalances. The aluminum industry specific risks can have a material effect on profitability for the alumina and bauxite markets.

We could be materially adversely affected by declines in aluminum prices, including global, regional and product-specific prices.

The overall price of primary aluminum consists of several components: (i) the underlying base metal component, which is typically based on quoted prices from the London Metal Exchange (the “LME”); (ii) the regional premium, which comprises the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (e.g., the Midwest premium for metal sold in the United States); and (iii) the product premium, which represents the incremental price for receiving physical metal in a particular shape (e.g., coil, billet, slab, rod, etc.) or alloy. Each of the above three components has its own drivers of variability. The LME price is typically driven by macroeconomic factors, global supply and demand of aluminum (including expectations for growth and contraction and the level of global inventories), and trading activity of financial investors. An imbalance in global supply and demand of aluminum, such as decreasing demand without corresponding supply declines, could have a negative impact on aluminum pricing. Speculative trading in aluminum and the influence of hedge funds and other financial institutions participating in commodity markets have also increased in recent years, contributing to higher levels of price volatility. In 2015, the cash

 

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LME price of aluminum reached a high of $1,919 per metric ton and a low of $1,424 per metric ton. High LME inventories, or the release of substantial inventories into the market, could lead to a reduction in the price of aluminum. Declines in the LME price have had a negative impact on our results of operations. Additionally, our results could be adversely affected by decreases in regional premiums that participants in the physical metal market pay for immediate delivery of aluminum. Regional premiums tend to vary based on the supply of and demand for metal in a particular region and associated transportation costs. LME warehousing rules and surpluses have caused regional premiums to decrease, which would have a negative impact on our results of operations. Product premiums generally are a function of supply and demand for a given primary aluminum shape and alloy combination in a particular region. A sustained weak LME aluminum pricing environment, deterioration in LME aluminum prices, or a decrease in regional premiums or product premiums could have a material adverse effect on our business, financial condition, and results of operations or cash flow.

Most of our alumina contracts contain two pricing components: (1) the API price basis and (2) a negotiated adjustment basis that takes into account various factors, including freight, quality, customer location and market conditions. Because the API component can exhibit significant volatility due to market exposure, revenue associated with our alumina operations are exposed to market pricing. Our bauxite-related contracts are typically one to two-year contracts with very little, if any, market exposure; however, we intend to enter into long-term bauxite contracts and therefore, our revenue associated with our bauxite operations may become further exposed to market pricing.

Changes to LME warehousing rules could cause aluminum prices to decrease.

Since 2013, the LME has been engaged in a program aimed at reforming the rules under which registered warehouses in its global network operate. The initial rule changes took effect on February 1, 2015, and the LME has announced additional changes that will be implemented in 2016. These rule changes, and any subsequent changes the exchange chooses to make, could impact the supply/demand balance in the primary aluminum physical market and may impact regional delivery premiums and LME aluminum prices. Decreases in regional delivery premiums and/or decreases in LME aluminum prices could have a material adverse effect on our business, financial condition, and results of operations or cash flow.

We may not be able to realize the expected benefits from our strategy of creating a lower cost, competitive commodity business by optimizing our portfolio.

We are continuing to execute a strategy of creating a lower cost, competitive integrated aluminum production business by optimizing our portfolio. We are creating a competitive standalone business by taking decisive actions to lower the cost base of our upstream operations, including closing, selling or curtailing high-cost global smelting capacity, optimizing alumina refining capacity, and pursuing the sale of our interest in certain other operations.

We have made, and may continue to plan and execute, acquisitions and divestitures and take other actions to grow or streamline our portfolio. There is no assurance that anticipated benefits of our strategic actions will be realized. With respect to portfolio optimization actions such as divestitures, curtailments and closures, we may face barriers to exit from unprofitable businesses or operations, including high exit costs or objections from various stakeholders. In addition, we may incur unforeseen liabilities for divested entities if a buyer fails to honor all commitments. Our business operations are capital intensive, and curtailment or closure of operations or facilities may include significant charges, including employee separation costs, asset impairment charges and other measures. There can be no assurance that divestitures or closures will be undertaken or completed in their entirety as planned or that they will be beneficial to the company.

Market-driven balancing of global aluminum supply and demand may be disrupted by non-market forces or other impediments to production closures.

In response to market-driven factors relating to the global supply and demand of aluminum and alumina, we have curtailed or closed portions of our aluminum and alumina production capacity. Certain other industry producers have independently undertaken to reduce production as well. Reductions in production may be delayed or impaired by the terms of long-term contracts to buy power or raw materials.

 

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The existence of non-market forces on global aluminum industry capacity, such as political pressures in certain countries to keep jobs or to maintain or further develop industry self-sufficiency, may prevent or delay the closure or curtailment of certain producers’ smelters, irrespective of their position on the industry cost curve. For example, continued Chinese excess capacity overhanging the market and increased exports from China of heavily subsidized aluminum products may continue to materially disrupt world aluminum markets causing continued pricing deterioration.

If industry overcapacity persists due to the disruption by such non-market forces on the market-driven balancing of the global supply and demand of aluminum, the resulting weak pricing environment and margin compression may adversely affect the operating results of the company.

Our operations consume substantial amounts of energy; profitability may decline if energy costs rise or if energy supplies are interrupted.

Our operations consume substantial amounts of energy. Although we generally expect to meet the energy requirements for our alumina refineries and primary aluminum smelters from internal sources or from long-term contracts, certain conditions could negatively affect our results of operations, including the following:

 

    significant increases in electricity costs rendering smelter operations uneconomic;

 

    significant increases in fuel oil or natural gas prices;

 

    unavailability of electrical power or other energy sources due to droughts, hurricanes or other natural causes;

 

    unavailability of energy due to local or regional energy shortages resulting in insufficient supplies to serve consumers;

 

    interruptions in energy supply or unplanned outages due to equipment failure or other causes;

 

    curtailment of one or more refineries or smelters due to the inability to extend energy contracts upon expiration or to negotiate new arrangements on cost-effective terms or due to the unavailability of energy at competitive rates; or

 

    curtailment of one or more smelters due to discontinuation of power supply interruptibility rights granted to us under an interruptibility regime in place under the laws of the country in which the smelter is located, or due to a determination that such arrangements do not comply with applicable laws, thus rendering the smelter operations that had been relying on such country’s interruptibility regime uneconomic.

If events such as those listed above were to occur, the resulting high energy costs or the disruption of an energy source or the requirement to repay all or a portion of the benefit we received under a power supply interruptibility regime could have a material adverse effect on our business and results of operations.

Our global operations expose us to risks that could adversely affect our business, financial condition, operating results or cash flows.

We have operations or activities in numerous countries and regions outside the United States, including Australia, Brazil, Canada, Europe, Guinea, and the Kingdom of Saudi Arabia. The company’s global operations are subject to a number of risks, including:

 

    economic and commercial instability risks, including those caused by sovereign and private debt default, corruption, and changes in local government laws, regulations and policies, such as those related to tariffs and trade barriers, taxation, exchange controls, employment regulations and repatriation of earnings;

 

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    geopolitical risks, such as political instability, civil unrest, expropriation, nationalization of properties by a government, imposition of sanctions, changes to import or export regulations and fees, renegotiation or nullification of existing agreements, mining leases and permits;

 

    war or terrorist activities;

 

    major public health issues, such as an outbreak of a pandemic or epidemic (such as Sudden Acute Respiratory Syndrome, Avian Influenza, H7N9 virus, the Ebola virus or the Zika virus), which could cause disruptions in our operations or workforce;

 

    difficulties enforcing intellectual property and contractual rights in certain jurisdictions; and

 

    unexpected events, including fires or explosions at facilities, and natural disasters.

While the impact of any of the foregoing factors is difficult to predict, any one or more of them could adversely affect our business, financial condition, operating results or cash flows. Existing insurance arrangements may not provide protection for the costs that may arise from such events.

Our global operations expose us to various legal and regulatory systems, and changes in conditions beyond our control in foreign countries.

In addition to the business risks inherent in operating outside the United States, legal and regulatory systems may be less developed and predictable and the possibility of various types of adverse governmental action more pronounced. For example, we have several state agreements with the government of Western Australia that establish and govern our alumina refining activities in Western Australia. Unexpected or uncontrollable events or circumstances in any of these foreign markets, including actions by foreign governments such as changes in fiscal regimes, termination of our agreements with foreign governments or increased government regulation could materially and adversely affect our business, financial condition, results of operations or cash flows.

We face significant competition, which may have an adverse effect on profitability.

Alcoa Corporation competes with a variety of both U.S. and non-U.S. aluminum industry competitors. Alcoa Corporation’s metals also compete with other materials, such as steel, titanium, plastics, composites, ceramics, and glass, among others. Technological advancements or other developments by or affecting Alcoa Corporation’s competitors or customers could affect Alcoa Corporation’s results of operations. In addition, Alcoa Corporation’s competitive position depends, in part, on its ability to leverage its innovation expertise across its businesses and key end markets and having access to an economical power supply to sustain its operations in various countries. See “Business—Competition.”

Our business is capital intensive, and if there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend operations with respect to those industries, which could result in our recording asset impairment charges or taking other measures that may adversely affect our results of operations and profitability.

Our business operations are capital intensive, and we devote a significant amount of capital to certain industries. If there are downturns in the industries that we serve, we may be forced to significantly curtail or suspend our operations with respect to those industries, including laying-off employees, recording asset impairment charges and other measures. In addition, we may not realize the benefits or expected returns from announced plans, programs, initiatives and capital investments. Any of these events could adversely affect our results of operations and profitability.

 

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Our business and growth prospects may be negatively impacted by limits in our capital expenditures.

We require substantial capital to invest in growth opportunities and to maintain and prolong the life and capacity of our existing facilities. Insufficient cash generation or capital project overruns may negatively impact our ability to fund as planned our sustaining and return-seeking capital projects. We may also need to address commercial and political issues in relation to reductions in capital expenditures in certain of the jurisdictions in which we operate. If our interest in our joint ventures is diluted or we lose key concessions, our growth could be constrained. Any of the foregoing could have a material adverse effect on our business, results of operations, financial condition and prospects.

Our capital resources may not be adequate to provide for all of our cash requirements, and we are exposed to risks associated with financial, credit, capital and banking markets.

In the ordinary course of business, we expect to seek to access competitive financial, credit, capital and/or banking markets. Currently, we believe we have adequate access to these markets to meet our reasonably anticipated business needs based on our historic financial performance, as well as our expected continued strong financial position. To the extent our access to competitive financial, credit, capital and/or banking markets was to be impaired, our operations, financial results and cash flows could be adversely impacted.

Deterioration in our credit profile could increase our costs of borrowing money and limit our access to the capital markets and commercial credit.

We expect to request that the major credit rating agencies evaluate our creditworthiness and give us specified credit ratings. These ratings would be based on a number of factors, including our financial strength and financial policies as well as our strategies, operations and execution. These credit ratings are limited in scope, and do not address all material risks related to investment in us, but rather reflect only the view of each rating agency at the time the rating is issued. Nonetheless, the credit ratings we receive will impact our borrowing costs as well as our access to sources of capital on terms that will be advantageous to our business. Failure to obtain sufficiently high credit ratings could adversely affect the interest rate in future financings, our liquidity or our competitive position and could also restrict our access to capital markets. In addition, our credit ratings could be lowered or withdrawn entirely by a rating agency if, in its judgment, the circumstances warrant. If a rating agency were to downgrade our rating, our borrowing costs would increase, and our funding sources could decrease. As a result of these factors, a downgrade of our credit ratings could have a materially adverse impact on our future operations and financial position.

We may not realize expected benefits from our productivity and cost-reduction initiatives.

We have undertaken, and may continue to undertake, productivity and cost-reduction initiatives to improve performance and conserve cash, including procurement strategies for raw materials, labor productivity, improving operating performance, deployment of company-wide business process models, such as our degrees of implementation process in which ideas are executed in a disciplined manner to generate savings, and overhead cost reductions. There is no assurance that these initiatives will be successful or beneficial to us or that estimated cost savings from such activities will be realized.

Cyber attacks and security breaches may threaten the integrity of our intellectual property and other sensitive information, disrupt our business operations, and result in reputational harm and other negative consequences that could have a material adverse effect on our financial condition and results of operations.

We face global cybersecurity threats, which may range from uncoordinated individual attempts to sophisticated and targeted measures, known as advanced persistent threats, directed at the company. Cyber attacks and security breaches may include, but are not limited to, attempts to access information, computer viruses, denial of service and other electronic security breaches.

 

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We believe that we face a heightened threat of cyber attacks due to the industries we serve and the locations of our operations. We have experienced cybersecurity attacks in the past, including breaches of our information technology systems in which information was taken, and may experience them in the future, potentially with more frequency or sophistication. Based on information known to date, past attacks have not had a material impact on our financial condition or results of operations. However, due to the evolving nature of cybersecurity threats, the scope and impact of any future incident cannot be predicted. While the company continually works to safeguard our systems and mitigate potential risks, there is no assurance that such actions will be sufficient to prevent cyber attacks or security breaches that manipulate or improperly use our systems or networks, compromise confidential or otherwise protected information, destroy or corrupt data, or otherwise disrupt our operations. The occurrence of such events could negatively impact our reputation and our competitive position and could result in litigation with third parties, regulatory action, loss of business, potential liability and increased remediation costs, any of which could have a material adverse effect on our financial condition and results of operations. In addition, such attacks or breaches could require significant management attention and resources, and result in the diminution of the value of our investment in research and development.

Our profitability could be adversely affected by increases in the cost of raw materials, by significant lag effects of decreases in commodity or LME-linked costs or by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts.

Our results of operations are affected by changes in the cost of raw materials, including energy, carbon products, caustic soda and other key inputs, as well as freight costs associated with transportation of raw materials to refining and smelting locations. We may not be able to fully offset the effects of higher raw material costs or energy costs through price increases, productivity improvements or cost reduction programs. Similarly, our operating results are affected by significant lag effects of declines in key costs of production that are commodity or LME-linked. For example, declines in the costs of alumina and power during a particular period may not be adequate to offset sharp declines in metal price in that period. We could also be adversely affected by large or sudden shifts in the global inventory of aluminum and the resulting market price impacts. Increases in the cost of raw materials or decreases in input costs that are disproportionate to concurrent sharper decreases in the price of aluminum, or shifts in global inventory of aluminum that result in changes to market prices, could have a material adverse effect on our operating results.

Joint ventures and other strategic alliances may not be successful.

We participate in joint ventures and have formed strategic alliances and may enter into other similar arrangements in the future. For example, Alcoa World Alumina and Chemicals (AWAC) is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited. AWAC consists of a number of affiliated entities, which own, operate or have an interest in, bauxite mines and alumina refineries, as well as certain aluminum smelters, in seven countries. In addition, Alcoa Corporation is party to a joint venture with Ma’aden, the Saudi Arabian Mining Company, to develop a fully integrated aluminum complex (including a bauxite mine, alumina refinery, aluminum smelter and rolling mill) in the Kingdom of Saudi Arabia. Although the company has, in connection with these and our other existing joint ventures and strategic alliances, sought to protect our interests, joint ventures and strategic alliances inherently involve special risks. Whether or not the company holds majority interests or maintains operational control in such arrangements, our partners may:

 

    have economic or business interests or goals that are inconsistent with or opposed to those of the company;

 

    exercise veto rights so as to block actions that we believe to be in our or the joint venture’s or strategic alliance’s best interests;

 

    take action contrary to our policies or objectives with respect to our investments; or

 

    as a result of financial or other difficulties, be unable or unwilling to fulfill their obligations under the joint venture, strategic alliance or other agreements, such as contributing capital to expansion or maintenance projects.

 

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There can be no assurance that our joint ventures or strategic alliances will be beneficial to us, whether due to the above-described risks, unfavorable global economic conditions, increases in construction costs, currency fluctuations, political risks, or other factors.

We could be adversely affected by changes in the business or financial condition of a significant customer or joint venture partner.

A significant downturn or deterioration in the business or financial condition of a key customer or joint venture partner could affect our results of operations in a particular period. Our customers may experience delays in the launch of new products, labor strikes, diminished liquidity or credit unavailability, weak demand for their products or other difficulties in their businesses. If we are not successful in replacing business lost from such customers, profitability may be adversely affected. Our joint venture partners could be rendered unable to contribute their share of operating or capital costs, having an adverse impact on our business.

Customer concentration and supplier capacity in the Rolled Products segment could adversely impact margins.

Our Rolled Products segment primarily serves the North American aluminum food and beverage can and bottle markets. Four aluminum can and bottle manufacturers comprise over 90% of the aluminum beverage can and bottle market; Rolled Products competes with both domestic and foreign sheet rolling mills to supply these manufacturers. In this segment, customers tend to sign multiple year supply contracts for the vast majority of their requirements. Our customer mix reflects industry concentrations and norms; loss of existing customers or renegotiated pricing on new contracts could adversely affect both operating levels and profitability.

An adverse decline in the liability discount rate, lower-than-expected investment return on pension assets and other factors could affect our results of operations or amount of pension funding contributions in future periods.

Our results of operations may be negatively affected by the amount of expense we record for our pension and other post-retirement benefit plans, reductions in the fair value of plan assets and other factors. U.S. generally accepted accounting principles (“GAAP”) require that we calculate income or expense for our plans using actuarial valuations.

These valuations reflect assumptions about financial market and other economic conditions, which may change based on changes in key economic indicators. The most significant year-end assumptions used by the company to estimate pension or other postretirement benefit income or expense for the following year are the discount rate applied to plan liabilities and the expected long-term rate of return on plan assets. In addition, the company is required to make an annual measurement of plan assets and liabilities, which may result in a significant charge to shareholders’ equity. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates—Pension and Other Postretirement Benefits” and Note W to the Combined Financial Statements under the caption “Pension and Other Postretirement Benefits.” Although GAAP expense and pension funding contributions are impacted by different regulations and requirements, the key economic factors that affect GAAP expense would also likely affect the amount of cash or securities we would contribute to the pension plans.

Potential pension contributions include both mandatory amounts required under federal law and discretionary contributions to improve the plans’ funded status. The Moving Ahead for Progress in the 21st Century Act (“MAP-21”), enacted in 2012, provided temporary relief for employers like the company who sponsor defined benefit pension plans related to funding contributions under the Employee Retirement Income Security Act of 1974 by allowing the use of a 25-year average discount rate within an upper and lower range for purposes of determining minimum funding obligations. In 2014, the Highway and Transportation Funding Act (“HATFA”) was signed into law. HATFA extended the relief provided by MAP-21 and modified the interest

 

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rates that had been set by MAP-21. In 2015, the Bipartisan Budget Act of 2015 (BBA 2015) was enacted, which extends the relief period provided by HAFTA. We believe that the relief provided by BBA 2015 will moderately reduce the cash flow sensitivity of the company’s U.S. pension plans’ funded status to potential declines in discount rates over the next several years. However, higher than expected pension contributions due to a decline in the plans’ funded status as a result of declines in the discount rate or lower-than-expected investment returns on plan assets could have a material negative effect on our cash flows. Adverse capital market conditions could result in reductions in the fair value of plan assets and increase our liabilities related to such plans, adversely affecting our liquidity and results of operations.

We are exposed to fluctuations in foreign currency exchange rates and interest rates, as well as inflation, and other economic factors in the countries in which we operate.

Economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, competitive factors in the countries in which we operate, and continued volatility or deterioration in the global economic and financial environment could affect our revenues, expenses and results of operations. Changes in the valuation of the U.S. dollar against other currencies, particularly the Australian dollar, Brazilian real, Canadian dollar, Euro and Norwegian kroner, may affect our profitability as some important inputs are purchased in other currencies, while our products are generally sold in U.S. dollars. In addition, although a strong U.S. dollar generally has a positive impact on our near-term profitability, over a longer term, a strong U.S. dollar may have an unfavorable impact on our position on the global aluminum cost curve due to the company’s U.S. smelting portfolio. As the U.S. dollar strengthens, the cost curve shifts down for smelters outside the United States but costs for our U.S. smelting portfolio may not decline.

Weakness in global economic conditions or in any of the industries or geographic regions in which we or our customers operate, as well as the cyclical nature of our customers’ businesses generally or sustained uncertainty in financial markets, could adversely impact our revenues and profitability by reducing demand and margins.

Our results of operations may be materially affected by the conditions in the global economy generally and in global capital markets. There has been extreme volatility in the capital markets and in the end markets and geographic regions in which we or our customers operate, which has negatively affected our revenues. Many of the markets in which our customers participate are also cyclical in nature and experience significant fluctuations in demand for our products based on economic conditions, consumer demand, raw material and energy costs, and government actions. Many of these factors are beyond our control.

A decline in consumer and business confidence and spending, together with severe reductions in the availability and cost of credit, as well as volatility in the capital and credit markets, could adversely affect the business and economic environment in which we operate and the profitability of our business. We are also exposed to risks associated with the creditworthiness of our suppliers and customers. If the availability of credit to fund or support the continuation and expansion of our customers’ business operations is curtailed or if the cost of that credit is increased, the resulting inability of our customers or of their customers to either access credit or absorb the increased cost of that credit could adversely affect our business by reducing our sales or by increasing our exposure to losses from uncollectible customer accounts. These conditions and a disruption of the credit markets could also result in financial instability of some of our suppliers and customers. The consequences of such adverse effects could include the interruption of production at the facilities of our customers, the reduction, delay or cancellation of customer orders, delays or interruptions of the supply of raw materials we purchase, and bankruptcy of customers, suppliers or other creditors. Any of these events could adversely affect our profitability, cash flow and financial condition.

 

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Unanticipated changes in our tax provisions or exposure to additional tax liabilities could affect our future profitability.

We are subject to income taxes in both the United States and various non-U.S. jurisdictions. Our domestic and international tax liabilities are dependent upon the distribution of income among these different jurisdictions. Changes in applicable domestic or foreign tax laws and regulations, or their interpretation and application, including the possibility of retroactive effect, could affect the company’s tax expense and profitability. Our tax expense includes estimates of additional tax that may be incurred for tax exposures and reflects various estimates and assumptions. The assumptions include assessments of future earnings of the company that could impact the valuation of our deferred tax assets. Our future results of operations could be adversely affected by changes in the effective tax rate as a result of a change in the mix of earnings in countries with differing statutory tax rates, changes in the overall profitability of the company, changes in tax legislation and rates, changes in generally accepted accounting principles, changes in the valuation of deferred tax assets and liabilities, the results of tax audits and examinations of previously filed tax returns or related litigation and continuing assessments of our tax exposures. Corporate tax reform and tax law changes continue to be analyzed in the United States and in many other jurisdictions. Significant changes to the U.S. corporate tax system in particular could have a substantial impact, positive or negative, on our effective tax rate, cash tax expenditures and deferred tax assets and liabilities.

We may be exposed to significant legal proceedings, investigations or changes in U.S. federal, state or foreign law, regulation or policy.

Our results of operations or liquidity in a particular period could be affected by new or increasingly stringent laws, regulatory requirements or interpretations, or outcomes of significant legal proceedings or investigations adverse to the company. We may experience a change in effective tax rates or become subject to unexpected or rising costs associated with business operations or provision of health or welfare benefits to employees due to changes in laws, regulations or policies. We are also subject to a variety of legal compliance risks. These risks include, among other things, potential claims relating to product liability, health and safety, environmental matters, intellectual property rights, government contracts, taxes and compliance with U.S. and foreign export laws, anti-bribery laws, competition laws and sales and trading practices. We could be subject to fines, penalties, damages (in certain cases, treble damages), or suspension or debarment from government contracts. In addition, if we violate the terms of our agreements with governmental authorities, we may face additional monetary sanctions and such other remedies as a court deems appropriate.

While we believe we have adopted appropriate risk management and compliance programs to address and reduce these risks, the global and diverse nature of our operations means that these risks will continue to exist, and additional legal proceedings and contingencies may arise from time to time. In addition, various factors or developments can lead the company to change current estimates of liabilities or make such estimates for matters previously not susceptible of reasonable estimates, such as a significant judicial ruling or judgment, a significant settlement, significant regulatory developments or changes in applicable law. A future adverse ruling or settlement or unfavorable changes in laws, regulations or policies, or other contingencies that the company cannot predict with certainty could have a material adverse effect on our results of operations or cash flows in a particular period. See “Business—Legal Proceedings” and Note A under the caption “Litigation Matters” and Note N under the caption “Contingencies and Commitments—Contingencies—Litigation” to the Combined Financial Statements.

We are subject to a broad range of health, safety and environmental laws and regulations in the jurisdictions in which we operate and may be exposed to substantial costs and liabilities associated with such laws and regulations.

Our operations worldwide are subject to numerous complex and increasingly stringent health, safety and environmental laws and regulations. The costs of complying with such laws and regulations, including

 

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participation in assessments and cleanups of sites, as well as internal voluntary programs, are significant and will continue to be so for the foreseeable future. Environmental laws may impose cleanup liability on owners and occupiers of contaminated property, including past or divested properties, regardless of whether the owners and occupiers caused the contamination or whether the activity that caused the contamination was lawful at the time it was conducted. Environmental matters for which we may be liable may arise in the future at our present sites, where no problem is currently known, at previously owned sites, at sites previously operated by the company, at sites owned by our predecessors or at sites that we may acquire in the future. Compliance with environmental, health and safety legislation and regulatory requirements may prove to be more limiting and costly than we anticipate. Our results of operations or liquidity in a particular period could be affected by certain health, safety or environmental matters, including remediation costs and damages related to certain sites. Additionally, evolving regulatory standards and expectations can result in increased litigation and/or increased costs, all of which can have a material and adverse effect on earnings and cash flows.

Climate change, climate change legislation or regulations and greenhouse effects may adversely impact our operations and markets.

Energy is a significant input in a number of our operations. There is growing recognition that consumption of energy derived from fossil fuels is a contributor to global warming.

A number of governments or governmental bodies have introduced or are contemplating legislative and regulatory change in response to the potential impacts of climate change. There is also current and emerging regulation, such as the mandatory renewable energy target in Australia, Québec’s transition to a “cap and trade” system, the European Union Emissions Trading Scheme and the United States’ clean power plan, which became effective on December 22, 2015. We will likely see changes in the margins of greenhouse gas-intensive assets and energy-intensive assets as a result of regulatory impacts in the countries in which we operate. These regulatory mechanisms may be either voluntary or legislated and may impact our operations directly or indirectly through customers or our supply chain. Inconsistency of regulations may also change the attractiveness of the locations of some of the company’s assets. Assessments of the potential impact of future climate change legislation, regulation and international treaties and accords are uncertain, given the wide scope of potential regulatory change in countries in which we operate. We may realize increased capital expenditures resulting from required compliance with revised or new legislation or regulations, costs to purchase or profits from sales of, allowances or credits under a “cap and trade” system, increased insurance premiums and deductibles as new actuarial tables are developed to reshape coverage, a change in competitive position relative to industry peers and changes to profit or loss arising from increased or decreased demand for goods produced by the company and, indirectly, from changes in costs of goods sold.

The potential physical impacts of climate change on the company’s operations are highly uncertain, and will be particular to the geographic circumstances. These may include changes in rainfall patterns, shortages of water or other natural resources, changing sea levels, changing storm patterns and intensities, and changing temperature levels. These effects may adversely impact the cost, production and financial performance of our operations.

Our operations may impact the environment or cause exposure to hazardous substances, and our properties may have environmental contamination, which could result in material liabilities to us.

We may be subject to claims under federal and state statutes and/or common law doctrines for toxic torts and other damages as well as for natural resource damages and the investigation and clean-up of soil, surface water, groundwater, and other media under laws such as the federal Comprehensive Environmental Response, Compensation and Liabilities Act (CERCLA, commonly known as Superfund). Such claims may arise, for example, out of current or former conditions at sites that we own or operate currently, as well as at sites that we and companies we acquired owned or operated in the past, and at contaminated sites that have always been owned or operated by third parties. Liability may be without regard to fault and may be joint and several, so that we may be held responsible for more than our share of the contamination or other damages, or even for the entire share.

 

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These and other similar unforeseen impacts that our operations may have on the environment, as well as exposures to hazardous substances or wastes associated with our operations, could result in costs and liabilities that could materially and adversely affect us.

Loss of key personnel may adversely affect our business.

Our success greatly depends on the performance of our executive management team. The loss of the services of any member of our executive management team or other key persons could have a material adverse effect on our business, results of operations and financial condition.

Union disputes and other employee relations issues could adversely affect our financial results.

A significant portion of our employees are represented by labor unions in a number of countries under various collective bargaining agreements with varying durations and expiration dates. See “Business—Employees.” We may not be able to satisfactorily renegotiate collective bargaining agreements when they expire. In addition, existing collective bargaining agreements may not prevent a strike or work stoppage at our facilities in the future. We may also be subject to general country strikes or work stoppages unrelated to our business or collective bargaining agreements. Any such work stoppages (or potential work stoppages) could have a material adverse effect on our financial results.

Risks Related to the Separation

We have no recent history of operating as an independent company, and our historical and pro forma financial information is not necessarily representative of the results that we would have achieved as a separate, publicly traded company and may not be a reliable indicator of our future results.

The historical information about Alcoa Corporation in this information statement refers to Alcoa Corporation’s businesses as operated by and integrated with ParentCo. Our historical and pro forma financial information included in this information statement is derived from the consolidated financial statements and accounting records of ParentCo. Accordingly, the historical and pro forma financial information included in this information statement does not necessarily reflect the financial condition, results of operations or cash flows that we would have achieved as a separate, publicly traded company during the periods presented or those that we will achieve in the future primarily as a result of the factors described below:

 

    Generally, our working capital requirements and capital for our general corporate purposes, including capital expenditures and acquisitions, have historically been satisfied as part of the corporate-wide cash management policies of ParentCo. Following the completion of the separation, our results of operations and cash flows are likely to be more volatile and we may need to obtain additional financing from banks, through public offerings or private placements of debt or equity securities, strategic relationships or other arrangements, which may or may not be available and may be more costly.

 

    Prior to the separation, our business has been operated by ParentCo as part of its broader corporate organization, rather than as an independent company. ParentCo or one of its affiliates performed various corporate functions for us, such as legal, treasury, accounting, auditing, human resources, investor relations, and finance. Our historical and pro forma financial results reflect allocations of corporate expenses from ParentCo for such functions, which are likely to be less than the expenses we would have incurred had we operated as a separate publicly traded company.

 

    Currently, our business is integrated with the other businesses of ParentCo. Historically, we have shared economies of scope and scale in costs, employees, vendor relationships and customer relationships. While we have sought to separate these arrangements with minimal impact on Alcoa Corporation, there is no guarantee these arrangements will continue to capture these benefits in the future.

 

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    As a current part of ParentCo, we take advantage of ParentCo’s overall size and scope to procure more advantageous distribution arrangements, including shipping costs and arrangements. After the separation, as a standalone company, we may be unable to obtain similar arrangements to the same extent as ParentCo did, or on terms as favorable as those ParentCo obtained, prior to completion of the separation.

 

    After the completion of the separation, the cost of capital for our business may be higher than ParentCo’s cost of capital prior to the separation.

 

    Our historical financial information does not reflect the debt that we have incurred as part of the separation and distribution.

Other significant changes may occur in our cost structure, management, financing and business operations as a result of operating as a company separate from ParentCo. For additional information about the past financial performance of our business and the basis of presentation of the historical combined financial statements and the Unaudited Pro Forma Combined Condensed Financial Statements of our business, see “Unaudited Pro Forma Combined Condensed Financial Statements,” “Selected Historical Combined Financial Data of Alcoa Corporation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements and accompanying notes included elsewhere in this information statement.

We may not achieve some or all of the expected benefits of the separation, and the separation may materially adversely affect our business.

We may not be able to achieve the full strategic and financial benefits expected to result from the separation, or such benefits may be delayed or not occur at all. The separation is expected to provide the following benefits, among others: (i) enabling the management of each company to more effectively pursue its own distinct operating priorities and strategies, and enable the management of each company to focus on strengthening its core business and its unique needs, and pursue distinct and targeted opportunities for long-term growth and profitability; (ii) permitting each company to allocate its financial resources to meet the unique needs of its own business, which will allow each company to intensify its focus on its distinct strategic priorities and to more effectively pursue its own distinct capital structures and capital allocation strategies; (iii) allowing each company to more effectively articulate a clear investment thesis to attract a long-term investor base suited to its business and providing investors with two distinct and targeted investment opportunities; (iv) creating an independent equity currency tracking each company’s underlying business, affording Alcoa Corporation and Arconic direct access to the capital markets and facilitating each company’s ability to consummate future acquisitions or other restructuring transactions utilizing its common stock; (v) allowing each company more consistent application of incentive structures and targets, due to the common nature of the underlying businesses; and (vi) separating and simplifying the structures currently required to manage two distinct and differing underlying businesses.

We may not achieve these and other anticipated benefits for a variety of reasons, including, among others: (i) the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business; (ii) following the separation, we may be more susceptible to market fluctuations, including fluctuations in commodities prices, and other adverse events than if we were still a part of ParentCo because our business will be less diversified than ParentCo’s business prior to the completion of the separation; (iii) after the separation, as a standalone company, we may be unable to obtain certain goods, services and technologies at prices or on terms as favorable as those ParentCo obtained prior to completion of the separation; (iv) the separation may require Alcoa Corporation to pay costs that could be substantial and material to our financial resources, including accounting, tax, legal, and other professional services costs, recruiting and relocation costs associated with hiring key senior management and personnel new to Alcoa Corporation, and tax costs; and (v) the separation will entail changes to our information technology systems, reporting systems, supply chain and other operations that may require significant expense and may not be implemented in an as timely and effective fashion as we expect. If we fail to achieve some or all of the

 

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benefits expected to result from the separation, or if such benefits are delayed, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.

Our plan to separate into two independent publicly traded companies is subject to various risks and uncertainties and may not be completed in accordance with the expected plans or anticipated timeline, or at all, and will involve significant time and expense, which could disrupt or adversely affect our business.

On September 28, 2015, ParentCo announced plans to separate into two independent publicly traded companies. The separation is subject to approval by the ParentCo Board of Directors of the final terms of the separation and market and certain other conditions. Unanticipated developments, including changes in the competitive conditions of ParentCo’s markets, regulatory approvals or clearances, the uncertainty of the financial markets and challenges in executing the separation, could delay or prevent the completion of the proposed separation, or cause the separation to occur on terms or conditions that are different or less favorable than expected.

The process of completing the proposed separation has been and is expected to continue to be time-consuming and involves significant costs and expenses. For example, during the six months ended June 30, 2016, ParentCo recorded nonrecurring separation costs of $63 million, which were primarily related to third-party consulting, contractor fees and other incremental costs directly associated with the separation process. The separation costs may be significantly higher than what we currently anticipate and may not yield a discernible benefit if the separation is not completed or is not well executed, or the expected benefits of the separation are not realized. Executing the proposed separation will also require significant amounts of management’s time and effort, which may divert management’s attention from operating and growing our business. Other challenges associated with effectively executing the separation include attracting, retaining and motivating employees during the pendency of the separation and following its completion; addressing disruptions to our supply chain, manufacturing and other operations resulting from separating ParentCo into two large but independent companies; separating ParentCo’s information systems; and establishing a new brand identity in the marketplace.

The combined post-separation value of one share of Arconic common stock and one-third of a share of Alcoa Corporation common stock may not equal or exceed the pre-distribution value of one share of ParentCo common stock.

As a result of the distribution, ParentCo expects the trading price of shares of Arconic common stock immediately following the distribution to be different from the “regular-way” trading price of such shares immediately prior to the distribution because the trading price will no longer reflect the value of the Alcoa Corporation Business held by Alcoa Corporation. There can be no assurance that the aggregate market value of one share of Arconic common stock and one-third of a share of Alcoa Corporation common stock following the separation will be higher or lower than the market value of a share of ParentCo common stock if the separation did not occur.

Challenges in the commercial and credit environment may adversely affect our ability to complete the separation and our future access to capital.

Our ability to issue debt or enter into other financing arrangements on acceptable terms could be adversely affected if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or other significantly unfavorable changes in economic conditions. Volatility in the world financial markets could increase borrowing costs or affect our ability to access the capital markets. These conditions may adversely affect our ability to obtain and maintain investment grade credit ratings prior to and following the separation.

 

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We expect to incur both one-time and ongoing material costs and expenses as a result of our separation from ParentCo, which could adversely affect our profitability.

We expect to incur, as a result of our separation from ParentCo, both one-time and ongoing costs and expenses that are greater than those we currently incur. These increased costs and expenses may arise from various factors, including financial reporting, costs associated with complying with federal securities laws (including compliance with the Sarbanes-Oxley Act of 2002, as amended (“Sarbanes-Oxley”)), tax administration, and legal and human resources related functions, and it is possible that these costs will be material to our business.

We could experience temporary interruptions in business operations and incur additional costs as we build our information technology infrastructure and transition our data to our own systems.

We are in the process of creating our own, or engaging third parties to provide, information technology infrastructure and systems to support our critical business functions, including accounting and reporting, in order to replace many of the systems ParentCo currently provides to us. We may incur temporary interruptions in business operations if we cannot transition effectively from ParentCo’s existing operating systems, databases and programming languages that support these functions to our own systems. Our failure to implement the new systems and transition our data successfully and cost-effectively could disrupt our business operations and have a material adverse effect on our profitability. In addition, our costs for the operation of these systems may be higher than the amounts reflected in our historical combined financial statements.

Our accounting and other management systems and resources may not be adequately prepared to meet the financial reporting and other requirements to which we will be subject as a standalone publicly traded company following the distribution.

Our financial results previously were included within the consolidated results of ParentCo, and we believe that our reporting and control systems were appropriate for those of subsidiaries of a public company. However, we were not directly subject to the reporting and other requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As a result of the distribution, we will be directly subject to reporting and other obligations under the Exchange Act, including the requirements of Section 404 of Sarbanes-Oxley, which will require annual management assessments of the effectiveness of our internal control over financial reporting and a report by our independent registered public accounting firm addressing these assessments. These reporting and other obligations will place significant demands on our management and administrative and operational resources, including accounting resources. We may not have sufficient time following the separation to meet these obligations by the applicable deadlines.

Moreover, to comply with these requirements, we anticipate that we will need to migrate our systems, including information technology systems, implement additional financial and management controls, reporting systems and procedures and hire additional accounting and finance staff. We expect to incur additional annual expenses related to these steps, and those expenses may be significant. If we are unable to upgrade our financial and management controls, reporting systems, information technology and procedures in a timely and effective fashion, our ability to comply with our financial reporting requirements and other rules that apply to reporting companies under the Exchange Act could be impaired. Any failure to achieve and maintain effective internal controls could have a material adverse effect on our business, financial condition, results of operations and cash flows.

In connection with our separation from ParentCo, ParentCo will indemnify us for certain liabilities and we will indemnify ParentCo for certain liabilities. If we are required to pay under these indemnities to ParentCo, our financial results could be negatively impacted. The ParentCo indemnity may not be sufficient to hold us harmless from the full amount of liabilities for which ParentCo will be allocated responsibility, and ParentCo may not be able to satisfy its indemnification obligations in the future.

Pursuant to the separation agreement and certain other agreements with ParentCo, ParentCo will agree to indemnify us for certain liabilities, and we will agree to indemnify ParentCo for certain liabilities, in each case

 

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for uncapped amounts, as discussed further in “Certain Relationships and Related Party Transactions.” Indemnities that we may be required to provide ParentCo are not subject to any cap, may be significant and could negatively impact our business. Third parties could also seek to hold us responsible for any of the liabilities that ParentCo has agreed to retain. Any amounts we are required to pay pursuant to these indemnification obligations and other liabilities could require us to divert cash that would otherwise have been used in furtherance of our operating business. Further, the indemnity from ParentCo may not be sufficient to protect us against the full amount of such liabilities, and ParentCo may not be able to fully satisfy its indemnification obligations. Moreover, even if we ultimately succeed in recovering from ParentCo any amounts for which we are held liable, we may be temporarily required to bear these losses ourselves. Each of these risks could negatively affect our business, results of operations and financial condition.

We may be held liable to ParentCo if we fail to perform certain services under the transition services agreement, and the performance of such services may negatively impact our business and operations.

Alcoa Corporation and ParentCo will enter into a transition services agreement in connection with the separation pursuant to which Alcoa Corporation and ParentCo will provide each other, on an interim, transitional basis, various services, including, but not limited to, employee benefits administration, specialized technical and training services and access to certain industrial equipment, information technology services, regulatory services, continued industrial site remediation and closure services on discrete projects, project management services for certain equipment installation and decommissioning projects, general administrative services and other support services. If we do not satisfactorily perform our obligations under the agreement, we may be held liable for any resulting losses suffered by ParentCo, subject to certain limits. In addition, during the transition services periods, our management and employees may be required to divert their attention away from our business in order to provide services to ParentCo, which could adversely affect our business.

ParentCo may fail to perform under various transaction agreements that will be executed as part of the separation or we may fail to have necessary systems and services in place when certain of the transaction agreements expire.

In connection with the separation, Alcoa Corporation and ParentCo will enter into a separation and distribution agreement and will also enter into various other agreements, including a transition services agreement, a tax matters agreement, an employee matters agreement, a stockholder and registration rights agreement with respect to Arconic’s continuing ownership of Alcoa Corporation common stock, intellectual property license agreements, a metal supply agreement, real estate and office leases, a spare parts loan agreement and an agreement relating to the North American packaging business. The separation agreement, the tax matters agreement and the employee matters agreement, together with the documents and agreements by which the internal reorganization will be effected, will determine the allocation of assets and liabilities between the companies following the separation for those respective areas and will include any necessary indemnifications related to liabilities and obligations. The separation agreement also provides that Alcoa Corporation will pay over to ParentCo the proceeds in respect of the pending sale of ParentCo’s Yadkin hydroelectric project following the effective time of the distribution. The transition services agreement will provide for the performance of certain services by each company for the benefit of the other for a period of time after the separation. Alcoa Corporation will rely on ParentCo to satisfy its performance and payment obligations under these agreements. If ParentCo is unable or unwilling to satisfy its obligations under these agreements, including its indemnification obligations, we could incur operational difficulties and/or losses. If we do not have in place our own systems and services, or if we do not have agreements with other providers of these services once certain transaction agreements expire, we may not be able to operate our business effectively and our profitability may decline. We are in the process of creating our own, or engaging third parties to provide, systems and services to replace many of the systems and services that ParentCo currently provides to us. However, we may not be successful in implementing these systems and services, we may incur additional costs in connection with, or following, the implementation of these systems and services, and we may not be successful in transitioning data from ParentCo’s systems to ours.

 

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We may not be able to engage in desirable capital-raising or strategic transactions following the separation.

Under current U.S. federal income tax law, a spin-off that otherwise qualifies for tax-free treatment can be rendered taxable to the parent corporation and its shareholders as a result of certain post-spin-off transactions, including certain acquisitions of shares or assets of the spun-off corporation. To preserve the tax-free treatment of the separation and the distribution, and in addition to Alcoa Corporation’s indemnity obligation described above, the tax matters agreement will restrict Alcoa Corporation, for the two-year period following the distribution, except in specific circumstances, from: (i) entering into any transaction pursuant to which all or a portion of Alcoa Corporation stock would be acquired, whether by merger or otherwise, (ii) issuing equity securities beyond certain thresholds, (iii) repurchasing shares of Alcoa Corporation stock other than in certain open-market transactions, (iv) ceasing to actively conduct certain of its businesses or (v) taking or failing to take any other action that prevents the distribution and certain related transactions from qualifying as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. These restrictions may limit Alcoa Corporation’s ability to pursue certain equity issuances, strategic transactions or other transactions that may maximize the value of Alcoa Corporation’s business. For more information, see “Certain Relationships and Related Party Transactions—Tax Matters Agreement” and “Material U.S. Federal Income Tax Consequences.”

The terms we will receive in our agreements with ParentCo could be less beneficial than the terms we may have otherwise received from unaffiliated third parties.

The agreements we will enter into with ParentCo in connection with the separation, including a separation and distribution agreement, a transition services agreement, a tax matters agreement, an employee matters agreement, a stockholder and registration rights agreement with respect to ParentCo’s continuing ownership of Alcoa Corporation common stock, intellectual property license agreements, a metal supply agreement, real estate and office leases, a spare parts loan agreement and an agreement relating to the North American packaging business were prepared in the context of the separation while Alcoa Corporation was still a wholly owned subsidiary of ParentCo. Accordingly, during the period in which the terms of those agreements were prepared, Alcoa Corporation did not have an independent Board of Directors or a management team that was independent of ParentCo. As a result, the terms of those agreements may not reflect terms that would have resulted from arm’s-length negotiations between unaffiliated third parties. See “Certain Relationships and Related Party Transactions.”

If the distribution, together with certain related transactions, does not qualify as a transaction that is generally tax-free for U.S. federal income tax purposes, ParentCo, Alcoa Corporation, and ParentCo shareholders could be subject to significant tax liabilities and, in certain circumstances, Alcoa Corporation could be required to indemnify ParentCo for material taxes and other related amounts pursuant to indemnification obligations under the tax matters agreement.

It is a condition to the distribution that (i) the private letter ruling from the IRS regarding certain U.S. federal income tax matters relating to the separation and the distribution received by ParentCo remain valid and be satisfactory to the ParentCo Board of Directors and (ii) ParentCo receive an opinion of its outside counsel, satisfactory to the ParentCo Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code. The IRS private letter ruling is and the opinion of counsel will be based upon and rely on, among other things, various facts and assumptions, as well as certain representations, statements and undertakings of ParentCo and Alcoa Corporation, including those relating to the past and future conduct of ParentCo and Alcoa Corporation. If any of these representations, statements or undertakings is, or becomes, inaccurate or incomplete, or if ParentCo or Alcoa Corporation breaches any of its representations or covenants contained in any of the separation–related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel, the IRS private letter ruling and/or the opinion of counsel may be invalid and the conclusions reached therein could be jeopardized.

 

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Notwithstanding receipt of the IRS private letter ruling and the opinion of counsel, the IRS could determine that the distribution and/or certain related transactions should be treated as taxable transactions for U.S. federal income tax purposes if it determines that any of the representations, assumptions or undertakings upon which the IRS private letter ruling or the opinion of counsel was based are false or have been violated. In addition, the IRS private letter ruling does not address all of the issues that are relevant to determining whether the distribution, together with certain related transactions, qualifies as a transaction that is generally tax-free for U.S. federal income tax purposes, and the opinion of counsel will represent the judgment of such counsel and will not be binding on the IRS or any court and the IRS or a court may disagree with the conclusions in the opinion of counsel. Accordingly, notwithstanding receipt by ParentCo of the IRS private letter ruling and the opinion of counsel, there can be no assurance that the IRS will not assert that the distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes or that a court would not sustain such a challenge. In the event the IRS were to prevail with such challenge, ParentCo, Alcoa Corporation and ParentCo shareholders could be subject to significant U.S. federal income tax liability.

If the distribution, together with certain related transactions, fails to qualify as a transaction that is generally tax-free, for U.S. federal income tax purposes, under Sections 355 and 368(a)(1)(D) of the Code, in general, for U.S. federal income tax purposes, ParentCo would recognize taxable gain as if it had sold the Alcoa Corporation common stock in a taxable sale for its fair market value and ParentCo shareholders who receive Alcoa Corporation shares in the distribution would be subject to tax as if they had received a taxable distribution equal to the fair market value of such shares. For more information, see “Material U.S. Federal Income Tax Consequences.”

Under the tax matters agreement that ParentCo will enter into with Alcoa Corporation, Alcoa Corporation may be required to indemnify ParentCo against any additional taxes and related amounts resulting from (i) an acquisition of all or a portion of the equity securities or assets of Alcoa Corporation, whether by merger or otherwise (and regardless of whether Alcoa Corporation participated in or otherwise facilitated the acquisition), (ii) other actions or failures to act by Alcoa Corporation or (iii) any of Alcoa Corporation’s representations, covenants or undertakings contained in any of the separation-related agreements and documents or in any documents relating to the IRS private letter ruling and/or the opinion of counsel being incorrect or violated. Any such indemnity obligations could be material. For a more detailed discussion, see “Certain Relationships and Related Party Transactions—Tax Matters Agreement.” In addition, ParentCo, Alcoa Corporation and their respective subsidiaries may incur certain tax costs in connection with the separation, including non-U.S. tax costs resulting from separations in non-U.S. jurisdictions, which may be material.

Certain contingent liabilities allocated to Alcoa Corporation following the separation may mature, resulting in material adverse impacts to our business.

After the separation, there will be several significant areas where the liabilities of ParentCo may become our obligations. For example, under the Code and the related rules and regulations, each corporation that was a member of the ParentCo consolidated U.S. federal income tax return group during a taxable period or portion of a taxable period ending on or before the effective date of the distribution is severally liable for the U.S. federal income tax liability of the ParentCo consolidated U.S. federal income tax return group for that taxable period. Consequently, if ParentCo is unable to pay the consolidated U.S. federal income tax liability for a pre-separation period, we could be required to pay the amount of such tax, which could be substantial and in excess of the amount allocated to us under the tax matters agreement. For a discussion of the tax matters agreement, see “Certain Relationships and Related Party Transactions—Tax Matters Agreement.” Other provisions of federal law establish similar liability for other matters, including laws governing tax-qualified pension plans, as well as other contingent liabilities.

 

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The transfer to us of certain contracts, permits and other assets and rights may require the consents or approvals of, or provide other rights to, third parties and governmental authorities. If such consents or approvals are not obtained, we may not be entitled to the benefit of such contracts, permits and other assets and rights, which could increase our expenses or otherwise harm our business and financial performance.

The separation agreement will provide that certain contracts, permits and other assets and rights are to be transferred from ParentCo or its subsidiaries to Alcoa Corporation or its subsidiaries in connection with the separation. The transfer of certain of these contracts, permits and other assets and rights may require consents or approvals of third parties or governmental authorities or provide other rights to third parties. In addition, in some circumstances, we and ParentCo are joint beneficiaries of contracts, and we and ParentCo may need the consents of third parties in order to split or bifurcate the existing contracts or the relevant portion of the existing contracts to us or ParentCo.

Some parties may use consent requirements or other rights to seek to terminate contracts or obtain more favorable contractual terms from us, which, for example, could take the form of price increases, require us to expend additional resources in order to obtain the services or assets previously provided under the contract, or require us to seek arrangements with new third parties or obtain letters of credit or other forms of credit support. If we are unable to obtain required consents or approvals, we may be unable to obtain the benefits, permits, assets and contractual commitments that are intended to be allocated to us as part of our separation from ParentCo, and we may be required to seek alternative arrangements to obtain services and assets which may be more costly and/or of lower quality. The termination or modification of these contracts or permits or the failure to timely complete the transfer or bifurcation of these contracts or permits could negatively impact our business, financial condition, results of operations and cash flows.

Until the separation occurs, ParentCo has sole discretion to change the terms of the separation in ways which may be unfavorable to us.

Until the separation occurs, Alcoa Corporation will be a wholly owned subsidiary of ParentCo. Accordingly, ParentCo will have the sole and absolute discretion to determine and change the terms of the separation, including the establishment of the record date for the distribution and the distribution date, as well as to reduce the amount of outstanding shares of common stock of Alcoa Corporation that it will retain, if any, following the distribution. These changes could be unfavorable to us. In addition, ParentCo may decide at any time not to proceed with the separation and distribution.

No vote of ParentCo shareholders is required in connection with the distribution. As a result, if the distribution occurs and you do not want to receive Alcoa Corporation common stock in the distribution, your sole recourse will be to divest yourself of your ParentCo common stock prior to the record date.

No vote of ParentCo shareholders is required in connection with the distribution. Accordingly, if the distribution occurs and you do not want to receive Alcoa Corporation common stock in the distribution, your only recourse will be to divest yourself of your ParentCo common stock prior to the record date for the distribution.

Risks Related to Our Common Stock

We cannot be certain that an active trading market for our common stock will develop or be sustained after the separation and, following the separation, our stock price may fluctuate significantly.

A public market for our common stock does not currently exist. We anticipate that on or prior to the record date for the distribution, trading of shares of our common stock will begin on a “when-issued” basis and will continue through the distribution date. However, we cannot guarantee that an active trading market will develop or be sustained for our common stock after the separation, nor can we predict the prices at which shares of our common stock may trade after the separation. Similarly, we cannot predict the effect of the separation on the

 

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trading prices of our common stock or whether the combined market value of one-third of a share of our common stock and one share of Arconic common stock will be less than, equal to or greater than the market value of one share of ParentCo common stock prior to the distribution.

The market price of our common stock may fluctuate significantly due to a number of factors, some of which may be beyond our control, including:

 

    actual or anticipated fluctuations in our operating results;

 

    changes in earnings estimated by securities analysts or our ability to meet those estimates;

 

    the operating and stock price performance of comparable companies;

 

    actual or anticipated fluctuations in commodities prices;

 

    changes to the regulatory and legal environment under which we operate; and

 

    domestic and worldwide economic conditions.

A significant number of shares of our common stock may be sold following the distribution, including the sale by Arconic of the shares of our common stock that it may retain after the distribution, which may cause our stock price to decline.

Any sales of substantial amounts of our common stock in the public market or the perception that such sales might occur, in connection with the distribution or otherwise, may cause the market price of our common stock to decline. Upon completion of the distribution, we expect that we will have an aggregate of approximately 182,467,761 shares of our common stock issued and outstanding. Shares distributed to ParentCo shareholders in the separation will generally be freely tradeable without restriction or further registration under the U.S. Securities Act of 1933, as amended (the “Securities Act”), except for shares owned by one of our “affiliates,” as that term is defined in Rule 405 under the Securities Act.

Following the distribution, Arconic will retain approximately 19.9% of our outstanding shares of our common stock. Pursuant to the IRS private letter ruling, Arconic will be required to dispose of such shares of our common stock that it owns as soon as practicable and consistent with its reasons for retaining such shares, but in no event later than five years after the distribution. We will agree that, following the 60-day period commencing immediately after the effective time of the distribution, upon the request of Arconic, we will use commercially reasonable efforts to effect a registration under applicable federal and state securities laws of any shares of our common stock retained by Arconic. See “Certain Relationships and Related Person Transactions—Stockholder and Registration Rights Agreement.” Any disposition by Arconic, or any significant stockholder, of our common stock in the public market, or the perception that such dispositions could occur, could adversely affect prevailing market prices for our common stock.

We are unable to predict whether large amounts of our common stock will be sold in the open market following the distribution. We are also unable to predict whether a sufficient number of buyers of our common stock to meet the demand to sell shares of our common stock at attractive prices would exist at that time.

Your percentage of ownership in Alcoa Corporation may be diluted in the future.

In the future, your percentage ownership in Alcoa Corporation may be diluted because of equity issuances for acquisitions, capital market transactions or otherwise, including any equity awards that we will grant to our directors, officers and employees. Our employees will have stock-based awards that correspond to shares of our common stock after the distribution as a result of conversion of their ParentCo stock-based awards. We anticipate that our compensation committee will grant additional stock-based awards to our employees after the distribution. Such awards will have a dilutive effect on our earnings per share, which could adversely affect the market price of our common stock. From time to time, we will issue additional stock-based awards to our employees under our employee benefits plans.

 

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Anti-takeover provisions could enable our management to resist a takeover attempt by a third party and limit the power of our stockholders.

Alcoa Corporation’s amended and restated certificate of incorporation and bylaws will contain, and Delaware law contains, provisions that are intended to deter coercive takeover practices and inadequate takeover bids by making such practices or bids unacceptably expensive to the bidder and to encourage prospective acquirers to negotiate with Alcoa Corporation’s Board of Directors rather than to attempt a hostile takeover. These provisions are expected to include, among others:

 

    the inability of our stockholders to act by written consent unless such written consent is unanimous;

 

    the ability of our remaining directors to fill vacancies on our Board of Directors;

 

    limitations on stockholders’ ability to call a special stockholder meeting;

 

    rules regarding how stockholders may present proposals or nominate directors for election at stockholder meetings; and

 

    the right of our Board of Directors to issue preferred stock without stockholder approval.

In addition, we expect to be subject to Section 203 of the Delaware General Corporation Law (“DGCL”), which could have the effect of delaying or preventing a change of control that you may favor. Section 203 provides that, subject to limited exceptions, persons that acquire, or are affiliated with persons that acquire, more than 15% of the outstanding voting stock of a Delaware corporation may not engage in a business combination with that corporation, including by merger, consolidation or acquisitions of additional shares, for a three-year period following the date on which that person or any of its affiliates becomes the holder of more than 15% of the corporation’s outstanding voting stock.

We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers to negotiate with our Board of Directors and by providing our Board of Directors with more time to assess any acquisition proposal. These provisions are not intended to make Alcoa Corporation immune from takeovers; however, these provisions will apply even if the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our Board of Directors determines is not in the best interests of Alcoa Corporation’s and our stockholders. These provisions may also prevent or discourage attempts to remove and replace incumbent directors. See “Description of Alcoa Corporation Capital Stock—Anti-Takeover Effects of Various Provisions of Delaware Law and our Certificate of Incorporation and Bylaws.”

In addition, an acquisition or further issuance of our stock could trigger the application of Section 355(e) of the Code. For a discussion of Section 355(e), see “Material U.S. Federal Income Tax Consequences.” Under the tax matters agreement, Alcoa Corporation would be required to indemnify ParentCo for the resulting tax, and this indemnity obligation might discourage, delay or prevent a change of control that our stockholders may consider favorable.

We cannot guarantee the timing, amount or payment of dividends on our common stock.

The timing, declaration, amount and payment of future dividends to our stockholders will fall within the discretion of our Board of Directors. The Board of Directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, covenants associated with certain of our debt service obligations, industry practice, legal requirements, regulatory constraints and other factors that our Board of Directors deems relevant. For more information, see “Dividend Policy.” Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividend at the same rate or at all if we commence paying dividends.

 

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Our amended and restated certificate of incorporation will designate the state courts within the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could discourage lawsuits against Alcoa Corporation and our directors and officers.

Our amended and restated certificate of incorporation will provide that unless the Board of Directors otherwise determines, the Court of Chancery of the State of Delaware will be the sole and exclusive forum for any derivative action or proceeding brought on behalf of Alcoa Corporation, any action asserting a claim for or based on a breach of a fiduciary duty owed by any current or former director or officer of Alcoa Corporation to Alcoa Corporation or to Alcoa Corporation stockholders, including a claim alleging the aiding and abetting of such a breach of fiduciary duty, any action asserting a claim against Alcoa Corporation or any current or former director or officer of Alcoa Corporation arising pursuant to any provision of the DGCL or our amended and restated certificate of incorporation or bylaws, any action asserting a claim relating to or involving Alcoa Corporation governed by the internal affairs doctrine, or any action asserting an “internal corporate claim” as that term is defined in Section 115 of the DGCL. However, if the Court of Chancery of the State of Delaware dismisses any such action for lack of subject matter jurisdiction, the action may be brought in the federal court for the District of Delaware.

Although our amended and restated certificate of incorporation will include this exclusive forum provision, it is possible that a court could rule that this provision is inapplicable or unenforceable. This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with Alcoa Corporation or our directors or officers, which may discourage such lawsuits against Alcoa Corporation and our directors and officers. Alternatively, if a court were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we may incur additional costs associated with resolving such matters in other jurisdictions, which could negatively affect our business, results of operations and financial condition.

Risks Related to Our Indebtedness

Our indebtedness, including the notes, restricts our current and future operations, which could adversely affect our ability to respond to changes in our business and manage our operations.

The terms of the Revolving Credit Agreement and the indenture governing the notes include a number of restrictive covenants that impose significant operating and financial restrictions on us, including restrictions on our ability to, among other things:

 

    make investments, loans, advances, guarantees and acquisitions;

 

    dispose of assets;

 

    incur or guarantee additional debt and issue certain disqualified equity interests and preferred stock;

 

    make certain restricted payments, including a limit on dividends on equity securities or payments to redeem, repurchase or retire equity securities or other indebtedness;

 

    engage in transactions with affiliates;

 

    materially alter the business we conduct;

 

    enter into certain restrictive agreements;

 

    create liens on assets to secure debt;

 

    consolidate, merge, sell or otherwise dispose of all or substantially all of Alcoa Corporation’s, the Issuer’s or a subsidiary guarantor’s assets; and

 

    take any actions that would reduce our ownership of AWAC entities below an agreed level.

In addition, the Revolving Credit Agreement requires us to comply with financial covenants. The Revolving Credit Agreement requires that we maintain a leverage ratio no greater than 2.25 to 1.00 and an interest expense coverage ratio no less than 5.00 to 1.00, in each case, for any period of four consecutive fiscal quarters of Alcoa Corporation.

 

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For more information on the restrictive covenants in the Revolving Credit Agreement, see “Description of Material Indebtedness.”

Our ability to comply with these agreements may be affected by events beyond our control, including prevailing economic, financial and industry conditions. These covenants could have an adverse effect on our business by limiting our ability to take advantage of financing, merger and acquisition or other opportunities. The breach of any of these covenants or restrictions could result in a default under the Revolving Credit Agreement or the indenture governing the notes.

Our failure to comply with the agreements relating to our outstanding indebtedness, including as a result of events beyond our control, could result in an event of default that could materially and adversely affect our business, financial condition, results of operations or cash flows.

If there were an event of default under any of the agreements relating to our outstanding indebtedness, including the Revolving Credit Agreement and the indenture governing the notes, we may not be able to incur additional indebtedness under the Revolving Credit Agreement and the holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be due and payable immediately. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments if accelerated upon an event of default, which could have a material adverse effect on our ability to continue to operate as a going concern. Further, if we are unable to repay, refinance or restructure our secured indebtedness, the holders of such indebtedness could proceed against the collateral securing that indebtedness. In addition, any event of default or declaration of acceleration under one debt instrument also could result in an event of default under one or more of our other debt instruments.

 

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CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

This information statement and other materials ParentCo and Alcoa Corporation have filed or will file with the SEC contain or incorporate by reference “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Forward-looking statements include those containing such words as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “intends,” “may,” “outlook,” “plans,” “projects,” “seeks,” “sees,” “should,” “targets,” “will,” or other words of similar meaning. All statements that reflect Alcoa Corporation’s expectations, assumptions, or projections about the future other than statements of historical fact are forward-looking statements, including, without limitation, statements regarding the separation and distribution, including the timing and expected benefits thereof; forecasts concerning global demand growth for aluminum, end market conditions, supply/demand balances, and growth opportunities for aluminum in automotive, aerospace, and other applications; targeted financial results or operating performance; and statements about Alcoa Corporation’s strategies, outlook, and business and financial prospects. These statements reflect beliefs and assumptions that are based on Alcoa Corporation’s perception of historical trends, current conditions and expected future developments, as well as other factors management believes are appropriate in the circumstances. Forward-looking statements are subject to a number of known and unknown risks, uncertainties, and other factors and are not guarantees of future performance. Actual results, performance, or outcomes may differ materially from those expressed in or implied by those forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, among others:

 

    whether the separation is completed, as expected or at all, and the timing of the separation and the distribution;

 

    whether the conditions to the distribution are satisfied;

 

    whether the operational, strategic and other benefits of the separation can be achieved;

 

    whether the costs and expenses of the separation can be controlled within expectations;

 

    material adverse changes in aluminum industry conditions, including global supply and demand conditions and fluctuations in LME-based prices, and premiums, as applicable, for primary aluminum, alumina, and other products, and fluctuations in index-based and spot prices for alumina;

 

    deterioration in global economic and financial market conditions generally;

 

    unfavorable changes in the markets served by Alcoa Corporation or ParentCo, including aerospace, automotive, commercial transportation, building and construction, packaging, defense, and industrial gas turbine;

 

    the impact on costs and results of changes in foreign currency exchange rates, particularly the Australian dollar, Brazilian real, Canadian dollar, Euro, and Norwegian kroner;

 

    increases in energy costs or the unavailability or interruption of energy supplies;

 

    increases in the costs of other raw materials;

 

    Alcoa Corporation’s inability to achieve the level of revenue growth, cash generation, cost savings, improvement in profitability and margins, fiscal discipline, or strengthening of competitiveness and operations (including moving its alumina refining and aluminum smelting businesses down on the industry cost curves) anticipated from its restructuring programs and productivity improvement, cash sustainability, technology, and other initiatives;

 

    Alcoa Corporation’s inability to realize expected benefits, in each case as planned and by targeted completion dates, from sales of assets, closures or curtailments of facilities, newly constructed, expanded, or acquired facilities, or international joint ventures, including our joint venture with Alumina Limited and our joint venture in Saudi Arabia;

 

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    risks relating to operating globally, including geopolitical, economic, and regulatory risks and unexpected events beyond Alcoa Corporation’s control, such as unfavorable changes in laws and governmental policies, civil unrest, imposition of sanctions, expropriation of assets, major public health issues, and terrorism;

 

    the outcome of contingencies, including legal proceedings, government or regulatory investigations, and environmental remediation;

 

    adverse changes in discount rates or investment returns on pension assets;

 

    the impact of cyber attacks and potential information technology or data security breaches;

 

    unexpected events, unplanned outages, supply disruptions or failure of equipment or processes to meet specifications;

 

    the loss of customers, suppliers and other business relationships as a result of competitive developments, or other factors;

 

    the potential failure to retain key employees of Alcoa Corporation; and

 

    compliance with debt covenants and maintenance of credit ratings as well as the impact of interest and principal repayment of our existing and any future debt.

The above list of factors is not exhaustive or necessarily in order of importance. Additional information concerning factors that could cause actual results to differ materially from those in forward-looking statements include those discussed under “Risk Factors” in this information statement and in our publicly filed documents referred to in “Where You Can Find More Information.” Alcoa Corporation disclaims any intention or obligation to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise, except as required by applicable law.

 

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THE SEPARATION AND DISTRIBUTION

Overview

On September 28, 2015, ParentCo announced its intention to separate its Alcoa Corporation Business from its Arconic Business. The separation will occur by means of a pro rata distribution to ParentCo shareholders of at least 80.1% of the outstanding shares of common stock of Alcoa Corporation, which was formed to hold ParentCo’s Bauxite, Alumina, Aluminum, Cast Products and Energy businesses ParentCo’s rolling mill operations in Warrick, Indiana, and ParentCo’s 25.1% interest in the Ma’aden Rolling Company in Saudi Arabia. Following the distribution, ParentCo shareholders will own directly at least 80.1% of the outstanding shares of common stock of Alcoa Corporation, and Alcoa Corporation will be a separate company from ParentCo. ParentCo will retain no more than 19.9% of the outstanding shares of common stock of Alcoa Corporation following the distribution. Prior to completing the separation, ParentCo may adjust the percentage of Alcoa Corporation shares to be distributed to ParentCo shareholders and retained by ParentCo in response to market and other factors, and it will amend this information statement to reflect any such adjustment. The number of shares of ParentCo common stock you own will not change as a result of the separation.

In connection with such distribution, Alcoa Corporation has incurred approximately $1,250 million of indebtedness, and we expect that:

 

    ParentCo will complete an internal reorganization, which we refer to as the “internal reorganization,” as a result of which Alcoa Corporation will become the parent company of the ParentCo operations comprising, and the entities that will conduct, the Alcoa Corporation Business;

 

    ParentCo will change its name to “Arconic Inc.”; and

 

    “Alcoa Upstream Corporation” will change its name to “Alcoa Corporation”.

On September 29, 2016, the ParentCo Board of Directors approved the distribution of approximately 80.1% of Alcoa Corporation’s issued and outstanding shares of common stock on the basis of one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held as of the close of business on October 20, 2016, the record date for the distribution. Arconic currently plans to dispose of all of the Alcoa Corporation common stock that it retains after the distribution, which may include dispositions through one or more subsequent exchanges for debt or equity or a sale of its shares for cash, following a 60-day lock-up period and within the 18-month period following the distribution, subject to market conditions. Any shares not disposed of by Arconic during such 18-month period will be sold or otherwise disposed of by Arconic consistent with the business reasons for the retention of those shares, but in no event later than five years after the distribution.

At 12:01 a.m., Eastern Time, on November 1, 2016, the distribution date, each ParentCo shareholder will receive one share of Alcoa Corporation common stock for every three shares of ParentCo common stock held at the close of business on the record date for the distribution, as described below. ParentCo shareholders will receive cash in lieu of any fractional shares of Alcoa Corporation common stock that they would have received after application of this ratio. Upon completion of the separation, each ParentCo shareholder as of the record date will continue to own shares of ParentCo (which, as a result of ParentCo’s name change to Arconic, will be Arconic shares) and will own a proportionate share of the outstanding common stock of Alcoa Corporation to be distributed. You will not be required to make any payment, surrender or exchange your ParentCo common stock or take any other action to receive your shares of Alcoa Corporation common stock in the distribution. The distribution of Alcoa Corporation common stock as described in this information statement is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “—Conditions to the Distribution.”

 

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Reasons for the Separation

The ParentCo Board of Directors believes that separating its Alcoa Corporation Business from its Arconic Business is in the best interests of ParentCo and its shareholders for a number of reasons, including:

 

    Management Focus on Core Business and Distinct Opportunities. The separation will permit each company to more effectively pursue its own distinct operating priorities and strategies, and will enable the management teams of each company to focus on strengthening its core business, unique operating and other needs, and pursue distinct and targeted opportunities for long-term growth and profitability.

 

    Allocation of Financial Resources and Separate Capital Structures. The separation will permit each company to allocate its financial resources to meet the unique needs of its own business, which will allow each company to intensify its focus on its distinct strategic priorities. The separation will also allow each business to more effectively pursue its own distinct capital structures and capital allocation strategies.

 

    Targeted Investment Opportunity. The separation will allow each company to more effectively articulate a clear investment thesis to attract a long-term investor base suited to its business, and will facilitate each company’s access to capital by providing investors with two distinct and targeted investment opportunities.

 

    Creation of Independent Equity Currencies. The separation will create two independent equity securities, affording Alcoa Corporation and Arconic direct access to the capital markets and enabling each company to use its own industry-focused stock to consummate future acquisitions or other restructuring transactions. As a result, each company will have more flexibility to capitalize on its unique strategic opportunities.

 

    Employee Incentives, Recruitment and Retention. The separation will allow each company to more effectively recruit, retain and motivate employees through the use of stock-based compensation that more closely reflects and aligns management and employee incentives with specific growth objectives, financial goals and business performance. In addition, the separation will allow incentive structures and targets at each company to be better aligned with each underlying business. Similarly, recruitment and retention will be enhanced by more consistent talent requirements across the businesses, allowing both recruiters and applicants greater clarity and understanding of talent needs and opportunities associated with the core business activities, principles and risks of each company.

 

    Other Business Rationale. The separation will separate and simplify the structures currently required to manage two distinct and differing underlying businesses. These differences include exposure to industry cycles, manufacturing and procurement methods, customer base, research and development activities, and overhead structures.

The ParentCo Board of Directors also considered a number of potentially negative factors in evaluating the separation, including:

 

    Risk of Failure to Achieve Anticipated Benefits of the Separation. We may not achieve the anticipated benefits of the separation for a variety of reasons, including, among others: the separation will require significant amounts of management’s time and effort, which may divert management’s attention from operating our business; and following the separation, we may be more susceptible to market fluctuations, including fluctuations in commodities prices, and other adverse events than if we were still a part of ParentCo because our business will be less diversified than ParentCo’s business prior to the completion of the separation.

 

   

Loss of Scale and Increased Administrative Costs. As a current part of ParentCo, Alcoa Corporation takes advantage of ParentCo’s size and purchasing power in procuring certain goods and services. After the separation, as a standalone company, we may be unable to obtain these goods, services and technologies at prices or on terms as favorable as those ParentCo obtained prior to completion of the

 

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separation. In addition, as a part of ParentCo, Alcoa Corporation benefits from certain functions performed by ParentCo, such as accounting, tax, legal, human resources and other general and administrative functions. After the separation, Arconic will not perform these functions for us, other than certain functions that will be provided for a limited time pursuant to the transition services agreement, and, because of our smaller scale as a standalone company, our cost of performing such functions could be higher than the amounts reflected in our historical financial statements, which would cause our profitability to decrease.

 

    Disruptions and Costs Related to the Separation. The actions required to separate Arconic’s and Alcoa Corporation’s respective businesses could disrupt our operations. In addition, we will incur substantial costs in connection with the separation and the transition to being a standalone public company, which may include accounting, tax, legal and other professional services costs, recruiting and relocation costs associated with hiring key senior management personnel who are new to Alcoa Corporation, tax costs and costs to separate information systems.

 

    Limitations on Strategic Transactions. Under the terms of the tax matters agreement that we will enter into with ParentCo, we will be restricted from taking certain actions that could cause the distribution or certain related transactions to fail to qualify as tax-free transactions under applicable law. These restrictions may limit for a period of time our ability to pursue certain strategic transactions and equity issuances or engage in other transactions that might increase the value of our business.

 

    Uncertainty Regarding Stock Prices. We cannot predict the effect of the separation on the trading prices of Alcoa Corporation or Arconic common stock or know with certainty whether the combined market value of one-third of a share of our common stock and one share of Arconic common stock will be less than, equal to or greater than the market value of one share of ParentCo common stock prior to the distribution.

In determining to pursue the separation, the ParentCo Board of Directors concluded the potential benefits of the separation outweighed the foregoing factors. See the sections entitled “The Separation and Distribution—Reasons for the Separation” and “Risk Factors” included elsewhere in this information statement.

Reasons for Arconic’s Retention of Up to 19.9% of Alcoa Corporation Shares

In considering the appropriate structure for the separation, ParentCo determined that, immediately after the distribution becomes effective, Arconic will own no more than 19.9% of the outstanding shares of common stock of Alcoa Corporation. In light of recent volatile commodity market conditions and conditions in the high-yield debt market, Arconic’s retention of Alcoa Corporation shares positions both companies with appropriate capital structures, liquidity, and financial flexibility and resources that support their individual business strategies. The retention enables Alcoa Corporation to be separated with low leverage, and thus significant flexibility to manage through future market cycles. At the same time, the retention reduces Arconic’s reliance on Alcoa Corporation raising debt in the current high-yield market environment to fund payments to Arconic to optimize its own capital structure. The retention of Alcoa Corporation shares strengthens Arconic’s balance sheet by providing Arconic a liquid security that can be monetized or exchanged to accelerate debt reduction and/or fund future growth initiatives, thereby facilitating an appropriate capital structure and financial flexibility necessary for Arconic to execute its growth strategy. Arconic’s retained interest shows confidence in the future of Alcoa Corporation and will allow Arconic’s balance sheet to benefit from any near-term improvements in commodity markets. Arconic intends to responsibly dispose of any Alcoa Corporation common stock that it retains after the distribution, which may include dispositions through one or more subsequent exchanges for debt or equity or a sale of its shares for cash, following a 60-day lock-up period and within the 18-month period following the distribution, subject to market conditions. Any shares not disposed of by Arconic during such 18-month period will be sold or otherwise disposed of by Arconic consistent with the business reasons for the retention of those shares, but in no event later than five years after the distribution. ParentCo intends to continue to monitor market conditions in the commodity and high-yield debt market, and to assess the impact of each on the ultimate structure of the separation.

 

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Formation of Alcoa Corporation

Alcoa Upstream Corporation was formed in Delaware on March 10, 2016 for the purpose of holding ParentCo’s Alcoa Corporation Business, and it will be renamed Alcoa Corporation in connection with the separation and distribution. As part of the plan to separate the Alcoa Corporation Business from the remainder of its businesses, in connection with the internal reorganization, ParentCo plans to transfer, or otherwise ensure the transfer of, the equity interests of certain entities that are expected to operate the Alcoa Corporation Business and the assets and liabilities of the Alcoa Corporation Business to Alcoa Corporation prior to the distribution.

When and How You Will Receive the Distribution

With the assistance of Computershare Trust Company, N.A., the distribution agent for the distribution, (the “distribution agent” or “Computershare”), ParentCo expects to distribute Alcoa Corporation common stock at 12:01 a.m., Eastern Time, on November 1, 2016, the distribution date, to all holders of outstanding ParentCo common stock as of the close of business on October 20, 2016, the record date for the distribution. Computershare, which currently serves as the transfer agent and registrar for ParentCo common stock, will serve as the settlement and distribution agent in connection with the distribution and the transfer agent and registrar for Alcoa Corporation common stock.

If you own ParentCo common stock as of the close of business on the record date for the distribution, Alcoa Corporation common stock that you are entitled to receive in the distribution will be issued electronically, as of the distribution date, to you in direct registration form or to your bank or brokerage firm on your behalf. If you are a registered holder, Computershare will then mail you a direct registration account statement that reflects your shares of Alcoa Corporation common stock. If you hold your ParentCo shares through a bank or brokerage firm, your bank or brokerage firm will credit your account for the Alcoa Corporation shares. Direct registration form refers to a method of recording share ownership when no physical share certificates are issued to shareholders, as is the case in this distribution. If you sell ParentCo common stock in the “regular-way” market up to and including the distribution date, you will be selling your right to receive shares of Alcoa Corporation common stock in the distribution.

Commencing on or shortly after the distribution date, if you hold physical share certificates that represent your ParentCo common stock and you are the registered holder of the shares represented by those certificates, the distribution agent will mail to you an account statement that indicates the number of shares of Alcoa Corporation common stock that have been registered in book-entry form in your name.

Most ParentCo shareholders hold their common stock through a bank or brokerage firm. In such cases, the bank or brokerage firm is said to hold the shares in “street name” and ownership would be recorded on the bank or brokerage firm’s books. If you hold your ParentCo common stock through a bank or brokerage firm, your bank or brokerage firm will credit your account for the Alcoa Corporation common stock that you are entitled to receive in the distribution. If you have any questions concerning the mechanics of having shares held in “street name,” please contact your bank or brokerage firm.

Transferability of Shares You Receive

Shares of Alcoa Corporation common stock distributed to holders in connection with the distribution will be transferable without registration under the Securities Act, except for shares received by persons who may be deemed to be our affiliates. Persons who may be deemed to be our affiliates after the distribution generally include individuals or entities that control, are controlled by or are under common control with us, which may include certain of our executive officers, directors or principal shareholders. Securities held by our affiliates will be subject to resale restrictions under the Securities Act. Our affiliates will be permitted to sell shares of our common stock only pursuant to an effective registration statement or an exemption from the registration requirements of the Securities Act, such as the exemption afforded by Rule 144 under the Securities Act. We will agree that, following the 60-day period commencing immediately after the effective time of the distribution, upon the request of Arconic, we will use commercially reasonable efforts to effect a registration under applicable federal and state securities laws of any shares of our common stock retained by Arconic.

 

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Number of Shares of Alcoa Corporation Common Stock You Will Receive

For every three shares of ParentCo common stock that you own at the close of business on October 20, 2016, the record date for the distribution, you will receive one of Alcoa Corporation common stock on the distribution date. ParentCo will not distribute any fractional shares of Alcoa Corporation common stock to its shareholders. Instead, if you are a registered holder, Computershare will aggregate fractional shares into whole shares, sell the whole shares in the open market at prevailing market prices and distribute the aggregate cash proceeds (net of discounts and commissions) of the sales pro rata (based on the fractional share such holder would otherwise be entitled to receive) to each holder who otherwise would have been entitled to receive a fractional share in the distribution. The distribution agent, in its sole discretion, without any influence by ParentCo or Alcoa Corporation, will determine when, how, and through which broker-dealer and at what price to sell the whole shares. Any broker-dealer used by the distribution agent will not be an affiliate of either ParentCo or Alcoa Corporation and the distribution agent is not an affiliate of either ParentCo or Alcoa Corporation. Neither Alcoa Corporation nor ParentCo will be able to guarantee any minimum sale price in connection with the sale of these shares. Recipients of cash in lieu of fractional shares will not be entitled to any interest on the amounts of payment made in lieu of fractional shares.

The net cash proceeds of these sales of fractional shares will be taxable for U.S. federal income tax purposes. See “Material U.S. Federal Income Tax Consequences” for an explanation of the material U.S. federal income tax consequences of the distribution. If you hold physical certificates for shares of ParentCo common stock and are the registered holder, you will receive a check from the distribution agent in an amount equal to your pro rata share of the net cash proceeds of the sales. We estimate that it will take approximately two weeks from the distribution date for the distribution agent to complete the distributions of the net cash proceeds. If you hold your shares of ParentCo common stock through a bank or brokerage firm, your bank or brokerage firm will receive, on your behalf, your pro rata share of the net cash proceeds of the sales and will electronically credit your account for your share of such proceeds.

Treatment of Equity-Based Compensation

In connection with the separation, equity-based awards granted by ParentCo prior to the separation are expected to be treated as described below. As of the separation, these awards will be held by (i) current and former employees of Alcoa Corporation and its subsidiaries and certain other former employees classified as former employees of Alcoa Corporation for purposes of post-separation compensation and benefits matters (collectively, the “Alcoa Corporation Employees and Alcoa Corporation Former Employees”) and (ii) current and former employees of Arconic and its subsidiaries and certain other former employees classified as former employees of Arconic for purposes of post-separation compensation and benefits matters (collectively, the “Arconic Employees and Arconic Former Employees”).

Stock Options

Stock Options Held by Alcoa Corporation Employees and Alcoa Corporation Former Employees. Each award of ParentCo stock options held by an Alcoa Corporation Employee or Alcoa Corporation Former Employee will be converted into an award of stock options with respect to Alcoa Corporation common stock. The exercise price of, and number of shares subject to, each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award as measured immediately before and immediately after the separation, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award immediately prior to the separation.

Stock Options Held by Arconic Employees and Former Arconic Employees. Each award of ParentCo stock options held by an Arconic Employee or Former Arconic Employee will continue to relate to ParentCo common stock (which, as a result of ParentCo’s name change to Arconic, will be Arconic common stock after the separation), provided that the exercise price of, and number of shares subject to, each such award will be adjusted

 

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in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award as measured immediately before and immediately after the separation, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award immediately prior to the separation.

Restricted Share Units

Restricted ShareStock Units Held by Alcoa Corporation Employees and Alcoa Corporation Former Employees. Each award of ParentCo restricted share units held by an Alcoa Corporation Employee or Alcoa Corporation Former Employee will be converted into an award of restricted share units with respect to Alcoa Corporation common stock. The number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award as measured immediately before and immediately after the separation, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award immediately prior to the separation.

Restricted Stock Units Held by Arconic Employees and Former Arconic Employees. Each award of ParentCo restricted share units held by an Arconic Employee or Former Arconic Employee will continue to relate to ParentCo common stock (which, as a result of ParentCo’s name change to Arconic, will be Arconic common stock after the separation), provided that the number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award as measured immediately before and immediately after the separation, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award immediately prior to the separation.

Performance-Based Restricted Share Units

Performance-Based Restricted Share Units Held by Alcoa Corporation Employees and Alcoa Corporation Former Employees. Each award of ParentCo performance-based restricted share units held by an Alcoa Corporation Employee or Alcoa Corporation Former Employee will be converted into an award of performance-based restricted share units with respect to Alcoa Corporation common stock. The number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award as measured immediately before and immediately after the separation, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award immediately prior to the separation.

Performance-Based Restricted Share Units Held by Arconic Employees and Former Arconic Employees. Each award of ParentCo performance-based restricted share units held by an Arconic Employee or Former Arconic Employee will continue to relate to ParentCo common stock (which, as a result of ParentCo’s name change to Arconic, will be Arconic common stock after the separation), provided that the number of shares subject to each such award will be adjusted in a manner intended to preserve the aggregate intrinsic value of the original ParentCo award as measured immediately before and immediately after the separation, subject to rounding. Such adjusted award will otherwise continue to have the same terms and conditions that applied to the original ParentCo award immediately prior to the separation.

Internal Reorganization

As part of the separation, and prior to the distribution, ParentCo and its subsidiaries expect to complete an internal reorganization in order to transfer to Alcoa Corporation the Alcoa Corporation Business that it will hold following the separation. Among other things and subject to limited exceptions, the internal reorganization is expected to result in Alcoa Corporation owning, directly or indirectly, the operations comprising, and the entities that conduct, the Alcoa Corporation Business.

 

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The internal reorganization is expected to include various restructuring transactions pursuant to which (i) the operations, assets and liabilities of ParentCo and its subsidiaries used to conduct the Alcoa Corporation Business will be separated from the operations, assets and liabilities of ParentCo and its subsidiaries used to conduct the Arconic Business and (ii) such Alcoa Corporation Business operations, assets and liabilities and investments will be contributed, transferred, allocated through the Pennsylvania division statute (Section 361 et seq. of the Pennsylvania Business Corporation Law) or otherwise allocated to Alcoa Corporation or one of its direct or indirect subsidiaries. Such restructuring transactions may take the form of asset transfers, mergers, demergers, divisions, dividends, contributions and similar transactions, and may involve the formation of new subsidiaries in U.S. and non-U.S. jurisdictions to own and operate the Alcoa Corporation Business or the Arconic Business in such jurisdictions.

As part of this internal reorganization, ParentCo will contribute to Alcoa Corporation certain assets, including equity interests in entities that are expected to conduct the Alcoa Corporation Business.

Following the completion of the internal reorganization and immediately prior to the distribution, Alcoa Corporation will be the parent company of the entities that will conduct the Alcoa Corporation Business, and ParentCo (through subsidiaries other than Alcoa Corporation and its subsidiaries) will remain the parent company of the entities that are expected to conduct the Arconic Business.

Results of the Distribution

After the distribution, Alcoa Corporation will be an independent, publicly traded company. The actual number of shares to be distributed will be determined at the close of business on October 20, 2016, the record date for the distribution, and will reflect any exercise of ParentCo options between the date the ParentCo Board of Directors declares the distribution and the record date for the distribution. The distribution will not affect the number of outstanding shares of ParentCo common stock or any rights of ParentCo shareholders. ParentCo will not distribute any fractional shares of Alcoa Corporation common stock.

We will enter into a separation agreement and other related agreements with ParentCo before the distribution to effect the separation and provide a framework for our relationship with Arconic after the separation. These agreements will provide for the allocation between Arconic and Alcoa Corporation of ParentCo’s assets, liabilities and obligations (including employee benefits, intellectual property, equipment sharing, and tax-related assets and liabilities) attributable to periods prior to Alcoa Corporation’s separation from ParentCo and will govern the relationship between Arconic and Alcoa Corporation after the separation. For a more detailed description of these agreements, see “Certain Relationships and Related Party Transactions.”

Market for Alcoa Corporation Common Stock

There is currently no public trading market for Alcoa Corporation common stock. Alcoa Corporation intends to apply to list its common stock on the NYSE under the symbol “AA.” Alcoa Corporation has not and will not set the initial price of its common stock. The initial price will be established by the public markets.

We cannot predict the price at which Alcoa Corporation common stock will trade after the distribution. In fact, the combined trading prices, after the distribution, of the shares of Alcoa Corporation common stock that each ParentCo shareholder will receive in the distribution and the ParentCo common stock held at the record date for the distribution may not equal the “regular-way” trading price of the ParentCo common stock immediately prior to the distribution. The price at which Alcoa Corporation common stock trades may fluctuate significantly, particularly until an orderly public market develops. Trading prices for Alcoa Corporation common stock will be determined in the public markets and may be influenced by many factors. See “Risk Factors—Risks Related to Our Common Stock.”

 

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Incurrence of Debt

A subsidiary of Alcoa Corporation has incurred certain indebtedness, including (i) a secured revolving credit agreement providing for revolving loans in an aggregate principal amount of up to $1.5 billion and (ii) $1.25 billion of senior notes. Upon release of the senior notes from escrow, Alcoa Corporation intends to pay a substantial portion of the proceeds of the senior notes to Arconic. ParentCo’s existing senior notes are expected to remain an obligation of Arconic after the separation, except to the extent that Arconic uses funds received by it from Alcoa Corporation to repay existing indebtedness. For more information, see “Description of Material Indebtedness.”

Trading Between the Record Date and Distribution Date

Beginning on or shortly before the record date for the distribution and continuing up to and including through the distribution date, ParentCo expects that there will be two markets in ParentCo common stock: a “regular-way” market and an “ex-distribution” market. ParentCo common stock that trades on the “regular-way” market will trade with an entitlement to Alcoa Corporation common stock distributed in the distribution. ParentCo common stock that trades on the “ex-distribution” market will trade without an entitlement to Alcoa Corporation common stock distributed in the distribution. Therefore, if you sell shares of ParentCo common stock in the “regular-way” market up to and including through the distribution date, you will be selling your right to receive shares of Alcoa Corporation common stock in the distribution. If you own ParentCo common stock at the close of business on the record date and sell those shares on the “ex-distribution” market up to and including through the distribution date, you will receive the shares of Alcoa Corporation common stock that you are entitled to receive pursuant to your ownership of shares of ParentCo common stock as of the record date.

Furthermore, beginning on or shortly before the record date for the distribution and continuing up to and including the distribution date, Alcoa Corporation expects that there will be a “when-issued” market in its common stock. “When-issued” trading refers to a sale or purchase made conditionally because the security has been authorized but not yet issued. The “when-issued” trading market will be a market for Alcoa Corporation common stock that will be distributed to holders of ParentCo common stock on the distribution date. If you owned ParentCo common stock at the close of business on the record date for the distribution, you would be entitled to Alcoa Corporation common stock distributed pursuant to the distribution. You may trade this entitlement to shares of Alcoa Corporation common stock, without trading the ParentCo common stock you own, on the “when-issued” market. On the first trading day following the distribution date, “when-issued” trading with respect to Alcoa Corporation common stock will end, and “regular-way” trading will begin.

Conditions to the Distribution

The distribution will be effective at 12:01 a.m., Eastern Time, on November 1, 2016, which is the distribution date, provided that the conditions set forth in the separation agreement have been satisfied (or waived by ParentCo in its sole and absolute discretion), including, among others:

 

    the SEC declaring effective the registration statement of which this information statement forms a part; there being no order suspending the effectiveness of the registration statement in effect; and no proceedings for such purposes having been instituted or threatened by the SEC;

 

    the mailing of this information statement to ParentCo shareholders;

 

    (i) the private letter ruling from the IRS received by ParentCo regarding certain U.S. federal income tax matters relating to the separation and distribution being satisfactory to the Board of Directors and remaining valid, and (ii) the receipt by ParentCo of an opinion of its outside counsel, satisfactory to the ParentCo Board of Directors, regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes under Sections 355 and 368(a)(1)(D) of the Code;

 

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    the internal reorganization having been completed and the transfer of assets and liabilities of the Alcoa Corporation Business from ParentCo to Alcoa Corporation, and the transfer of assets and liabilities of the Arconic Business from Alcoa Corporation to ParentCo, having been completed in accordance with the separation and distribution agreement;

 

    the receipt of one or more opinions from an independent appraisal firm to the ParentCo Board of Directors as to the solvency of ParentCo and Alcoa Corporation after the completion of the distribution, in each case in a form and substance acceptable to the ParentCo Board of Directors in its sole and absolute discretion;

 

    all actions necessary or appropriate under applicable U.S. federal, state or other securities or blue sky laws and the rule and regulations thereunder having been taken or made and, where applicable, having become effective or been accepted;

 

    the execution of certain agreements contemplated by the separation and distribution agreement;

 

    no order, injunction or decree issued by any government authority of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the separation, the distribution or any of the related transactions being in effect;

 

    the shares of Alcoa Corporation common stock to be distributed having been accepted for listing on the NYSE, subject to official notice of distribution;

 

    ParentCo having received certain proceeds from the financing arrangements described under “Description of Material Indebtedness” and being satisfied in its sole and absolute discretion that, as of the effective time of the distribution, it will have no further liability under such arrangements; and

 

    no other event or development existing or having occurred that, in the judgment of ParentCo’s Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the separation, the distribution and the other related transactions.

ParentCo will have the sole and absolute discretion to determine (and change) the terms of, and whether to proceed with, the distribution and, to the extent it determines to so proceed, to determine the record date for the distribution and the distribution date, and the distribution ratio, as well as to reduce the amount of outstanding shares of common stock of Alcoa Corporation that it will retain, if any, following the distribution. ParentCo will also have sole and absolute discretion to waive any of the conditions to the distribution. ParentCo does not intend to notify its shareholders of any modifications to the terms of the separation or distribution that, in the judgment of its Board of Directors, are not material. For example, the ParentCo Board of Directors might consider material such matters as significant changes to the distribution ratio and the assets to be contributed or the liabilities to be assumed in the separation. To the extent that the ParentCo Board of Directors determines that any modifications by ParentCo materially change the material terms of the distribution, ParentCo will notify ParentCo shareholders in a manner reasonably calculated to inform them about the modification as may be required by law, by, for example, publishing a press release, filing a current report on Form 8-K or circulating a supplement to this information statement.

 

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DIVIDEND POLICY

The payment of any dividends in the future, and the timing and amount thereof, is within the discretion of Alcoa Corporation’s Board of Directors. The Board of Directors’ decisions regarding the payment of dividends will depend on many factors, such as our financial condition, earnings, capital requirements, debt service obligations, restrictive covenants in our debt, industry practice, legal requirements, regulatory constraints and other factors that our Board of Directors deems relevant. Our ability to pay dividends will depend on our ongoing ability to generate cash from operations and on our access to the capital markets. We cannot guarantee that we will pay a dividend in the future or continue to pay any dividends if and when we commence paying dividends.

 

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CAPITALIZATION

The following table sets forth our capitalization as of June 30, 2016 on a historical basis and on a pro forma basis to give effect to the pro forma adjustments included in our unaudited pro forma financial information. The information below is not necessarily indicative of what our capitalization would have been had the separation, distribution and related financing transactions been completed as of June 30, 2016. In addition, it is not indicative of our future capitalization. This table should be read in conjunction with “Unaudited Pro Forma Combined Condensed Financial Statements,” “Selected Historical Combined Financial Data of Alcoa Corporation,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined financial statements and notes included in the “Index to Financial Statements” section of this information statement.

 

     June 30, 2016  
(amounts in millions)    Actual      Pro Forma  
     (Unaudited)  

Cash

     

Cash and cash equivalents

   $ 332       $ 632   
  

 

 

    

 

 

 

Capitalization:

     

Debt Outstanding

     

Long-term debt, including amount due within one year

   $ 255       $ 1,463   
  

 

 

    

 

 

 

Equity

     

Common stock, par value

   $ —         $ 182   

Additional paid-in capital

     —           10,165   

Net parent investment

     11,137         —     

Accumulated other comprehensive loss

     (1,456      (4,160
  

 

 

    

 

 

 

Total net parent investment and accumulated other comprehensive loss

     9,681         6,187   
  

 

 

    

 

 

 

Noncontrolling interest

     2,180         2,180   
  

 

 

    

 

 

 

Total equity

     11,861         8,367   
  

 

 

    

 

 

 

Total capitalization

   $ 12,116       $ 9,830   
  

 

 

    

 

 

 

 

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SELECTED HISTORICAL COMBINED FINANCIAL DATA OF ALCOA CORPORATION

The following table presents the selected historical combined financial data for Alcoa Corporation. We derived the selected statement of combined operations data for the six months ended June 30, 2016 and 2015 and the selected combined balance sheet data as of June 30, 2016 from our unaudited Combined Financial Statements included in this information statement. We derived the selected statement of combined operations data for the years ended December 31, 2015, 2014, and 2013, and the selected combined balance sheet data as of December 31, 2015 and 2014, as set forth below, from our audited Combined Financial Statements, which are included in the “Index to Financial Statements” section of this information statement. We derived the selected statement of combined operations data for the years ended December 31, 2012 and 2011 and the selected combined balance sheet data as of December 31, 2013, 2012, and 2011 from Alcoa Corporation’s unaudited underlying financial records, which were derived from the financial records of ParentCo and are not included in this information statement.

The historical results do not necessarily indicate the results expected for any future period. To ensure a full understanding, you should read the selected historical combined financial data presented below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and accompanying notes included elsewhere in this information statement.

 

     As of and for the
six months ended
June 30,
     As of and for the year ended December 31,  
     2016     2015      2015     2014     2013     2012     2011  
(dollars in millions, except realized prices;
shipments in thousands of metric tons (kmt))
                                           

Sales

   $ 4,452      $ 6,069       $ 11,199      $ 13,147      $ 12,573      $ 13,060      $ 14,709   

Amounts attributable to Alcoa Corporation:

               

Net (loss) income

   $ (265   $ 69       $ (863   $ (256   $ (2,909   $ (219   $ 129   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Shipments of alumina (kmt)

     4,434        5,244         10,755        10,652        9,966        9,295        9,218   

Shipments of aluminum (kmt)

     1,534        1,612         3,227        3,518        3,742        3,933        3,932   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Alcoa Corporation’s average realized price per metric ton of primary aluminum

   $ 1,835      $ 2,331       $ 2,092      $ 2,396      $ 2,280      $ 2,353      $ 2,669   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

   $ 16,374      $ 17,969       $ 16,413      $ 18,680      $ 21,126      $ 24,777      $ 24,772   

Total debt

   $ 255      $ 282       $ 225      $ 342      $ 420      $ 507      $ 759   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS

The Unaudited Pro Forma Combined Condensed Financial Statements presented below have been derived from Alcoa Corporation’s historical combined financial statements included in this information statement. While the historical combined financial statements reflect the past financial results of the Alcoa Corporation Business, these pro forma statements give effect to the separation of that business into a standalone, publicly traded company. The pro forma adjustments to reflect the separation include:

 

    the effect of our post-separation capital structure, which includes the incurrence by a subsidiary of Alcoa Corporation of $1,250 million of indebtedness as described in this information statement;

 

    the expected transfer to Alcoa Corporation, upon completion of the separation transaction, of certain pension and postretirement benefit plan liabilities that were not included in the historical combined balance sheet;

 

    the distribution of at least 80.1% of our issued and outstanding common stock by ParentCo in connection with the separation; and

 

    the impact of, and transactions contemplated by, the separation and distribution agreement, including the transition services agreement and tax matters agreement, between us and ParentCo and the provisions contained therein.

The pro forma adjustments are based on available information and assumptions our management believes are reasonable; however, such adjustments are subject to change as the costs of operating as a standalone company are determined. In addition, such adjustments are estimates and may not prove to be accurate. The Unaudited Pro Forma Combined Condensed Financial Statements have been derived from our historical combined financial statements included in this information statement and include certain adjustments to give effect to events that are (i) directly attributable to the distribution and related transaction agreements, (ii) factually supportable, and (iii) with respect to the statement of operations, expected to have a continuing impact on Alcoa Corporation. Any change in costs or expenses associated with operating as a standalone company would constitute projected amounts based on estimates and, therefore, are not factually supportable; as such, the Unaudited Pro Forma Combined Condensed Financial Statements have not been adjusted for any such estimated changes.

The Unaudited Pro Forma Statement of Combined Operations for the fiscal year ended December 31, 2015 and the six months ended June 30, 2016 has been prepared as though the separation occurred on January 1, 2015. The Unaudited Pro Forma Combined Balance Sheet at June 30, 2016 has been prepared as though the separation occurred on June 30, 2016. The Unaudited Pro Forma Combined Condensed Financial Statements are for illustrative purposes only, and do not reflect what our financial position and results of operations would have been had the separation occurred on the dates indicated and are not necessarily indicative of our future financial position and future results of operations.

The Unaudited Pro Forma Combined Condensed Financial Statements should be read in conjunction with our historical combined financial statements, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this information statement. The Unaudited Pro Forma Combined Condensed Financial Statements constitute forward-looking information and are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Cautionary Statement Concerning Forward-Looking Statements” included elsewhere in this information statement.

 

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Alcoa Corporation

Unaudited Pro Forma Statement of Combined Operations

(in millions, except per share data)

 

For the six months ended June 30, 2016

   As Reported     Pro Forma
Adjustments
           Pro Forma        

Total sales

   $ 4,452           $ 4,452     
  

 

 

        

 

 

   

Cost of goods sold (exclusive of expenses below)

     3,797        (15     (a)         3,782     

Selling, general administrative, and other expenses

     175        (31     (b)         144     

Research and development expenses

     28             28     

Provision for depreciation, depletion, and amortization

     355             355     

Restructuring and other charges

     92             92     

Interest expense

     130        (72     (c)         58     

Other expenses, net

     16             16     
  

 

 

        

 

 

   

Total costs and expenses

     4,593             4,475     
  

 

 

        

 

 

   

Loss before income taxes

     (141          (23  

Provision for income taxes

     86        —          (d)         86     
  

 

 

        

 

 

   

Net loss

     (227          (109  

Less: Net income attributable to noncontrolling interests

     38             38     
  

 

 

        

 

 

   

Net loss attributable to Alcoa Corporation

   $ (265        $ (147  

Unaudited pro forma earnings per share:

           

Basic

          $ (0.81     (e)   

Diluted

          $ (0.81     (e)   

Weighted-average shares outstanding:

           

Basic

            182.4        (e)   

Diluted

            182.4        (e)   

 

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Alcoa Corporation

Unaudited Pro Forma Statement of Combined Operations

(in millions, except per share data)

 

For the year ended December 31, 2015 

   As Reported     Pro Forma
Adjustments
           Pro Forma        

Total sales

   $ 11,199           $ 11,199     
  

 

 

        

 

 

   

Cost of goods sold (exclusive of expenses below)

     9,039        (98     (a)         8,941     

Selling, general administrative, and other expenses

     353        (12     (b)         341     

Research and development expenses

     69             69     

Provision for depreciation, depletion, and amortization

     780             780     

Restructuring and other charges

     983             983     

Interest expense

     270        (153     (c)         117     

Other expenses, net

     42             42     
  

 

 

        

 

 

   

Total costs and expenses

     11,536             11,273     
  

 

 

        

 

 

   

Loss before income taxes

     (337          (74  

Provision for income taxes

     402        —          (d)         402     
  

 

 

        

 

 

   

Net loss

     (739          (476  

Less: Net income attributable to noncontrolling interests

     124             124     
  

 

 

        

 

 

   

Net loss attributable to Alcoa Corporation

   $ (863        $ (600  

Unaudited pro forma earnings per share:

           

Basic

          $ (3.30     (e)   

Diluted

          $ (3.30     (e)   

Weighted-average shares outstanding:

           

Basic

            181.7        (e)   

Diluted

            181.7        (e)   

 

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Alcoa Corporation

Unaudited Pro Forma Condensed Combined Balance Sheet

(in millions)

 

June 30, 2016

   As Reported     Pro Forma
Adjustments
           Pro Forma  

Assets

         

Current assets:

         

Cash and cash equivalents

   $ 332        300        (f)       $ 632   

Receivables from customers

     426             426   

Inventories

     1,166             1,166   

Other current assets

     462             462   
  

 

 

        

 

 

 

Total current assets

     2,386             2,686   

Properties, plants, and equipment, net

     9,569             9,569   

Other noncurrent assets

     4,419             4,419   
  

 

 

        

 

 

 

Total Assets

   $ 16,374           $ 16,674   
  

 

 

        

 

 

 

Liabilities

         

Current liabilities:

         

Accounts payable, trade

   $ 1,277           $ 1,277   

Other current liabilities

     832        143        (g)(h)         975   

Long-term debt due within one year

     22             22   
  

 

 

        

 

 

 

Total current liabilities

     2,131             2,274   

Long-term debt, less amount due within one year

     233        1,208        (f)         1,441   

Accrued pension and other postretirement benefits

     424        2,389        (g)         2,813   

Environmental remediation

     206        54        (h)         260   

Asset retirement obligations

     553             553   

Other noncurrent liabilities

     966             966   
  

 

 

        

 

 

 

Total liabilities

     4,513             8,307   
  

 

 

        

 

 

 

Contingencies and commitments

         

Equity

         

Common stock

     —         182        (i)         182   

Additional paid-in capital

     —         10,165        (i)         10,165   

Net parent investment

     11,137        (790     (j)         —    
       (10,347     (i)      

Accumulated other comprehensive loss

     (1,456     (2,704     (g)         (4,160
  

 

 

   

 

 

      

 

 

 

Total net parent investment and accumulated other comprehensive loss

     9,681             6,187   
  

 

 

        

 

 

 

Noncontrolling interest

     2,180             2,180   
  

 

 

        

 

 

 

Total equity

     11,861             8,367   
  

 

 

        

 

 

 

Total Liabilities and Equity

   $ 16,374           $ 16,674   
  

 

 

        

 

 

 

 

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Alcoa Corporation

Notes to Unaudited Pro Forma Combined Financial Statements

(dollars in millions)

 

(a) Reflects the favorable pro forma adjustment of $15 for the six months ended June 30, 2016, and $98 for year ended December 31, 2015, relating to the defined benefit pension and other post-retirement employee benefit (OPEB) plans that were legally separated and created as new plans to be assumed by Alcoa Corporation, had the separation occurred at the beginning of the period presented. On a carve-out basis, the ParentCo plans were accounted for on a multi-employer basis, with related expenses allocated to Alcoa Corporation based primarily on: a) pensionable compensation with respect to active participants; and b) Alcoa Corporation’s revenues as a percentage of ParentCo.’s total segment revenues with respect to ParentCo.’s general corporate participants and closed or sold operations. These historical allocated expenses are higher than the expense that would have been recognized had the new pension and OPEB plans been recorded as direct plans of Alcoa Corporation as of the beginning of the period presented. The new plans have a low ratio of active participants as compared to retired participants for Alcoa Corporation. As such, the amortization period for unrecognized gains and losses was based on the average remaining life expectancy of plan participants (ParentCo shared plans used average remaining service period of active employees).

 

     The plan assumptions used to measure pro forma pension and OPEB expense for the six months ended June 30, 2016, were also used for purposes of measuring pro forma expense for the year ended December 31, 2015.

The calculation of the pro forma adjustment is as follows:

 

     Year ended
December 31, 2015
     Six months ended
June 30, 2016
 

Expense for Shared Plans in historical financial statements

   $ 191       $ 62   

Estimated expense for new separated plans

     93         47   
  

 

 

    

 

 

 

Pro forma adjustment

   $ (98    $ (15
  

 

 

    

 

 

 

 

(b) Reflects the removal of costs related to the separation that were incurred during the historical periods that will not continue to be incurred post-separation. These costs were primarily for legal, tax, and accounting, and other professional fees.

 

(c) Reflects a net adjustment to interest expense resulting from the incurrence by a subsidiary of Alcoa Corporation of third-party indebtedness (see note (f) below) as part of the capital structure to be established at the time of separation and the removal of certain historical interest expense. The interest rate of the incremental $1,250 third-party indebtedness is fixed at 6.75% for $750 and 7.00% for $500, resulting in incremental expense of $46 and $91 (includes amortization of deferred financing costs) for the six months ended June 30, 2016 and the year ended December 31, 2015, respectively. The incremental interest expense from the issuance of additional third-party indebtedness is offset by the elimination of $118 and $244 in interest expense for the six months ended June 30, 2016, and the year ended December 31, 2015, respectively, which represents an allocation of the cost of ParentCo’s debt included in the historical combined financial statements that will not be an obligation of Alcoa Corporation following the separation.

 

(d) Alcoa Corporation does not anticipate any income tax impact related to the pro forma adjustments described in notes (a), (b), and (c) above.

 

(e)

Pro forma earnings per share and pro forma weighted-average shares outstanding are based on the number of shares of ParentCo outstanding as of June 30, 2016, and December 31, 2015, respectively, adjusted for: a) the 1-for-3 reverse stock split for ParentCo’s common stock that was effected on October 5, 2016; b) an assumed distribution ratio of one share of Alcoa Corporation common stock for every three shares of

 

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  ParentCo common stock (giving effect to the 1-for-3 reverse split mentioned above) held on the record date; and c) approximately 36 million additional shares to be retained by ParentCo. While the actual future impact of potential dilution from shares of common stock related to equity awards granted to our employees under ParentCo’s equity plans will depend on various factors, including employees who may change employment from one company to another, we do not currently estimate that the future dilutive impact is material. For the periods presented, the impact of such equity awards would have been anti-dilutive.

 

(f) Reflects the incurrence by a subsidiary of Alcoa Corporation of $1,250 in third-party indebtedness (of which $750 has an eight-year term and $500 has a ten-year term) as part of the capital structure to be established at the time of separation, of which Alcoa Corporation will retain approximately $300 in cash and the remainder will be distributed to ParentCo. Additionally, Alcoa Corporation will have access to a senior secured $1,500 revolving credit facility (estimated 5-year term), which is expected to be undrawn at the time of separation. Total deferred financing costs associated with these instruments are $42, which will be amortized to interest expense over the terms of the respective instruments, and are reflected as a reduction to long-term debt.

 

(g) Reflects the addition of estimated net benefit plan liabilities that will be transferred to Alcoa Corporation in connection with the planned separation. These net benefit plan liabilities have not been included in the historical combined balance sheet of Alcoa Corporation. A full valuation allowance is expected to be recorded against the deferred tax asset associated with the net benefit plan liabilities.

 

(h) Reflects the net addition of $61 (of which $7 is current) in environmental remediation liabilities associated with certain former operating locations of ParentCo, including those related to retained obligations from operating locations previously divested, that will be assumed by Alcoa Corporation in accordance with the terms of the separation and distribution agreement.

 

(i) On the distribution date, ParentCo’s net investment in Alcoa Corporation (after reflecting the impact of the pro forma adjustment described in notes (g), (h), and (j)) will be re-designated as Alcoa Corporation’s shareholders’ equity and will be allocated between common stock and additional paid in capital based on the number of shares of Alcoa Corporation common stock outstanding at the distribution date.

 

(j) Reflects a net adjustment for the distribution of net proceeds for additional third-party indebtedness described in note (f) above and the establishment of both defined benefit plan and environmental remediation liabilities described in notes (g) and (h) above.

 

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BUSINESS

All amounts discussed in this section are in millions of U.S. dollars, unless otherwise indicated. This section discusses Alcoa Corporation’s business assuming the completion of all of the transactions described in this information statement, including the separation.

Our Company

Alcoa Corporation is a global industry leader in the production of bauxite, alumina and aluminum, enhanced by a strong portfolio of value-added cast and rolled products and substantial energy assets. Alcoa Corporation draws on the innovation culture, customer relationships and strong brand of ParentCo. Previously known as the Aluminum Company of America, ParentCo pioneered the aluminum industry 128 years ago with the discovery of the first commercial process for the affordable production of aluminum. Since the discovery, Alcoa aluminum was used in the Wright brothers’ first flight (1903), ParentCo helped produce the first aluminum-sheathed skyscraper (1952), the first all-aluminum vehicle frame (1994) and the first aluminum beer bottle (2004). Today, Alcoa Corporation extends this heritage of product and process innovation as it strives to continuously redefine world-class operational performance at its locations, while partnering with its customers across its range of global products. We believe that the lightweight capabilities and enhanced performance attributes that aluminum offers across a number of end markets are in increasingly high demand and underpin strong growth prospects for Alcoa Corporation.

Alcoa Corporation’s operations encompass all major production processes in the primary aluminum industry value chain, which we believe provides Alcoa Corporation with a strong platform from which to serve our customers in each critical segment. Our portfolio is well-positioned to take advantage of a projected 5% growth in global aluminum demand in 2016 and to be globally cost competitive throughout all phases of the aluminum commodity price cycle.

 

LOGO

Our Strengths

Alcoa Corporation’s significant competitive advantages distinguish us from our peers.

World-class aluminum assets. Alcoa Corporation has an industry-leading, cost-competitive portfolio comprising six businesses—Bauxite, Alumina, Aluminum, Cast Products, Rolled Products and Energy. These assets include the largest bauxite mining portfolio in the world; a first quartile low cost, globally diverse alumina refining system; and a newly optimized aluminum smelting portfolio. With our innovative network of casthouses, we can customize the majority of our primary aluminum production to the precise specifications of our customers and we believe that our rolling mills provide us with a cost competitive and efficient platform to serve the North American packaging market. Our portfolio of energy assets provides third-party sales opportunities, and in some cases, the operational flexibility to either support metal production or capture earnings through third-party power sales. In

 

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addition, the expertise within each business supports the next step in our value chain by providing optimized products and process knowledge.

Our fully integrated Saudi Arabian joint venture, formed in 2009 with the Saudi Arabian Mining Company (Ma’aden), showcases those synergies. Through our Ma’aden joint venture, we have developed the lowest cost aluminum production complex within the worldwide Alcoa Corporation system. The complex includes a bauxite mine, an alumina refinery, an aluminum smelter and a rolling mill. The complex, which relies on low-cost and clean power generation, is an integral part of Alcoa Corporation’s strategy to lower its overall production cost base. By establishing a strong footprint in the growing Middle East region, Alcoa Corporation is also well-positioned to capitalize on growth and new market opportunities in the region. Ma’aden owns a 74.9% interest in the joint venture. Alcoa Corporation owns a 25.1% interest in the smelter and rolling mill; and Alcoa World Alumina and Chemicals (which is owned 60% by Alcoa Corporation) holds a 25.1% interest in the mine and refinery.

Customer relationships across the industry spectrum and around the world. As a well-established world leader in the production of bauxite, alumina and aluminum products, Alcoa Corporation has the scale, global reach and proximity to major markets to deliver our products to our customers and their supply chains all over the world. We believe Alcoa Corporation’s global network, broad product portfolio and extensive technical expertise position us to be the supplier of choice for a range of customers across the entire aluminum value chain. Our global reach also provides portfolio diversity that can enable us to benefit from local or regional economic cycles. Every Alcoa Corporation business segment operates in multiple countries and both hemispheres.

Alcoa Corporation Global Footprint

 

LOGO

Access to key strategic markets. As illustrated by our bauxite mining operations in the Brazilian Amazon rainforest, and our participation in the first fully integrated aluminum complex in Saudi Arabia, our ability to operate successfully and sustainably has allowed us to forge partnerships in new markets, enter markets more efficiently, gain local knowledge, develop local capacity and reduce risk. We believe that these attributes also make us a preferred strategic partner of our current host countries and of those looking to evaluate and build future opportunities in our industry.

Experienced management team with substantial industry expertise. Our management team has a strong track record of performance and execution. Roy C. Harvey, who has served as President of ParentCo’s Global

 

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Primary Products business, will be Alcoa Corporation’s Chief Executive Officer. Mr. Harvey has served more than 14 years in various capacities at ParentCo, including as ParentCo’s Executive Vice President of Human Resources and Environment, Health, Safety and Sustainability and Vice President of Investor Relations. In addition, William F. Oplinger, ParentCo’s Executive Vice President and Chief Financial Officer, will become Alcoa Corporation’s Executive Vice President and Chief Financial Officer. Tómas Már Sigurdsson, the Chief Operating Officer of ParentCo’s Global Primary Products business, will become Alcoa Corporation’s Executive Vice President and Chief Operating Officer. Our senior management team collectively has more than 110 years of experience in the metals and mining, commodities and aluminum industries.

History of operational excellence and continuous productivity improvements. Alcoa Corporation’s dedication to operational excellence has enabled us to withstand unfavorable market conditions. In addition, our productivity program has allowed us to capture cost savings and, by focusing on continuously improving our manufacturing and procurement processes, we seek to produce ongoing cost benefits through the efficient use of raw materials, resources and other inputs. We believe that Alcoa Corporation is positioned to be resilient against market down-swings and to capitalize on the upswings throughout the market cycle.

Positioned for future market scenarios. Since 2010, we have reshaped our portfolio and implemented other changes to our business model in order to make Alcoa Corporation more resilient in times of market volatility. We believe these changes will continue to drive value-creation opportunities in years ahead. Among other disciplined actions, we have:

 

    closed, divested or curtailed 35% of total smelting operating capacity and 25% of total operating refining capacity, enabling us to become more cost competitive;

 

    enhanced our portfolio through our 25.1% investment in the Alcoa Corporation-Ma’aden joint venture in Saudi Arabia, the lowest-cost integrated aluminum complex within the worldwide Alcoa Corporation system, which is now fully operational;

 

    revolutionized the way we sell smelter-grade alumina by shifting our pricing model to an Alumina Price Index (API) or spot pricing, which reflects alumina supply and demand fundamentals;

 

    grown our portfolio of value-added cast product offerings, and increased the percentage of value-added products we sell;

 

    transitioned our non-rolling assets from a regional operating structure to five separate business units focused on Bauxite, Alumina, Aluminum, Cast Products and Energy, and taken significant steps to position each business unit for greater efficiency, profitability and value-creation at each stage of the value chain; and

 

    reduced costs in our Rolled Products operations, and intensified our focus on innovation and value-added products, including aluminum bottle and specialty coatings.

Through our actions, we have improved the position of our alumina refining system on the global alumina cost curve from the 30th percentile in 2010 to the 17th percentile as of the date of this information statement, 4 points better than our 2016 target of the 21st percentile. We have also improved 13 points on the global aluminum cost curve since 2010, to the 38th percentile as of the date of this information statement, achieving our 2016 target. In addition, we have maintained a first quartile 19th percentile position on the global bauxite cost curve.

The combined effect of these actions has been to enhance our business position in a recovering macroeconomic environment for bauxite, alumina, aluminum and aluminum products, which we believe will allow us to weather the market downturns today while preparing to capitalize on upswings in the future.

 

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Dedication to environmental excellence and safety. We regularly review our strategy and performance with a view toward maximizing our efficient use of resources and our effective control of emissions, waste and land use, and to improve our environmental performance. For example, in order to lessen the impact of our mining activities, we have targeted minimum environmental footprints for each mine to achieve by 2020. Three of our mines that were active in 2015 have already achieved their minimum environmental footprint. During 2015, we disturbed a total of 2,988 acres of mine lands worldwide and rehabilitated 3,233 acres. Alcoa Corporation’s business lowered its CO2 intensity by more than 12% between 2010 and 2015, achieving its target of 30% reduction in CO2 intensity from a 2005 baseline, a full five years ahead of target. Alcoa Corporation is also committed to a world-class health and safety culture that has consistently delivered incident rates below industry averages. As part of ParentCo, the Alcoa Corporation business improved its Days Away, Restricted, and Transfer (DART) rate—a measure of days away from work or job transfer due to injury or illnesses—by 62% between 2010 and 2015. Alcoa Corporation intends to continue to intensify our fatality prevention efforts and the safety and well-being of our employees will remain the top priority for Alcoa Corporation.

Our Strategies

As Alcoa Corporation, we intend to continue to be an industry leader in the production of bauxite, alumina, primary aluminum and aluminum cast and rolled products. We will remain focused on cost efficiency and profitability, while also seeking to develop operational and commercial innovations that will sharpen our competitive edge. Our management team has considerable experience in managing through tough market cycles, which we believe will enable us to profit through commodity down-swings. In upswings, we believe our low cost assets will be well positioned to deliver strong returns.

Alcoa Corporation will also remain focused on our core values. We will continue to hold ourselves to the highest standards of environmental and ethical practices, support our communities through Alcoa Foundation grants and employee volunteerism, and maintain transparency in our actions and ongoing dialogue with local stakeholders. We believe that this is essential to support our license to operate in the unique communities in which we do business, ensuring sustainability, and making us the partner of choice. Combined with our continued focus on operational excellence and rigorous management of our assets, we expect to create value for our shareholders and customers and attract and retain highly-qualified talent.

We intend to remain true to our heritage by focusing on the following core principles:

Solution-Oriented Customer Relationships and Programs. We aim to succeed by helping our customers innovate and win in their markets. We will work to provide new and improved products and technical expertise that support our customers’ innovation, which we believe will help to strengthen the demand and consumption of aluminum across the globe for all segments of the value chain. We intend to continue prudently investing in our technical resources to both drive our own efficiencies and to help our customers develop solutions to their challenges.

Establishment of a Strong, Operator-Focused Culture. We are proud of the 128 year history of the Alcoa Corporation business and the culture of innovation and operational excellence upon which we are built. We intend to build a culture for Alcoa Corporation that is true to this heritage and focuses our management, operational processes and decision-making on the critical success of our mines and facilities. To support this effort, we will work to have an overhead structure that is appropriately scaled for our business, and will use our deep industry and operational expertise to navigate an ever-changing and volatile industry.

Operational reliability and excellence. We are committed to the development, maintenance and use of our reliability excellence program, which is designed to optimize the operational availability and integrity of our assets, while driving lower costs. We will also continue to build on our “Center of Excellence (COE)” model, which leverages central research and development and technical expertise within each business to facilitate the transfer of best practices, while also providing rapid response to plant level disruptions.

 

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Aggressive asset portfolio management. Alcoa Corporation will continue to review our portfolio of assets and opportunities to maximize value creation. Having delinked the aluminum value chain by restructuring our upstream businesses into standalone units (Bauxite, Alumina, Aluminum, Cast Products, Rolled Products and Energy), we believe we are well-positioned to pursue opportunities to reduce costs and grow revenue and margins across our portfolio. Examples of these opportunities include the growth of our third party bauxite sales, the ability, in some cases, to flex energy between aluminum production and power sales, the increase in our value-added cast products as a percentage of aluminum sales and the combination of the state-of-the-art rolling mill in Saudi Arabia and our Warrick rolling mill’s current products and customer relationships. We will also continue to monitor our assets relative to market conditions, industry trends and the position of those assets in their life cycle, and we will curtail, sell or close assets that do not meet our value-generation standards.

Efficient use of available capital. In seeking to allocate our capital efficiently, we expect that our near-term priorities will be to sustain valuable assets in the most cost-effective manner while de-levering our balance sheet by managing debt and long term liabilities. We intend to effectively deploy excess cash to maximize long-term shareholder value, with incremental growth opportunities and other value-creating uses of capital evaluated against return of capital to shareholders. We expect that return on capital (ROC) will be the primary metric we use to drive capital allocation decisions.

Disciplined Execution of High-Return Growth Projects. We expect to continue to look for and implement incremental growth projects that meet our rigorous ROC standards, while working to ensure that those projects are completed on time and within budget.

Continuous pursuit of improvements in productivity. A strong focus on productivity will remain a critical component of Alcoa Corporation’s continued success. We believe that our multi-phased approach, consisting of reliability excellence programs, strong procurement strategies across our businesses, and a continuous focus on technical efficiencies, will allow us to continue to drive productivity improvements.

Attracting and Retaining the Best Employees Globally. Our people-processes and career development programs are designed to attract and retain the best employees, whether it be as operators from the local communities in which we work, or senior management with experiences that can strengthen our ability to execute. We will strive to harness the collective creativity and diversity of thought of our workforce to drive better outcomes and to design, build and implement improvements to our processes and products.

Each of Alcoa Corporation’s six businesses provides a solid foundation upon which to grow.

Premier bauxite position. Alcoa Corporation is the world’s largest bauxite miner, with 45.3 million bone dry metric tons of production in 2015, enjoying a first-quartile cost curve position. We have access to large bauxite deposit areas with mining rights that extend in most cases more than 20 years. We have ownership in seven active bauxite mines globally, four of which we operate, that are strategically located near key Atlantic and Pacific markets, including the Huntly mine in Australia, the second largest bauxite mine in the world. In addition to supplying bauxite to our own alumina refining system, we are seeking to grow our newly developed third-party bauxite sales business. For example, during the third quarter of 2015, Alcoa Corporation’s affiliate, Alcoa of Australia Limited, received permission from the Government of Western Australia to export trial shipments from its Western Australia mines. In addition, we have secured multiple bauxite supply contracts valued at more than $410 million of revenue over 2016 and 2017. We intend to selectively grow our industry-leading assets, continue to build upon our solid operational strengths and develop new ore reserves. We intend to maintain our focus on mine reclamation and rehabilitation, which we believe not only benefits our current operations, but can facilitate access to new projects in diverse communities and ecosystems globally.

Attractive alumina portfolio. We are also the world’s largest alumina producer, with a highly competitive first-quartile cost curve position. Alcoa Corporation has nine refineries on five continents, including one of the world’s largest alumina production facilities, the Pinjarra refinery in Western Australia. In addition to supplying

 

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our aluminum smelters with high quality feedstock, we also have significant alumina sales to third parties, with almost 70% of 2015 production being sold externally. Our operations are strategically located for access to growing markets in Asia, the Middle East and Latin America. We are improving our alumina margins by continuing to shift the pricing of our third party smelter-grade alumina sales from the historical London Metal Exchange (LME) aluminum-based pricing to API pricing which better reflects alumina production cost and market fundamentals. In 2015, we grew the percentage of third-party smelter grade alumina shipments that were API or spot-priced to 75%, up from 68% in 2014 and up from 5% in 2010. In 2016, we expect that approximately 85% of our third-party alumina shipments will be based on API or spot pricing. We have also steadily increased our system-wide capacity over the past decade through a combination of operational improvements and incremental capacity projects, effectively adding capacity equivalent to a new refinery. We intend to maintain our first quartile global cost position for Alcoa Corporation’s Alumina business while incrementally growing capacity and continuously striving for sustained operational excellence.

Smelting portfolio positioned to benefit as aluminum demand increases. As a global aluminum producer with a second-quartile cost curve portfolio, we believe that Alcoa Corporation is well positioned to benefit from robust growth in aluminum demand. We estimate record global aluminum demand in 2016 of 59.7 million metric tons, up 5% over 2015. Global aluminum demand was expected to double between 2010 and 2020 and, through the first half of the decade, demand growth tracked ahead of the projection. We expect that our proximity to major markets—with over 50% of our capacity located in Canada, Iceland and Norway, close to the large North American and European markets—will give us a strategic advantage in capitalizing on growth in aluminum demand. In addition, our 25.1% ownership stake in the low-cost aluminum complex in Saudi Arabia, as well as our proven track record of taking actions to optimize our operations, makes us well-positioned to benefit from improved market conditions in the future. Furthermore, with approximately 75% of our smelter power needs contractually secured through 2022, we believe that Alcoa Corporation is well positioned to manage that important dimension of our cost base. Our Aluminum business intends to continue its pursuit of operating efficiencies and incremental capacity expansion projects. We intend to react quickly to market cycles to curtail unprofitable facilities, if necessary, but also maintain optionality to profit from higher metal price environments through the restart of idled capacity.

 

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Global network of casthouses. Alcoa Corporation currently operates 15 casthouses providing value-added products to customers in growing markets. We also have three casthouses that are currently curtailed. In our Cast Products business, our aim is to partner with our customers to develop solutions that support their success by providing them with superior quality products, customer service and technical support. Our network of casthouses has enabled us to steadily grow our cast products business by offering differentiated, value-added aluminum products that are cast into specific shapes to meet customer demand. We intend to continue to improve the value of our installed capacity through productivity and technology gains, and will look for opportunities to add new capacity and develop new product lines in markets where we believe superior returns can be realized. Value-added products grew to 67% of total Cast Products shipments in 2015, compared to 65% in 2014 and 57% in 2010. Our value-added product portfolio has been profitable throughout the primary aluminum market cycle and, from 2010 to 2015, our casting business realized $1.6 billion in incremental margins through value-added sales when compared to selling unalloyed commodity grade ingot. We have also introduced EZCAST™, VERSACAST™, SUPRACAST™ and EVERCAST™ advanced alloys with improved thermal performance and corrosion resistance that have already been qualified with top-tier original equipment manufacturers. Additional trials are underway and more are planned in 2016.

 

LOGO

Efficient and focused rolling mills. Alcoa Corporation has rolling operations in Warrick, Indiana and Saudi Arabia which, together, serve the North American aluminum can sheet market. The Warrick Rolling Mill is focused on packaging, producing can body stock, can end and tab stock, bottle stock and food can stock, and industrial sheet and lithographic sheet. The Ma’aden Rolling Mill currently produces can body stock, can end and tab stock, and hot-rolled strip for finishing into automotive sheet. Following the separation, it is anticipated that the facilities manufacturing products for the North American can packaging market will be located only at the Warrick and Ma’aden Rolling Mills, and that the Arconic rolling mills will not compete in this market. As the packaging market in North America has become highly commoditized, we believe that our experience in, and focus on, operational excellence and continuous productivity improvements will be key competitive advantages. We intend to lower costs through productivity improvements, improved capacity utilization and targeted capital deployment.

Substantial energy assets. Our Energy portfolio will continue to be focused on value creation by seeking to lower overall operational costs and maintaining flexibility to sell power or consume it internally. Alcoa Corporation has a valuable portfolio of energy assets with power production capacity of approximately 1,685 megawatts, of which approximately 61% is low-cost hydroelectric power. We believe that our energy assets provide us with operational flexibility to profit from market cyclicality. In continuously assessing the energy market environment, we strive to meet in-house energy requirements at the lowest possible cost and also sell power to external customers at attractive profit margins. With approximately 55% of Alcoa Corporation-generated power being sold externally in 2015, we achieved significant earnings from power sales globally. In addition, our team of Energy employees has considerable expertise in managing our external sourcing of energy for our operations, which has enabled us to achieve favorable commercial outcomes. For example, in 2015, we secured an attractive 12-year gas supply agreement (starting in 2020) to power our extensive alumina refinery operations in Western Australia.

 

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Certain Joint Ventures

AWAC

Alcoa World Alumina and Chemicals (AWAC) is an unincorporated global joint venture between Alcoa Corporation and Alumina Limited, a company incorporated under the laws of the Commonwealth of Australia and listed on the Australian Securities Exchange. AWAC consists of a number of affiliated entities that own, operate or have an interest in, bauxite mines and alumina refineries, as well as certain aluminum smelters, in seven countries. Alcoa Corporation owns 60% and Alumina Limited owns 40% of these entities, directly or indirectly, with such entities being consolidated by Alcoa Corporation for financial reporting purposes.

The scope of AWAC generally includes:

 

    Bauxite and Alumina: The mining of bauxite and other aluminous ores as well as the refining and other processing of these ores into alumina and other ancillary operations;

 

    Non-Metallurgical Alumina: The production and sale of non-metallurgical alumina and other alumina-based chemicals; and

 

    Integrated Operations: Ownership and operation of certain primary aluminum smelting, aluminum fabricating and other ancillary facilities.

Alcoa Corporation is the industrial leader of AWAC and provides the operating management for all of the operating entities forming AWAC. The operating management is subject to direction provided by the Strategic Council of AWAC, which is the principal forum for Alcoa Corporation and Alumina Limited to provide direction and counsel to the AWAC companies regarding strategic and policy matters. The Strategic Council consists of five members, three of whom are appointed by Alcoa Corporation (of which one is the Chairman of the Strategic Council), and two of whom are appointed by Alumina Limited (of which one is the Deputy Chairman of the Strategic Council).

All matters before the Strategic Council are decided by a majority vote of the members, except for certain matters which require approval by at least 80% of the members. Following completion of the separation, such matters will include changes to the scope of AWAC; changes in the dividend policy; equity calls in aggregate greater than $1 billion in any year; sales of all or a majority of the AWAC assets; loans from AWAC companies to Alcoa or Alumina Limited; certain acquisitions, divestitures, expansions, curtailments or closures; certain related-party transactions; financial derivatives, hedges or swap transactions; a decision by AWAC companies to file for insolvency; and changes to pricing formula in certain offtake agreements which may be entered into between AWAC companies and Alcoa Corporation or Alumina Limited.

AWAC Operations

AWAC entities’ assets include the following interests:

 

    100% of the bauxite mining, alumina refining, and aluminium smelting operations of AofA;

 

    100% of the refinery assets at Point Comfort, Texas, United States (“Point Comfort”);

 

    100% interest in various mining and refining assets and the Hydro-electric facilities in Suriname;

 

    a 39% interest in the São Luis refinery in Brazil;

 

    a 8.58% interest in the bauxite mining operations of Mineraçāo Rio Do Norte, an international mining consortium;

 

    100% of the Juruti bauxite deposit and mine in Brazil;

 

    100% of the refinery and alumina-based chemicals assets at San Ciprian, Spain;

 

    a 45% interest in Halco (Mining) Inc., a bauxite consortium that owns a 51% interest in Compagnie des Bauxites de Guinée, a bauxite mine in Guinea;

 

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    100% of Alcoa Steamship Company Inc.; and

 

    a 25.1% interest in the mine and refinery in Saudi Arabia.

 

    a 55% interest in the Portland smelter AWAC manages on behalf of the joint venture partners.

Exclusivity

Under the terms of their joint venture agreements, Alcoa Corporation and Alumina Limited have agreed that, subject to certain exceptions, AWAC is their exclusive vehicle for their investments, operations or participation in the bauxite and alumina business, and they will not compete with AWAC in those businesses. In the event of a change of control of either Alcoa Corporation or Alumina Limited, this exclusivity and non-compete restriction will terminate, and the partners will then have opportunities to unilaterally pursue bauxite or alumina projects outside of or within AWAC, subject to certain conditions provided in the Amended and Restated Charter of the Strategic Council.

Equity Calls

The cash flow of AWAC and borrowings are the preferred sources of funding for the needs of AWAC. Should the aggregate annual capital budget of AWAC require an equity contribution from Alcoa Corporation and Alumina Limited, an equity call can be made on 30 days’ notice, subject to certain limitations.

Dividend Policy

Effective on completion of the separation, AWAC will generally be required to distribute at least 50% of the prior calendar quarter’s net income of each AWAC company, and certain AWAC companies will also be required to pay a distribution every three months equal to the amount of available cash above specified thresholds and subject to the forecast cash needs of the company. Alcoa Corporation has also agreed that, after the separation, it will obtain a limited amount of debt funding for the AWAC companies to fund growth projects, subject to certain restrictions.

Leveraging Policy

Debt of AWAC is subject to a limit of 30% of total capital (defined as the sum of debt (net of cash) plus any minority interest plus shareholder equity). The AWAC joint venture will raise a limited amount of debt to fund growth projects within 12 months of it becoming permissible under Alcoa Corporation’s revolving credit line, provided that the amount of debt does not trigger a credit rating downgrade for Alcoa Corporation.

Other Joint Ventures

In December 2009, ParentCo and Saudi Arabian Mining Company (Ma’aden), which was formed by the government of Saudi Arabia to develop its mineral resources and is listed on the Saudi Stock Exchange (Tadawul), entered into a joint venture to develop a fully integrated aluminum complex in the Kingdom of Saudi Arabia. This project is the lowest-cost aluminum production complex within the worldwide Alcoa Corporation system. In its initial phases, the complex includes a bauxite mine with an initial capacity of 4 million bone dry metric tons per year; an alumina refinery with an initial capacity of 1.8 million metric tons per year (mtpy); an aluminum smelter with an initial capacity of ingot, slab and billet of 740,000 mtpy; and a rolling mill with initial capacity of 380,000 mtpy. The smelter, refinery and mine are fully operational. Ma’aden owns a 74.9% interest in the joint venture. Alcoa Corporation owns a 25.1% interest in the smelter and in the rolling mill; and AWAC holds a 25.1% interest in the mine and refinery.

The ABI smelter is a joint venture between Alcoa Corporation and Rio Tinto. Alcoa Corporation is the operating partner and owns 74.95% of the joint venture.

 

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The Machadinho Hydro Power Plant (HPP): Machadinho HPP is a consortium between Alcoa Alumínio (25.8%), Votorantim Energia (33.1%), Tractebel (19.,3%), Vale (8.3%) and other partners (CEEE, InterCement and DME Energetica) located in the Pelotas river, southern Brazil.

Barra Grande Hydro Power Plant (HPP): Barra Grande HPP is a joint venture between Alcoa Alumínio (42.2%), CPFL Energia (25%), Votorantim Energia (15%), InterCement (9%) and DME Energetica (8.8%) located in the Pelotas river, southern Brazil.

Estreito Hydro Power Plant (HPP): Estreito HPP is a consortium between Alcoa Alumínio (25.5%), Tractebel (40.1%), Vale (30%) and InterCement (4.4%) located in the Tocantins river, northern Brazil.

Serra do Facão Hydro Power Plant (HPP): Serra do Facão HPP is a consortium between Alcoa Alumínio (34.9%), Furnas (49.4%), Dme Energetica (10%) and Camargo Correa Energia (5.4%) located in the Sao Marcos river, central-Brazil.

Manicouagan Power Limited Partnership (Manicouagan) is a joint venture between Alcoa Corporation and Hydro Quebec. Manicouagan owns and operates the 335 megawatt McCormick hydroelectric project, which is located on the Manicouagan River in the Province of Quebec. Manicouagan supplies approximately 27% of the electricity requirements of Alcoa Corporation’s Baie-Comeau, Quebec, smelter. Alcoa Corporation owns 40% of the joint venture.

The Strathcona calciner is a joint venture between Alcoa Corporation and Rio Tinto. The calciner purchases green coke from the petroleum industry and converts it into calcined coke. The calcined coke is then used as a raw material in an aluminum smelter. Alcoa Corporation owns 39% of the joint venture.

The Alcoa Corporation Business

Bauxite

Bauxite is one of Alcoa Corporation’s basic raw materials and is also a product sold into the third-party marketplace. Aluminum is one of the most abundant elements in the earth’s crust. Aluminum metal is produced by smelting alumina. Alumina is produced primarily from refining bauxite. Bauxite contains various aluminum hydroxide minerals, the most important of which are gibbsite and boehmite. Alcoa Corporation processes most of the bauxite that it mines into alumina and sells the remainder to third parties. The company obtains bauxite from its own resources and from those belonging to the AWAC enterprise, located in the countries listed in the table below, as well as pursuant to both long-term and short-term contracts and mining leases. Tons of bauxite are reported as bone dry metric tons (“bdmt”) unless otherwise stated. See the glossary of bauxite mining-related terms at the end of this section.

During 2015, mines operated by Alcoa Corporation (owned by Alcoa Corporation and AWAC) produced 38.3 million bdmt and separately mines operated by third parties (with Alcoa Corporation and AWAC equity interests) produced 7.0 million bdmt on a proportional equity basis for a total bauxite production of 45.3 million bdmt.

Based on the terms of its bauxite supply contracts, AWAC bauxite purchases from Mineração Rio do Norte S.A. (“MRN”) and Compagnie des Bauxites de Guinée (“CBG”) differ from its proportional equity in those mines. Therefore during 2015, including those purchases, AWAC had access to 47.8 million bdmt of production from its portfolio of mines.

During 2015, AWAC sold 1.5 million bdmt of bauxite to third parties and purchased 0.2 million bdmt from third parties. The bauxite delivered to Alcoa Corporation and AWAC refineries amounted to 46.8 million bdmt during 2015.

The company is growing its third-party bauxite sales business. For example, during the third quarter of 2015, ParentCo received permission from the Government of Western Australia to export trial shipments from its Western Australia mines.

 

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The company has access to large bauxite deposit areas with mining rights that extend in most cases more than 20 years from the date of this information statement. For purposes of evaluating the amount of bauxite that will be available to supply as feedstock to its refineries, the company considers both estimates of bauxite resources as well as calculated bauxite reserves. Bauxite resources represent deposits for which tonnage, densities, shape, physical characteristics, grade and mineral content can be estimated with a reasonable level of confidence based on the amount of exploration sampling and testing information gathered through appropriate techniques from locations such as outcrops, trenches, pits, workings and drill holes. Bauxite reserves represent the economically mineable part of resource deposits, and include diluting materials and allowances for losses, which may occur when the material is mined. Appropriate assessments and studies have been carried out to define the reserves, and include consideration of and modification by realistically assumed mining, metallurgical, economic, marketing, legal, environmental, social and governmental factors. Alcoa Corporation employs a conventional approach (including additional drilling with successive tightening of the drilling grid) with customized techniques to define and characterize its various bauxite deposit types allowing Alcoa Corporation to confidently establish the extent of its bauxite resources and their ultimate conversion to reserves.

The following table only includes the amount of proven and probable reserves controlled by the company. While the level of reserves may appear low in relation to annual production levels, they are consistent with historical levels of reserves for the company’s mining locations and consistent with the company reserves strategy. Given the company’s extensive bauxite resources, the abundant supply of bauxite globally and the length of the company’s rights to bauxite, it is not cost-effective to invest the significant funds and efforts necessary to establish bauxite reserves that reflect the total size of the bauxite resources available to the company. Rather, bauxite resources are upgraded annually to reserves as needed by the location. Detailed assessments are progressively undertaken within a proposed mining area and mine activity is then planned to achieve a uniform quality in the supply of blended feedstock to the relevant refinery. Alcoa Corporation believes its present sources of bauxite on a global basis are sufficient to meet the forecasted requirements of its alumina refining operations for the foreseeable future.

Bauxite Resource Development Guidelines

Alcoa Corporation has adopted best practice guidelines for bauxite reserve and resource classification at its operating bauxite mines. Alcoa Corporation’s reserves are declared in accordance with Alcoa Corporation’s internal guidelines as administered by the Alcoa Ore Reserves Committee (“AORC”). The reported ore reserves set forth in the table below are those that Alcoa Corporation estimates could be extracted economically with current technology and in current market conditions. Alcoa Corporation does not use a price for bauxite, alumina or aluminum to determine its bauxite reserves. The primary criteria for determining bauxite reserves are the feed specifications required by the customer alumina refinery. More specifically, reserves are set based on the chemical specifications of the bauxite in order to minimize bauxite processing cost and maximize refinery economics for each individual refinery. The primary specifications that are important to this analysis are the “available alumina” and “reactive silica” content of the bauxite. Each alumina refinery will have a target specification for these parameters, but may receive bauxite within a range that allows blending in stockpiles to achieve the refinery target.

In addition to these chemical specifications, a number of other ore reserve design factors have been applied to differentiate bauxite reserves from other mineralized material. The contours of the bauxite reserves are designed using additional parameters such as available alumina content cutoff grade, reactive silica cutoff grade, ore density, overburden thickness, ore thickness and mine access considerations. These parameters are generally determined by using infill drilling or geological modeling.

Further, Alcoa Corporation mining locations utilize annual in-fill drilling or geological modeling programs designed to progressively upgrade the reserve and resource classification of their bauxite based on the above-described factors.

 

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Alcoa Corporation Bauxite Interests, Share of Reserves and Annual Production1

 

Country

  Project   Owners’
Mining Rights
(% Entitlement)
  Expiration
Date of
Mining
Rights
  Probable
Reserves
(million
bdmt)
  Proven
Reserves
(million
bdmt)
  Available
Alumina
Content
(%)
AvA1203
  Reactive
Silica
Content
(%)
RxSi02
  2015
Annual
Production
(million
bdmt)
  Ore Reserve Design
Factors

Australia

  Darling

Range

Mines

ML1SA

  Alcoa of
Australia
Limited
(AofA)2
(100%)
  2024   28.5   150.0   33.0
Range:
31.0-
34.0
  0.9
Max:
1.4
  31.7   •AvA1203 ³27.5%

•RxSi02 £ 3.5%

•Minimum mineable
  thickness 2m

•Minimum bench
  widths of 45m

Brazil

  Poços de
Caldas
  Alcoa
Alumínio S.A.
(Alumínio)3
(100%)
  20204   0.9   1.3   39.6
Range:
39.5-
41.5
  4.4
Range:
3.5-4.5
  0.3   •AvA1203 ³ 30%

•RxSi02 £ 7%

  Juruti4
RN101,
RN102,
RN103,
RN104, #34
  Alcoa World
Alumina
Brasil Ltda.
(AWA Brasil)2
(100%)
  21004   8.7   26.5   47.7
Range:
46.5-
48.5
  4.1
Range:
3.3-4.3
  4.7   •AvA1203 ³ 35%

•RxSi02 £ 10%

•Wash Recovery:
   ³ 30%

•Overburden/Ore
  (m/m) = 10/1

Suriname

  Coermotibo and
Onverdacht
  Suriname
Aluminum
Company,
L.L.C.
(Suralco)2
(55%) N.V.
Alcoa
Minerals of
Suriname
(AMS)5 (45%)
  20336   0.0   0.0   N/A   N/A   1.6   N/A

Equity Interests:

 

Brazil

  Trombetas   Mineração Rio
do Norte S.A.
(MRN)7
(18.2%)
  20464   3.7   10.4   49.5

Range:

49.0-

50.5

  4.5

Range:

4.0-

4.8

  3.0   •AvA1203 ³ 46%

•RxSi02 £ 7%

•Wash Recovery:

  ³ 30%

Guinea

  Boké   Compagnie
des Bauxites
de Guinée
(CBG)8
(22.95%)
  20389   59.5   23.2   TAl2O310

48.5

Range:

48.5-

52.4

  TSiO210

1.7

Range:

1.2-

2.1

  3.4   •AvA1203 ³ 44%

•RxSi02 £ 10%

•Minimum mineable
  thickness 2m

•Smallest Mining
  Unit size (SMU)

  50m x 50m

Kingdom
of Saudi Arabia

  Al Ba’itha   Ma’aden
Bauxite &
Alumina
Company
(25.1%)11
  2037   33.8   19.3   TAA12

49.4

  TSiO212

8.6

  0.6   •AvA1203 ³ 40%

•Mining dilution
  modelled as a
  skin of 12.5cm
  around the ore

•Mining recovery
  applied as a skin
  loss of 7.5 cm on
  each side of the
  mineralisation

•Mineralisation
  less than 1m thick
  excluded

 

1

This table shows only the AWAC and/or Alcoa Corporation share (proportion) of reserve and annual production tonnage.

 

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2 This entity is part of the AWAC group of companies and is owned 60% by Alcoa Corporation and 40% by Alumina Limited.
3 Alumínio is owned 100% by Alcoa Corporation.
4 Brazilian mineral legislation does not establish the duration of mining concessions. The concession remains in force until the exhaustion of the deposit. The company estimates that (i) the concessions at Poços de Caldas will last at least until 2020, (ii) the concessions at Trombetas will last until 2046 and (iii) the concessions at Juruti will last until 2100. Depending, however, on actual and future needs, the rate at which the deposits are exploited and government approval is obtained, the concessions may be extended to (or expire at) a later (or an earlier) date.
5 Alcoa World Alumina LLC (“AWA LLC”) owns 100% of N.V. Alcoa Minerals of Suriname (“AMS”). Suralco and AMS are parts of the AWAC group of companies which are owned 60% by Alcoa Corporation and 40% by Alumina Limited.
6 At the end of 2015, AWAC’s bauxite mineral and mining rights remained valid until 2033. The AWAC mines in Suriname were curtailed in the fourth quarter of 2015. There are no plans for AWAC to restart these mines and there are no reserves to declare.
7 Alumínio holds an 8.58% total interest, AWA Brasil holds a 4.62% total interest and AWA LLC holds a 5% total interest in MRN. MRN is jointly owned with affiliates of Rio Tinto Alcan Inc., Companhia Brasileira de Alumínio, Companhia Vale do Rio Doce, BHP Billiton Plc (“BHP Billiton”) and Norsk Hydro. Alumínio, AWA Brasil, and AWA LLC purchase bauxite from MRN under long-term supply contracts.
8 AWA LLC owns a 45% interest in Halco (Mining), Inc. (“Halco”). Halco owns 100% of Boké Investment Company, a Delaware company, which owns 51% of CBG. The Guinean Government owns 49% of CBG, which has the exclusive right through 2038 to develop and mine bauxite in certain areas within an approximately 2939 square-kilometer concession in northwestern Guinea.
9 AWA LLC and Alũmina Española, S.A. have bauxite purchase contracts with CBG that expire in 2033. Before that expiration date, AWA LLC and Alũmina Española, S.A expect to negotiate extensions of their contracts as CBG will have concession rights until 2038. The CBG concession can be renewed beyond 2038 by agreement of the Government of Guinea and CBG should more time be required to commercialize the remaining economic bauxite within the concession.
10 Guinea—Boké: CBG prices bauxite and plans the mine based on the bauxite qualities of total alumina (TAl2O3) and total silica (TSiO2).
11 Ma’aden Bauxite & Alumina Company is a joint venture owned by Saudi Arabian Mining Company (“Ma’aden”) (74.9%) and AWA Saudi Limited (25.1%). AWA Saudi Limited is part of the AWAC group of companies and is owned 60% by Alcoa Corporation and 40% by Alumina Limited.
12 Kingdom of Saudi Arabia—Al Ba’itha: Bauxite reserves and mine plans are based on the bauxite qualities of total available alumina (TAA) and total silica (TSiO2).

Qualifying statements relating to the table above:

Australia—Darling Range Mines: Huntly and Willowdale are the two AWAC active mines in the Darling Range of Western Australia. The mineral lease issued by the State of Western Australia to Alcoa Corporation’s majority owned subsidiary, Alcoa of Australia Limited (AofA) is known as ML1SA and encompasses a gross area of 712,881 hectares (including private land holdings, state forests, national parks and conservation areas) in the Darling Range and extends from east of Perth to east of Bunbury (the “ML1SA Area”). The ML1SA provides AofA with various rights, including certain exclusivity rights to explore for and mine bauxite, rights to deny third party mining tenements in limited circumstances, rights to mining leases for other minerals in the ML1SA Area, and the right to prevent certain governmental actions from interfering with or prejudicially affecting Alcoa Corporation’s rights. The ML1SA term extends to 2024, however it can be renewed for an additional 21 year period to 2045. The declared reserves are as for December 31, 2015. The amount of reserves reflects the total AWAC share. Additional resources are routinely upgraded by additional exploration and development drilling to reserve status. The Huntly and Willowdale mines supply bauxite to three local AWAC alumina refineries.

Brazil—Poços de Caldas: Declared reserves are as for December 31, 2015. Tonnage is total Alcoa share. Additional resources are being upgraded to reserves as needed.

Brazil—Juruti RN101, RN102, RN103, RN104, #34: Declared reserves are as for December 31, 2015. All reserves are on Capiranga Plateau. Declared reserves are total AWAC share. Declared reserve tonnages and the annual production tonnage are washed product tonnages. The Juruti mine’s operating license is periodically renewed.

 

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Suriname—Suralco: The AWAC mines in Suriname were curtailed in the fourth quarter of 2015. AWAC has no plans to restart these mines and there are no reserves to declare.

Brazil—Trombetas-MRN: Declared reserves are as for December 31, 2015. The CP Report for December 31, 2015 was issued on February 25, 2016. Declared and annual production tonnages reflect the total for Alumínio and AWAC shares (18.2%). Declared tonnages are washed product tonnages.

Guinea—Boké-CBG: Declared reserves are based on export quality bauxite reserves and are as for December 31, 2015. The CP Report for December 31, 2015 reserves was issued on February 29, 2016. Declared tonnages reflect only the AWAC share of CBG’s reserves. Annual production tonnage is reported based on AWAC’s 22.95% share. Declared reserves quality is reported based on total alumina (TAl2 O3) and total silica (TSiO2) because CBG export bauxite is sold on this basis. Additional resources are being routinely drilled and modeled to upgrade to reserves as needed.

Kingdom of Saudi Arabia—Al Ba’itha: The Al Ba’itha Mine began production during 2014 and production was increased in 2015. Declared reserves are as for December 31, 2015. The CP Report for December 31, 2015 reserves was issued on January 17, 2016. The proven reserves have been decremented for 2015 mine production. The declared reserves are located in the South Zone of the Az Zabirah Bauxite Deposit. The reserve tonnage in this declaration is AWAC share only (25.1%).

The following table provides additional information regarding the company’s bauxite mines:

 

Mine & Location

 

Means of Access

 

Operator

 

Title, Lease or
Options

 

History

 

Type of Mine
Mineralization Style

 

Power Source

 

Facilities, Use &
Condition

Australia—Darling Range; Huntly and Willowdale.  

Mine locations accessed by roads.

 

Ore is transported to refineries by long distance conveyor and rail.

  Alcoa Corporation   Mining lease from the Western Australia Government. ML1SA. Expires in 2024.   Mining began in 1963.  

Open-cut mines.

 

Bauxite is derived from the weathering of Archean granites and gneisses and Precambrian dolerite.

  Electrical energy from natural gas is supplied by the refinery.  

Infrastructure includes buildings for administration and services; workshops; power distribution; water supply; crushers; long distance conveyors.

 

Mines and facilities are operating.

Brazil—Poços de Caldas. Closest town is Poços de Caldas, MG, Brazil.  

Mine locations are accessed by road.

 

Ore transport to the refinery is by road.

  Alcoa Corporation   Mining licenses from the Government of Brazil and Minas Gerais. Company claims and third-party leases. Expires in 2020.   Mining began in 1965.  

Open-cut mines.

 

Bauxite derived from the weathering of nepheline syenite and phonolite.

  Commercial grid power.  

Mining offices and services are located at the refinery.

 

Numerous small deposits are mined by contract miners and the ore is trucked to either the refinery stockpile or intermediate stockpile area.

 

Mines and facilities are operating.

 

Mine production has been reduced to align with the reduced production of the Poços refinery which is now producing specialty alumina.

 

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Mine & Location

 

Means of Access

 

Operator

 

Title, Lease or
Options

 

History

 

Type of Mine
Mineralization Style

 

Power Source

 

Facilities, Use &
Condition

Brazil—Juruti Closest town is Juruti located on the Amazon River.  

The mine’s port at Juruti is located on the Amazon River and accessed by ship.

 

Ore is transported from the mine site to the port by company owned rail.

  Alcoa Corporation  

Mining licenses from the Government of Brazil and Pará. Mining rights do not have a legal expiration date. See footnote 4 to the table above.

 

Operating licenses for the mine, washing plant and RR have been renewed with validity until 2018.

 

Operating license for the port remains valid until the government agency formalizes the renewal.

 

The Juruti deposit was systematically evaluated by Reynolds Metals Company beginning in 1974.

 

ParentCo merged Reynolds into the Company in 2000. ParentCo then executed a due diligence program and expanded the exploration area. Mining began in 2009.

 

Open-cut mines.

 

Bauxite derived from weathering during the Tertiary of Cretaceous fine to medium grained feldspathic sandstones.

 

The deposits are covered by the Belterra clays.

  Electrical energy from fuel oil is generated at the mine site. Commercial grid power at the port.  

At the mine site: Fixed plant facilities for crushing and washing the ore; mine services offices and workshops; power generation; water supply; stockpiles; rail sidings.

 

At the port: Mine and rail administrative offices and services; port control facilities with stockpiles and ship loader.

 

Mine and port facilities are operating.

Suriname— Coermotibo and Onverdacht. Mines are located in the districts of Para and Marowijne.   The mines are accessed by road. Ore is delivered to the refinery by road from the Onverdacht area and by river barge from the Coermotibo area.   Alcoa Corporation  

Brokopondo Concession from the Government of Suriname.

 

Concessions formerly owned by a BHP Billiton (BHP) subsidiary that was a 45% joint venture partner in the Surinamese bauxite mining and alumina refining joint ventures. AWA LLC acquired that subsidiary in 2009.

 

After the acquisition of the subsidiary, its name was changed to N.V. Alcoa Minerals of Suriname.

Expires in 2033.

 

ParentCo became active in Suriname in 1916 with the founding of the Suriname Bauxite Company.

 

Bauxite was first exported in 1922.

 

The Brokopondo Agreement was signed in 1958.

 

As noted, Suralco bought the bauxite and alumina interests of a BHP subsidiary from BHP in 2009.

 

Open-cut mines.

 

At one of the mines, the overburden is dredged and mining progresses with conventional open-cut methods.

 

The protoliths of the bauxite have been completely weathered. The bauxite deposits are mostly derived from the weathering of Tertiary Paleogene arkosic sediments. In some places, the bauxite overlies Precambrian granitic and gneissic rocks which have been deeply weathered to saprolite. Bauxitization likely occurred during the middle to late Eocene Epoch.

  Commercial grid power.  

In the Onverdacht mining areas, the bauxite is mined and transported to the refinery by truck. In the Coermotibo mining areas, the bauxite is mined, stockpiled and then transported to the refinery by barge. Some of the ore is washed in a small beneficiation plant located in the Coermotibo area. The main mining administrative offices, services, workshops and laboratory are located at the refinery in Paranam. The ore is crushed at Paranam and fed into the refining process.

 

The Suralco mines were curtailed in the fourth quarter of 2015. There are no plans for AWAC to restart these mines.

 

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Mine & Location

 

Means of Access

 

Operator

 

Title, Lease or
Options

 

History

 

Type of Mine
Mineralization Style

 

Power Source

 

Facilities, Use &
Condition

Brazil—MRN Closest town is Trombetas in the State of Pará, Brazil.  

The mine and port areas are connected by sealed road and company owned rail.

 

Washed ore is transported to Porto Trombetas by rail.

 

Trombetas is accessed by river and by air at the airport.

  MRN  

Mining rights and licenses from the Government of Brazil.

 

Concession rights expire in 2046.

 

Mining began in 1979.

 

Major expansion in 2003.

 

Open-cut mines.

 

Bauxite derived from weathering during the Tertiary of Cretaceous fine to medium grained feldspathic sandstones.

 

The deposits are covered by the Belterra clays.

  MRN generates its own electricity from fuel oil.  

Ore mined from several plateaus is crushed and transported to the washing plant by long-distance conveyors.

 

The washing plant is located in the mining zone.

 

Washed ore is transported to the port area by company-owned and operated rail.

 

At Porto Trombetas the ore is loaded onto customer ships berthed in the Trombetas River. Some ore is dried and the drying facilities are located in the port area.

 

Mine planning and services and mining equipment workshops are located in the mine zone.

 

The main administrative, rail and port control offices and various workshops are located in the port area.

 

MRN’s main housing facilities, “the city”, are located near the port.

 

The mines, port and all facilities are operating.

 

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Mine & Location

 

Means of Access

 

Operator

 

Title, Lease or
Options

 

History

 

Type of Mine
Mineralization Style

 

Power Source

 

Facilities, Use &
Condition

Guinea—CBG Closest town to the mine is Sangaredi.

 

Closest town to the port is Kamsar. The CBG Lease is located within the Boké, Telimele and Gaoual administrative regions.

  The mine and port areas are connected by sealed road and company-operated rail. Ore is transported to the port at Kamsar by rail. There are air strips near both the mine and port. These are not operated by the company.   CBG   CBG Lease expires in 2038. The lease is renewable in 25-year increments. CBG’s rights are specified within the Basic Agreement and Amendment 1 to the Basic Agreement with the Government of Guinea.  

Construction began in 1969.

 

First export ore shipment was in 1973.

 

Open-cut mines.

 

The bauxite deposits within the CBG lease are of two general types.

 

TYPE 1: In-situ laterization of Ordovician and Devonian plateau sediments locally intruded by dolerite dikes and sills.

 

TYPE 2: Sangaredi type deposits are derived from clastic deposition of material eroded from the Type 1 laterite deposits and possibly some of the proliths from the TYPE 1 plateaus deposits.

  The company generates its own electricity from fuel oil at both Kamsar and Sangaredi.  

Mine offices, workshops, power generation and water supply for the mine and company mine city are located at Sangaredi.

 

The main administrative offices, port control, railroad control, workshops, power generation and water supply are located in Kamsar. Ore is crushed, dried and exported from Kamsar. CBG has company cities within both Kamsar and Sangaredi.

 

The mines, railroad, driers, port and other facilities are operating.

Kingdom of Saudi Arabia—Al Ba’itha Mine. Qibah is the closest regional centre to the mine, located in the Qassim province.   The mine and refinery are connected by road and rail. Ore is transported to the refinery at Ras Al Khair by rail.   Ma’aden Bauxite & Alumina Company   The current mining lease will expire in 2037.  

The initial discovery and delineation of bauxite resources was carried out between 1979 and 1984.

 

The southern zone of the Az Zabirah deposit was granted to Ma’aden in 1999.

 

Mine construction was completed in the second quarter of 2015, and the mining operations continued at planned levels.

 

Open-cut mine.

 

Bauxite occurs as a paleolaterite profile developed at an angular unconformity between underlying late Triassic to early Cretaceous sediments (parent rock sequence Biyadh Formation) and the overlying late Cretaceous Wasia Formation (overburden sequence).

  The company generates electricity at the mine site from fuel oil.  

The mine includes fixed plants for crushing and train loading; workshops and ancillary services; power plant; and water supply.

 

There is a company village with supporting facilities. Mining operations commenced in 2014.

 

Mine construction was completed in the second quarter of 2015 and the mining operations continued at planned levels.

 

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Glossary of Bauxite Mining Related Terms

 

Term

  

Abbreviation

  

Definition

Alcoa Ore Reserves Committee    AORC    The ParentCo group that will be within Alcoa Corporation following the completion of the separation, which is comprised of Alcoa Corporation geologists and engineers, that specifies the guidelines by which bauxite reserves and resources are classified. These guidelines are used by ParentCo managed mines and will be used by Alcoa Corporation managed mines.
Alumina    Al2O3    A compound of aluminum and oxygen. Alumina is extracted from bauxite using the Bayer Process. Alumina is a raw material for smelters to produce aluminum metal.
AORC Guidelines       The ParentCo guidelines that are used by ParentCo managed mines, and will be used by Alcoa Corporation managed mines, to classify reserves and resources. These guidelines are issued by the Alcoa Ore Reserves Committee.
Available alumina content    AvAl2O3    The amount of alumina extractable from bauxite using the Bayer Process.
Bauxite       The principal raw material (rock) used to produce alumina. Bauxite is refined using the Bayer Process to extract alumina.
Bayer Process       The principal industrial means of refining bauxite to produce alumina.
Bone dry metric ton    bdmt    Tonnage reported on a zero moisture basis.
Coermotibo       The mining area in Suriname containing the deposits of Bushman Hill, CBO Explo, Lost Hill and Remnant. These mines have been curtailed.
Competent Persons Report    CP Report    Joiny Ore Reserves Committee (JORC) Code compliant Reserves and Resources Report.

Juruti RN101, RN102, RN103, RN104, #34

     

 

Mineral claim areas in Brazil associated with the Juruti mine, within which Alcoa Corporation will have mining operating licenses issued by the state.

ML1SA       The Mineral lease issued by the State of Western Australia to ParentCo’s majority owned subsidiary (which will become Alcoa Corporation’s majority owned subsidiary in connection with the separation), Alcoa of Australia (AofA). AofA mines located at Huntly and Willowdale operate within ML1SA.
Onverdacht       The mining area in Suriname containing the deposits of Kaaimangrasi, Klaverblad, Lelydorp1 and Sumau 1. These mines have been curtailed.
Open-cut mine       The type of mine in which an excavation is made at the surface to extract mineral ore (bauxite). The mine is not underground and the sky is viewable from the mine floor.

 

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Term

  

Abbreviation

  

Definition

Probable reserve       That portion of a reserve, i.e. bauxite reserve, where the physical and chemical characteristics and limits are known with sufficient confidence for mining and to which various mining modifying factors have been applied. Probable reserves are at a lower confidence level than proven reserves.
Proven reserve       That portion of a reserve, i. e. bauxite reserve, where the physical and chemical characteristics and limits are known with high confidence and to which various mining modifying factors have been applied.
Reactive silica    RxSiO2    The amount of silica contained in the bauxite that is reactive within the Bayer Process.
Reserve       That portion of mineralized material, i.e. bauxite, that Alcoa Corporation has determined to be economically feasible to mine and supply to an alumina refinery.
Resources       Resources are bauxite occurrences and/or concentrations of economic interest that are in such form, quality and quantity that are reasonable prospects for economic extraction.
Silica    SiO2    A compound of silicon and oxygen.
Total alumina content    TAl2O3    The total amount of alumina in bauxite. Not all of this alumina is extractable or available in the Bayer Process.
Total available alumina    TAA    The total amount of alumina extractable from bauxite by the Bayer Process. This term is commonly used when there is a hybrid or variant Bayer Process that will refine the bauxite.
Total silica    TSiO2    The total amount of silica contained in the bauxite.

 

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Alumina

Alcoa Corporation is the world’s leading producer of alumina. Alcoa Corporation’s alumina refining facilities and its worldwide alumina capacity are shown in the following table:

 

Country

 

Facility

 

Owners

(% of Ownership)

  Nameplate
Capacity1
(000 MTPY)
    Alcoa
Corporation
Consolidated
Capacity2

(000 MTPY)
 

Australia

  Kwinana   AofA3 (100%)     2,190        2,190   
  Pinjarra   AofA (100%)     4,234        4,234   
  Wagerup   AofA (100%)     2,555        2,555   

Brazil

  Poços de Caldas   Alumínio4 (100%)     390 5      390   
  São Luís (Alumar)  

AWA Brasil3 (39%)

Rio Tinto Alcan Inc.6 (10%)

Alumínio (15%)

BHP Billiton6 (36%)

    3,500        1,890   

Spain

  San Ciprián   Alúmina Española, S.A.3 (100%)     1,500 7      1,500   

Suriname

  Suralco   Suralco3 (55%) AMS8 (45%)     2,207 9      2,207   

United States

  Point Comfort, TX   AWA LLC3 (100%)     2,305 10      2,305   
     

 

 

   

 

 

 

TOTAL

        18,881        17,271   
     

 

 

   

 

 

 

Equity Interests:

  

Country

 

Facility

 

Owners

(% of Ownership)

  Nameplate
Capacity1
(000 MTPY)
       

Kingdom of Saudi Arabia

  Ras Al Khair   Ma’aden Bauxite & Alumina Company (100%)11     1,800     

 

 

1 Nameplate Capacity is an estimate based on design capacity and normal operating efficiencies and does not necessarily represent maximum possible production.

 

2 The figures in this column reflect Alcoa Corporation’s share of production from these facilities. For facilities wholly-owned by AWAC entities, Alcoa Corporation takes 100% of the production.
3 This entity is part of the AWAC group of companies and is owned 60% by Alcoa Corporation and 40% by Alumina Limited.
4 This entity is owned 100% by Alcoa Corporation.
5 As a result of the decision to fully curtail the Poços de Caldas smelter, management initiated a reduction in alumina production at this refinery. The capacity that is operating at this refinery is producing at an approximately 45% output level.
6 The named company or an affiliate holds this interest.
7 The capacity that is operating at this refinery is producing at an approximately 95% output level.
8 AWA LLC owns 100% of N.V. Alcoa Minerals of Suriname (“AMS”). AWA LLC is part of the AWAC group of companies and is owned 60% by Alcoa Corporation and 40% by Alumina Limited.
9 The Suralco alumina refinery has been fully curtailed (see below).
10 The Point Comfort alumina refinery will be fully curtailed (see below).
11. Ma’aden Bauxite & Alumina Company is a joint venture owned by Saudi Arabian Mining Company (“Ma’aden”) (74.9%) and AWA Saudi Limited (25.1%). AWA Saudi Limited is part of the AWAC group of companies and is owned 60% by Alcoa Corporation and 40% by Alumina Limited.

As of December 31, 2015, Alcoa Corporation had approximately 2,801,000 mtpy of idle capacity against total Alcoa Corporation Consolidated Capacity of 17,271,000 mtpy. As noted above, Alcoa Corporation and

 

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Ma’aden developed an alumina refinery in the Kingdom of Saudi Arabia. Initial capacity of the refinery is 1.8 million mtpy, and it produced approximately 1.0 million mt in 2015. For additional information regarding the joint venture, see See Note I to the Combined Financial Statements under the caption “Investments.”

In March 2015, the company initiated a 12-month review of 2,800,000 mtpy in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of the company’s target to lower Alcoa Corporation’s refining operations on the global alumina cost curve to the 21st percentile by the end of 2016. The review resulted in the curtailment of the remaining capacity at the Suriname refinery (1,330,000 mtpy) in 2015 and the commencement of the curtailment of the remaining capacity of the Point Comfort, TX refinery (2,010,000 mtpy), which was completed by the end of June 2016. For additional information regarding the curtailments, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Segment Information—Alumina.”

Aluminum

Alcoa Corporation’s primary aluminum smelters and their respective capacities are shown in the following table:

 

Country

  

Facility

 

Owners

(% Of Ownership)

  Nameplate
Capacity(000
MTPY)
    Alcoa
Corporation
Consolidated
Capacity2
(000 MTPY)
 

Australia

   Portland  

AofA (55%)

CITIC3 (22.5%)

Marubeni3 (22.5%)

    358        197 4,5 

Brazil

   São Luís (Alumar)  

Alumínio (60%)

BHP Billiton3 (40%)

    447        268 6 

Canada

   Baie Comeau, Québec   Alcoa Corporation (100%)     280        280   
   Bécancour, Québec  

Alcoa Corporation (74.95%)

Rio Tinto Alcan Inc.7 (25.05%)

    413        310   
   Deschambault, Québec   Alcoa Corporation (100%)     260        260   

Iceland

   Fjarðaál   Alcoa Corporation (100%)     344        344   

Norway

   Lista   Alcoa Corporation (100%)     94        94   
   Mosjøen   Alcoa Corporation (100%)     188        188   

Spain

   Avilés   Alcoa Corporation (100%)     93 8      93   
   La Coruña   Alcoa Corporation (100%)     87 8      87   
   San Ciprián   Alcoa Corporation (100%)     228        228   

United States

   Evansville, IN (Warrick)   Alcoa Corporation (100%)     269 9      269   
   Massena West, NY   Alcoa Corporation (100%)     130        130   
   Rockdale, TX   Alcoa Corporation (100%)     191 10      191   
   Ferndale, WA (Intalco)   Alcoa Corporation (100%)     279 11      279   
   Wenatchee, WA   Alcoa Corporation (100%)     184 12      184   

TOTAL

         3,845        3,401   

Equity Interests:

        

Country

  

Facility

 

Owners

(% of Ownership)

  Nameplate
Capacity1
(000 MTPY)
       

Kingdom of Saudi Arabia

  

Ras Al Khair

 

Alcoa Corporation (25.1%)

    740     

 

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1 Nameplate Capacity is an estimate based on design capacity and normal operating efficiencies and does not necessarily represent maximum possible production.
2 The figures in this column reflect Alcoa Corporation’s share of production from these facilities.
3 The named company or an affiliate holds this interest.
4 This figure includes the minority interest of Alumina Limited in the Portland facility, which is owned by AofA. From this facility, Alcoa Corporation takes 100% of the production allocated to AofA.
5 The Portland smelter has approximately 30,000 mtpy of idle capacity.
6 The Alumar smelter has been fully curtailed since April 2015 (see below).
7 Owned through Rio Tinto Alcan Inc.’s interest in Pechiney Reynolds Québec, Inc., which is owned by Rio Tinto Alcan Inc. and Alcoa Corporation.
8 The Avilés and La Coruña smelters have approximately 56,000 mtpy of idle capacity combined.
9 On March 24, 2016, ParentCo permanently stopped production at the Warrick smelter.
10 The Rockdale smelter has been fully curtailed since the end of 2008.
11 The Intalco smelter has had approximately 49,000 mtpy of idle capacity. In November 2015, ParentCo announced that it would idle the remaining 230,000 mtpy capacity by the end of the first quarter of 2016. In January 2016, ParentCo announced that it will delay this further curtailment of the smelter until the end of the second quarter of 2016. On May 2, 2016, ParentCo announced that it would not curtail the Intalco smelter at the end of the second quarter as previously announced, as a result of an agreement with the Bonneville Power Administration.
12 The Wenatchee smelter has had approximately 41,000 mtpy of idle capacity. Alcoa Corporation idled the remaining 143,000 mtpy of capacity by the end of December 2015.

As of December 31, 2015, Alcoa Corporation had approximately 778,000 mtpy of idle capacity against total Alcoa Corporation Consolidated Capacity of 3,401,000 mtpy. As noted above, Alcoa Corporation and Ma’aden have developed an aluminum smelter in the Kingdom of Saudi Arabia. The smelter has an initial nameplate capacity of 740,000 mtpy. Since mid-2014, the smelter has been operating at full capacity, and it produced 757,833 mt in 2015.

In March 2015, ParentCo initiated a 12-month review of 500,000 mtpy of smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of ParentCo’s target to lower Alcoa Corporation’s smelting operations on the global aluminum cost curve to the 38th percentile by 2016. As a result of this review, the decision was made to curtail the remaining capacity (74,000 mtpy) at the São Luís smelter in Brazil and the Wenatchee, WA smelter (143,000 mtpy); and undertake permanent closures of the capacity at the Warrick, IN smelter (269,000 mtpy) (includes the closure of a related coal mine) and the infrastructure of the Massena East, NY smelter (potlines were previously shut down in both 2013 and 2014). On March 24, 2016, the Warrick smelter was permanently closed.

Separate from the smelting capacity review described above, in June 2015, ParentCo decided to permanently close the Poços de Caldas smelter (96,000 mtpy) in Brazil, which had been temporarily idle since May 2014 due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved.

For additional information regarding the curtailments and closures, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Our Business—2015 Actions.”

 

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Cast Products

Our cast products business offer differentiated, value-added aluminum products that are cast into specific shapes to meet customer demand. Alcoa Corporation has 18 casthouses capable of providing value-added products to customers in growing markets, with 15 currently operating, as shown in the following table:

 

Country

  

Facility

  

Owners

(% Of Ownership)

Australia

   Portland   

AofA (55%)

CITIC1 (22.5%)

Marubeni1 (22.5%)

Brazil

   Poços de Caldas    Alcoa Alumínio S.A. (Alumínio)1 (100%)
   São Luís (Alumar)2   

Alumínio (60%)

BHP Billiton1 (40%)

Canada

   Baie Comeau, Québec    Alcoa Corporation (100%)
   Bécancour, Québec   

Alcoa Corporation (74.95%)

Rio Tinto Alcan Inc.3 (25.05%)

   Deschambault, Québec    Alcoa Corporation (100%)

Iceland

   Fjarðaál    Alcoa Corporation (100%)

Norway

   Lista    Alcoa Corporation (100%)
   Mosjøen    Alcoa Corporation (100%)

Spain

   Avilés    Alcoa Corporation (100%)
   La Coruña    Alcoa Corporation (100%)
   San Ciprián    Alcoa Corporation (100%)

United States

   Massena, NY    Alcoa Corporation (100%)
   Ferndale, WA (Intalco)    Alcoa Corporation (100%)
   Warrick, IN    Alcoa Corporation (100%)
   Rockdale, TX4    Alcoa Corporation (100%)
   Wenatchee, WA5    Alcoa Corporation (100%)
EQUITY INTERESTS:      

Country

  

Facility

  

Owners

(% of Ownership)

Kingdom of Saudi Arabia

  

Ras Al Khair

  

Alcoa Corporation (25.1%)

 

1 The named company or an affiliate holds this interest.
2 The Alumar casthouse has been fully curtailed since April 2015.
3 Owned through Rio Tinto Alcan Inc.’s interest in Pechiney Reynolds Québec, Inc., which is owned by Rio Tinto Alcan Inc. and Alcoa Corporation.
4 The Rockdale casthouse has been fully curtailed since the end of 2008.
5 The Wenatchee casthouse has been fully idled since the end of December 2015.

Energy

Employing the Bayer Process, Alcoa Corporation refines alumina from bauxite ore. Alcoa Corporation then produces aluminum from the alumina by an electrolytic process requiring substantial amounts of electric power. Energy accounts for approximately 19% of the company’s total alumina refining production costs. Electric power accounts for approximately 23% of the company’s primary aluminum production costs. In 2015, Alcoa Corporation generated approximately 14% of the power used at its smelters worldwide and generally purchased the remainder under long-term arrangements. The sections below provide an overview of Alcoa Corporation’s energy facilities and summarize the sources of power and natural gas for Alcoa Corporation’s smelters and refineries.

 

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Energy Facilities

The following table sets forth the electricity generation capacity and 2015 generation of facilities in which Alcoa Corporation has an ownership interest (other than the Anglesea facility, which was permanently closed on August 31, 2015):

 

Country

  

Facility

   Alcoa
Corporation
Consolidated
Capacity
(MW)1
     2015
Generation
(MWh)
 

Brazil

   Barra Grande      156         1,562,663   
   Estreito      157         1,088,018   
   Machadinho      119         1,780,924   
   Serra do Facão      60         171,294   

Canada

   Manicouagan      132         1,161,994   

Suriname

   Afobaka      189         673,950   

United States

   Warrick2      657         4,538,257   
   Yadkin      215         661,214   

TOTAL

        1,685         11,638,314   

 

1 The Consolidated Capacity of the Brazilian energy facilities is the assured energy that is approximately 55% of hydropower plant nominal capacity.
2 On March 24, 2016, ParentCo permanently stopped production at the Warrick smelter.

In 2015, AofA permanently closed the Anglesea power station and associated coal mine in Victoria. The power station had previously provided electricity to the Point Henry smelter which closed in 2014. Since the Point Henry smelter closure, electricity was sold into the National Electricity Market (“NEM”); however a combination of low electricity prices and significant future capital expenditure meant the facility was no longer viable.

Alumínio owns a 25.74% stake in Consórcio Machadinho, which is the owner of the Machadinho hydroelectric power plant located in southern Brazil. Alumínio also has a 42.18% interest in Energética Barra Grande S.A. (“BAESA”), which built the Barra Grande hydroelectric power plant in southern Brazil. In addition, Alumínio also has a 34.97% share in Serra do Facão Energia S.A., which built the Serra do Facão hydroelectric power plant in the southeast of Brazil. Alumínio is also participating in the Estreito hydropower project in northern Brazil, through Estreito Energia S.A. (an Alumínio wholly owned company) holding a 25.49% stake in Consórcio Estreito Energia, which is the owner of the hydroelectric power plant. A consortium in which Alumínio participates and that had received concessions for the Pai Querê hydropower project in southern Brazil (Alumínio’s share is 35%) decided not to pursue the development of this concession which will be returned to the Federal Government.

Since May 2015 (after full curtailment of Poços de Caldas and São Luís (Alumar) smelters), the excess generation capacity from the above Brazil hydroelectric projects of around 480MW has been sold into the market.

Power generated from Afobaka is primarily sold to the Government of Suriname under a bilateral contract.

Alcoa Corporation’s wholly-owned subsidiary, Alcoa Power Generating Inc. (“APGI”) owns and operates the Yadkin hydroelectric project, consisting of four dams in North Carolina, and the Warrick coal-fired power plant located in Indiana. Power generated from APGI’s Yadkin system is largely being sold to an affiliate, Alcoa Power Marketing LLC, and then to the wholesale market. After the March 2016 closure of the Warrick smelter, approximately 36% of the capacity from the Warrick coal-fired power plant can be sold into the market under its current operating permits. APGI also owns certain FERC-regulated transmission assets in Indiana, North Carolina, Tennessee, New York, and Washington.

 

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Energy Sources

North America—Electricity

The Deschambault, Baie Comeau, and Bécancour smelters in Québec purchase all or a majority of their electricity under contracts with Hydro-Québec that expire on December 31, 2029. Upon expiration, Alcoa Corporation will have the option of extending the term of the Baie Comeau contract to February 23, 2036. The smelter located in Baie Comeau, Québec purchases approximately 73% of its power needs under the Hydro-Québec contract, and the remainder from a 40% owned hydroelectric generating company, Manicouagan Power Limited Partnership.

In the State of Washington, Alcoa Corporation’s Wenatchee smelter is served by a contract with Chelan County Public Utility District No. 1 (“Chelan PUD”) under which Alcoa Corporation receives approximately 26% of the hydropower output of Chelan PUD’s Rocky Reach and Rock Island dams. In November 2015, ParentCo announced the curtailment of the Wenatchee smelter which was completed by the end of December 2015.

Starting on January 1, 2013, the Intalco smelter began receiving physical power from the Bonneville Power Administration (“BPA”), under which the company receives physical power at the Northwest Power Act mandated industrial firm power (“IP”) rate through September 30, 2022. In May 2015, the contract was amended to reduce the amount of physical power received from BPA and allow for additional purchases of market power. In February and April 2016, the contract was amended again to reduce the contractual amount through February 2018.

Luminant Generation Company LLC (formerly TXU Generation Company LP) (“Luminant”) supplies all of the Rockdale smelter’s electricity requirements under a long-term power contract that does not expire until at least the end of 2038, with the parties having the right to terminate the contract after 2013 if there has been an unfavorable change in law or after 2025 if the cost of the electricity exceeds the market price. On April 29, 2014, Luminant Generation LLC, Luminant Mining Company LLC, Sandow Power Company LLC and their affiliated debtors filed petitions under Chapter 11 of the U.S. Bankruptcy Code. The Bankruptcy Court has confirmed the debtors’ amended plan of reorganization and has entered an order approving the debtor’s assumption of the Sandow Unit 4 agreement and certain other related agreements with Alcoa Corporation.

In the Northeast, the Massena West smelter in New York receives physical power from the New York Power Authority (“NYPA”) pursuant to a contract between Alcoa and NYPA that will expire in 2019.

Australia—Electricity

The Portland smelter continues to purchase electricity from the State Electricity Commission of Victoria (“SECV”) under a contract with Alcoa Portland Aluminium Pty Ltd, a wholly-owned subsidiary of AofA, that extends to October 2016. Upon the expiration of this contract, the Portland smelter will purchase power from the NEM variable spot market. In March 2010, AofA and Eastern Aluminium (Portland) Pty Ltd separately entered into fixed for floating swap contracts with Loy Yang (now AGL) in order to manage their exposure to the variable energy rates from the NEM. The fixed for floating swap contract with AGL for the Point Henry smelter was terminated in 2013. The fixed for floating swap contract with AGL for the Portland smelter operates from the date of expiration of the current contract with the SECV and continues until December 2036.

Europe—Electricity

Alcoa Corporation’s smelters at San Ciprián, La Coruña and Avilés, Spain purchase electricity under bilateral power contracts that expire December 31, 2016.

A competitive bidding mechanism to allocate interruptibility rights in Spain was settled during 2014 to be applied starting from January 1, 2015. The first auction process to allocate rights took place in November 2014,

 

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where ParentCo secured 275MW of interruptibility rights for the 2015 period for the San Ciprián smelter. A second auction process took place in December 2014, where ParentCo secured an additional 100MW of interruptibility rights for the 2015 period for the San Ciprián smelter (20x5MW), 120MW for the La Coruña smelter (24x5MW) and 110MW for the Avilés smelter (22x5MW). The auction process to allocate the rights for the following period took place in the first week of September 2015, where ParentCo secured interruptibility rights for 2016 in the amount of 375MW for San Ciprián Smelter (3x90MW + 21x5MW), 115MW for Avilés Smelter (23x5MW) and 120MW for La Coruña smelter (24x5MW).

Alcoa Corporation owns two smelters in Norway, Lista and Mosjøen, which have long-term power arrangements in place that continue until the end of 2019. Financial compensation of the indirect carbon emissions costs passed through in the electricity bill is received in accordance with EU Commission Guidelines and Norwegian compensation regime.

Iceland—Electricity

Landsvirkjun, the Icelandic national power company, supplies competitively priced electricity to Alcoa Corporation’s Fjarðaál smelter in eastern Iceland under a 40-year power contract.

Spain—Natural Gas

In order to facilitate the full conversion of the San Ciprian, Spain alumina refinery from fuel oil to natural gas, in October 2013, Alumina Española SA (AE) and Gas Natural Transporte SDG SL (GN) signed a take or pay gas pipeline utilization agreement. Pursuant to that agreement, the ultimate shareholders of AE, ParentCo and Alumina Limited, agreed to guarantee the payment of AE’s contracted gas pipeline utilization over the four years of the commitment period; in the event AE fails to do so, each shareholder being responsible for its respective proportionate share (i.e., 60/40). Such commitment came into force six months after the gas pipeline was put into operation by GN. The gas pipeline was completed in January 2015 and the refinery has switched to natural gas consumption for 100% of its needs.

Natural gas is supplied to the San Ciprián, Spain alumina refinery pursuant to supply contracts with Endesa, BP, Gas Natural Fenosa, expiring in June 2017, December 2016 and December 2016, respectively. Pursuant to those agreements, Alcoa Inversiones España, S.L. and Alumina Limited agreed to guarantee the payment of AE’s obligations under the Endesa contract, each shareholder being responsible for its respective proportionate share (i.e., 60/40). Similarly, Alcoa Inespal S.A. and Alumina Limited have agreed to guarantee the payment of AE’s obligations under the Gas Natural Fenosa contract over its respective length, with each entity being responsible for its proportionate share (i.e., 60/40).

North America—Natural Gas

In order to supply its refinery and smelters in the U.S. and Canada, Alcoa Corporation generally procures natural gas on a competitive bid basis from a variety of sources including producers in the gas production areas and independent gas marketers. For Alcoa Corporation’s larger consuming locations in Canada and the U.S., the gas commodity and the interstate pipeline transportation are procured (directly or via the local distribution companies) to provide increased flexibility and reliability. Contract pricing for gas is typically based on a published industry index or New York Mercantile Exchange (“NYMEX”) price. The company may choose to reduce its exposure to NYMEX pricing by hedging a portion of required natural gas consumption.

Australia—Natural Gas

AofA uses gas to co-generate steam and electricity for its alumina refining processes at the Kwinana, Pinjarra and Wagerup refineries. More than 90% of AofA’s gas requirements for the remainder of the decade are secured under long-term contracts. In 2015, AofA entered into a number of long-term gas supply agreements

 

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which secured a significant portion of AofA’s gas supplies to 2030. AofA is actively involved with projects aimed at developing cost-based gas supply opportunities. In April 2016, Alcoa Energy Holdings Australia Pty Ltd (a wholly owned subsidiary of AofA) sold its 20% equity interest in the Dampier-to-Bunbury natural gas pipeline, which transports gas from the northwest gas fields to AofA’s alumina refineries and other users in the Southwest of Western Australia, to DUET Investment Holdings Limited. Our alumina refining activities in Western Australia are provided pursuant to agreements between AofA and the State of Western Australia. These agreements govern AofA’s Western Australian operations and permitted AofA to establish the Kwinana, Pinjarra and Wagerup refineries and associated facilities.

Warrick and Ma’aden Rolling Mills

Alcoa Corporation’s 100%-owned Warrick rolling mill is located near Evansville, Indiana and has the capacity to produce more than 360,000 mtpy of aluminum sheet. In addition, Alcoa Corporation owns a 25.1% interest in the Ma’aden Rolling Company. As noted above, ParentCo and Ma’aden entered into a joint venture in December 2009 to develop a fully integrated aluminum complex in the Kingdom of Saudi Arabia. It includes, in addition to a bauxite mine, smelter and refinery, the Ma’aden Rolling Company, which owns a rolling mill with capacity to produce 380,000 mtpy and is 74 acres under roof.

The Warrick rolling mill operations are focused almost exclusively on packaging, producing narrow width can body stock, can end and tab stock, can bottle stock and food can stock, and to a lesser extent, industrial sheet and lithographic sheet. The Ma’aden rolling mill currently produces can body stock, can end and tab stock, and hot-rolled strip for finishing into automotive sheet. ParentCo’s rolling mill operations in Tennessee currently produce wide can body sheet for the packaging business, but also products for automotive applications. ParentCo plans to shift the production of the wide can body sheet for packaging applications from its Tennessee operations to the Ma’aden Rolling Mill. Accordingly, following the separation, it is expected that the Warrick and Ma’aden Rolling Mills will only be manufacturing products for the North American aluminum can packaging market. However, before the Ma’aden facilities can begin production of the wide can body sheet, product from the facilities must be qualified by existing customers as an acceptable source of supply. During a transition period expected to take approximately 18 months following the separation, pursuant to a transition supply agreement, Arconic will continue producing the wide can body sheet at Tennessee to permit Alcoa Corporation to continue supplying its customers without interruption. Arconic will also provide technical services and support with respect to rolling mill operations to Alcoa Corporation for a transitional period not to exceed 24 months. See “Certain Relationships and Related Party Transactions—Agreements with Arconic—North American Packaging Business Agreement.”

Sources and Availability of Raw Materials

Generally, materials are purchased from third-party suppliers under competitively priced supply contracts or bidding arrangements. The company believes that the raw materials necessary to its business are and will continue to be available.

For each metric ton of alumina produced, Alcoa Corporation consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):

 

Raw Material

  

Units

   

Consumption per MT of Alumina

Bauxite

     mt      2.2 – 3.7

Caustic soda

     kg      60 – 150

Electricity

     kWh      200 – 260 total consumed (0 to
210 imported)

Fuel oil and natural gas

     GJ      6.3 – 11.9

Lime (CaO)

     kg      6 – 58

 

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For each metric ton of aluminum produced, Alcoa Corporation consumes the following amounts of the identified raw material inputs (approximate range across relevant facilities):

 

Raw Material

  

Units

  

Consumption per MT of Aluminum

Alumina

   mt    1.92 ± 0.02

Aluminum fluoride

   kg    16.5 ± 6.5

Calcined petroleum coke

   mt    0.37 ± 0.02

Cathode blocks

   mt    0.006 ± 0.002

Electricity

   kWh    12900 – 17000

Liquid pitch

   mt    0.10 ± 0.03

Natural gas

   mcf    3.5 ± 1.5

Certain aluminum produced by Alcoa Corporation also includes alloying materials. Because of the number of different types of elements that can be used to produce Alcoa Corporation’s various alloys, providing a range of such elements would not be meaningful. With the exception of a very small number of internally used products, Alcoa Corporation produces its alloys in adherence to an Aluminum Association standard. The Aluminum Association, of which ParentCo is an active member and Alcoa Corporation expects to be an active member, uses a specific designation system to identify alloy types. In general, each alloy type has a major alloying element other than aluminum but will also have other constituents as well, but of lesser amounts.

Patents, Trade Secrets and Trademarks

The company believes that its domestic and international patent, trade secret and trademark assets provide it with a significant competitive advantage. The company’s rights under its patents, as well as the products made and sold under them, are important to the company as a whole and, to varying degrees, important to each business segment. Alcoa Corporation’s business as a whole is not, however, materially dependent on any single patent, trade secret or trademark. As a result of product development and technological advancement, the company continues to pursue patent protection in jurisdictions throughout the world. As of August 2016, Alcoa Corporation’s worldwide patent portfolio consisted of approximately 570 granted patents and 325 pending patent applications.

The company also has a number of domestic and international registered trademarks that have significant recognition within the markets that are served, including the name “Alcoa” and the Alcoa symbol for aluminum products. Alcoa Corporation’s rights under its trademarks are important to the company as a whole and, to varying degrees, important to each business segment.

Alcoa Corporation and ParentCo will enter into an agreement in connection with the separation, pursuant to which Alcoa Corporation will permit Arconic to use and display certain Alcoa Corporation trademarks (including the Alcoa name) in connection with, among other things, entity names, inventory for sale, facilities, buildings, signage, documents and other identifiers, for a transitional period following the separation. In addition, two Arconic businesses, Alcoa Wheels and Spectrochemical Standards, will have ongoing rights to use the Alcoa name following the separation. See “Certain Relationships and Related Party Transactions—Agreements with Arconic—Intellectual Property License Agreements.”

Competition

Bauxite:

The third-party market for metallurgical grade bauxite is relatively new and growing quickly as global demand for bauxite increases—particularly in China. The majority of bauxite mined globally is converted to alumina for the production of aluminum metal. While Alcoa Corporation has historically mined bauxite for internal consumption by our alumina refineries, we are focused on building our third-party bauxite business to

 

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meet growing demand. We sold two million tons of bauxite to a diverse third-party customer base in 2015 and also sent trial quantities to numerous alumina refineries worldwide for purposes of metallurgical testing.

Competitors in the third-party bauxite market include Rio Tinto Alcan, Norsk Hydro and multiple suppliers from Malaysia, India and other countries. We compete largely based on bauxite quality, price and proximity to end markets. Alcoa Corporation has a strong competitive position in this market for the following reasons:

 

    Low Cost Production: Alcoa Corporation is the world’s largest bauxite miner, holding a strong first quartile global cost curve position, with best practices in efficient mining operations and sustainability.

 

    Reliable, Long-Term Bauxite Resources: Alcoa Corporation’s strategic bauxite mine locations include Australia and Brazil as well as Guinea, which is home to the world’s largest reserves of high-quality metallurgical grade bauxite. Alcoa Corporation has a long history of stable operations in these countries and has access to large bauxite deposits with mining rights that extend in most cases more than 20 years from the date of this information statement.

 

    Access to Markets: Alcoa Corporation’s Australian bauxite mines are located in close proximity to the largest third-party customer base in China and our facilities are also accessible to a significant and growing alumina refining base in the Middle East.

Contracts for bauxite have generally been short-term contracts (two years or less in duration) with spot pricing and adjustments for quality and logistics, although Alcoa Corporation is currently pursuing long-term contracts with potential customers. The primary customer base for third-party bauxite is located in Asia—particularly China—as well as the Middle East.

Alumina:

The alumina market is global and highly competitive, with many active suppliers including producers as well as commodity traders. Alcoa Corporation faces competition from a number of companies in all of the regions in which we operate, including Aluminum Corporation of China Limited, China Hongqiao Group Limited, China Power Investment Corporation, Hindalco Industries Ltd., Hangzhou Jinjiang Group, National Aluminium Company Limited (NALCO), Noranda Aluminum Holding Corporation, Norsk Hydro ASA, Rio Tinto Alcan Inc., Sherwin Alumina Company, LLC, South32 Limited, United Company RUSAL Plc, and Chiping Xinfa Alumina Product Co., Ltd. In recent years, there has been significant growth in alumina refining in China and India. The majority of Alcoa Corporation’s product is sold in the form of smelter grade alumina, with 5% to 10% of total global alumina production being produced for non-metallurgical applications.

Key factors influencing competition in the alumina market include: cost position, price, reliability of bauxite supply, quality and proximity to customers and end markets. While we face competition from many industry players, we have several competitive advantages:

 

    Proximity to Bauxite: Alcoa Corporation’s refineries are strategically located next to low cost, upstream bauxite mines, and our alumina refineries are tuned to maximize efficiency with the exact bauxite qualities from these internal mines. In addition to refining efficiencies, vertical integration affords a stable and consistent long-term supply of bauxite to our refining portfolio.

 

    Low Cost Production: As the world’s largest alumina producer, Alcoa Corporation has competitive, efficient assets across its refining portfolio, with a 2015 average cost position in the first quartile of global alumina production. Contributing to this cost position is our experienced workforce and sophistication in refining technology and process automation.

 

    Access to Markets: Alcoa Corporation is a global supplier of alumina with refining operations in the key markets of North America, South America, Europe, the Middle East, and Australia, enabling us to meet customer demand in the Atlantic and Pacific basins, including China.

 

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Contracts for smelter grade alumina are often multi-year, although contract structures have evolved from primarily long-term contracts with fixed or LME-based pricing to shorter-term contracts with more frequent pricing adjustment. A significant development occurred in the pricing structure for alumina beginning in 2010. Traditionally, most alumina outside of China had been sold to third party smelters with the price calculated as a percentage of the LME aluminum price. In recent years however there has been a low correlation between LME aluminum prices and alumina input costs (principally energy, caustic soda and bauxite/freight). This disparity led to alumina prices becoming disconnected from the underlying economics of producing and selling alumina.

In 2010, a number of key commodity information service providers began publishing daily and weekly alumina (spot) pricing assessments or indices. Since that time, Alcoa Corporation has been systematically moving its third-party alumina sales contracts away from LME aluminum-based pricing to published alumina spot or index pricing, thus de-linking the price for alumina from the aluminum price to better reflect alumina’s distinct fundamentals. In 2015, approximately 75% of Alcoa Corporation’s smelter grade alumina shipments to third parties were sold at published spot/index prices, compared to 54% in 2013 and 37% in 2012. In 2016, we forecast that approximately 85% of our third-party alumina shipments will be based on API or spot pricing.

Alcoa Corporation’s largest customer for smelter grade alumina is its own aluminum smelters, which in 2015 accounted for approximately 34% of its total alumina sales. Remaining sales are made to customers all over the world and are typically priced by reference to published spot market prices.

Primary Aluminum / Cast Products

The market for primary aluminum is global, and demand for aluminum varies widely from region to region. We compete with commodity traders and aluminum producers such as Aluminum Corporation of China Limited, China Hongqiao Group Limited, East Hope Group Co. Ltd., Emirates Global Aluminum, Norsk Hydro, Rio Tinto Alcan Inc., Shandong Xinfa Aluminum & Power Group, State Power Investment Co. (SPIC), United Company RUSAL Plc as well as with alternative materials such as steel, titanium, copper, carbon fiber, composites, plastic and glass, each of which may be substituted for aluminum in certain applications.

The aluminum industry itself is highly competitive; some of the most critical competitive factors in our industry are product quality, production costs (including source and cost of energy), price, proximity to customers and end markets, timeliness of delivery, customer service (including technical support), and product innovation and breadth of offerings. Where aluminum products compete with other materials, the diverse characteristics of aluminum are also a significant factor, particularly its light weight and recyclability.

In addition, in some end-use markets, competition is also affected by customer requirements that suppliers complete a qualification process to supply their plants. This process can be rigorous and may take many months to complete. However, the ability to obtain and maintain these qualifications can represent a competitive advantage.

In recent years, we have seen increasing trade flows between regions despite shipping costs, import duties and the lack of localized customer support. There is a growing trade in higher value-added products, with recent trade patterns seeing more flow toward the deficit regions. However, suppliers in emerging markets may export lower value-added or even commodity aluminum products to larger, more mature markets, as we have seen recently with China.

The strength of our position in the primary aluminum market is largely attributable to the following factors:

 

    Value-Added Product Portfolio: Alcoa Corporation has 15 casthouses supplying global customers with a diverse product portfolio, both in terms of shapes and alloys. We have steadily grown our cast products business by offering differentiated, value-added aluminum products that are cast into specific shapes to meet customer demand, with 67% of 2015 smelter shipments representing value-added products, compared to 57% in 2010.

 

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    Low Cost Production: As the world’s fourth largest aluminum producer in 2015, Alcoa Corporation leverages significant economies of scale in order to continuously reduce costs. As a result, Alcoa operates competitive, efficient assets across its aluminum smelting and casting portfolios, with its 2015 average smelting cost position in the second quartile of global aluminum smelters. This cost position is supported by long-term energy arrangements at many locations; Alcoa Corporation has secured approximately 75% of its smelter power needs through 2022.

 

    Access to Markets: Alcoa Corporation is a global supplier of aluminum with smelting and casting operations in the key markets of North America, Europe, the Middle East, and Australia, enabling us to access a broad customer base with competitive logistics costs.

 

    Sustainability: As of June 30, 2016, approximately 70% of our aluminum smelting portfolio runs on clean hydroelectric power, lessening our demand for fossil fuels and potentially mitigating the risk to the company from future carbon tax legislation.

Contracts for primary aluminum vary widely in duration, from multi-year supply contracts to monthly or weekly spot purchases. Pricing for primary aluminum products is typically comprised of three components: (i) the published LME aluminum price for commodity grade P1020 aluminum, (ii) the published regional premium applicable to the delivery locale and (iii) a negotiated product premium which accounts for factors such as shape and alloy.

Alcoa Corporation’s largest customer for primary aluminum has historically been internal ParentCo downstream fabricating facilities (including the Warrick Rolling Mill), which in 2015 accounted for approximately 25% of total primary aluminum sales. Remaining sales were made to customers all over the world under contracts with varying terms and duration.

Rolled Products

The Warrick Rolling Mill leads our participation in several segments, including beverage can sheet, food can sheet, lithographic sheet, aluminum bottle sheet, and industrial products. The term “RCS” or Rigid Container Sheet is commonly used for both beverage and food can sheet. This includes the material used to produce the body of beverage containers (bodystock), the lid of beverage containers (endstock and tabstock), the material to produce food can body and lids (food stock) and the material to produce aluminum bottles (bottlestock) and bottle closures (closure sheet). The U.S. aluminum can business comprises approximately 96% beverage can sheet and approximately 4% food can sheet. Alcoa Corporation is the largest food can sheet producer.

The Warrick Rolling Mill competes with other North American producers of RCS products, namely Novelis Corp, Tri-Arrows Aluminum, and Constellium NV.

Buyers of RCS products in North America are large and concentrated and have significant market power. There are essentially five buyers of all the U.S. can sheet sold in the beverage industry (three can makers and the two beverage companies). In 2016, we estimate the North American (Canada/U.S./Mexico) aluminum can buyers and their share of the industry are: AB-Inbev (>35%), Coke (>20%), Ball (>15%), Crown (>15%), Rexam (>5%) and others (2%). The purchase of Rexam by Ball on June 30, 2016, including the divestitures of several U.S. plants to Ardagh Group will change these shares. Buyers traditionally buy RCS in proportions that represent the full aluminum can (80% body stock, 20% end and tab stock). In addition, as the aluminum can sheet represents approximately 60% of their manufacturing costs, there is a heavy focus on cost.

In 2015, our Warrick facility produced and sold 266 kMT of RCS and industrial products, of which 91% was sold to customers in North America. The majority of its sales were coated RCS products (food stock, beverage end and tab stock). Following the separation, both Warrick and Ma’aden will supply body stock material, temporarily supplemented by Arconic’s Tennessee Operations under a transition supply agreement.

Can sheet demand is a function of consumer demand for beverages in aluminum packaging. Aluminum cans have a number of functional advantages for beverage companies, including product shelf life, carbonation retention, and logistics/distribution efficiency. Demand is mostly affected by overall demand for carbonated soft

 

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drinks (CSDs) and beer. CSDs and beer compose approximately 60% and 40%, respectively, of overall aluminum can demand. In recent years, CSDs sales have been declining 1% to 4% year over year. At the same time, the aluminum can’s share of the beer segment has grown, nearly offsetting the drop in CSDs sales. In 2015, the U.S./Canada aluminum can shipments reached 93.2 billion cans, a 0.1% decline over 2014. Alcoholic can shipments reached 36.9 billion cans, growing 2.3% year over year, while non-alcoholic can shipments reached 56.3 billion, declining 1.7% year over year.

We also compete with competitive package types including PET bottles, glass bottles, steel tin plate and other materials. In the U.S., aluminum cans, PET bottles and glass bottles represent approximately 69%, 29% and 2%, respectively, of the CSDs segment. In the beer segment, aluminum cans, glass bottles, and aluminum bottles represent approximately 73-74%, 21-22% and 5%, respectively, of the business. In the food can segment, steel tin plate cans and aluminum food cans represent approximately 83% and 17%, respectively, with aluminum cans representing approximately 52% of the pet food segment.

We compete on cost, quality, and service. Alcoa Corporation intends to continue to improve our cost position by increasing recycled aluminum content in our metal feedstock as well as continuing to focus on capacity utilization. We believe our team of technical and operational resources provides distinctive quality and customer service. The Warrick Rolling Mill will also be the sole domestic supplier of lithographic sheet, focusing on quality, reduced lead-times and delivery performance.

Energy

Unlike bauxite, alumina and aluminum, electricity markets are regional. They are limited in size by physical and regulatory constraints, including the physical inability to transport electricity efficiently over long distances, the design of the electric grid, including interconnections, and by the regulatory structure imposed by various federal and state entities. Alcoa Corporation owns generation and transmission assets that produce and sell electric energy and ancillary services in the United States and Brazilian wholesale energy markets. Our competitors include integrated electric utilities that may be owned by governments (either fully or partially), cooperatives or investors, independent power producers and energy brokers and traders.

Competition factors in open power markets include fuel supply, production costs, operational reliability, access to the power grid, and environmental attributes (e.g., green power and renewable energy credits). As electricity is difficult and cost prohibitive to store, there are no electricity inventories to cushion the impact of supply and demand factors and the resultant pricing in electricity markets may be volatile. Demand for power varies greatly both seasonally and by time of day. Supply may be impacted in the short term by unplanned generator outages or transmission congestion and longer term by planned generator outages, droughts, high precipitation levels and fuel pricing (coal and/or natural gas).

Electricity contracts may be very short term (real-time), short term (day ahead) or years in duration, and contracts can be executed for immediate delivery or years in advance. Pricing may be fixed, indexed to an underlying fuel source or other index such as LME, cost-based or based on regional market pricing. Pricing may be all inclusive on a per energy unit delivered basis (e.g., dollars per megawatt hour) or the components may be separated and include a demand or capacity charge, an energy charge, an ancillary services charge and a transmission charge to make the delivered energy conform to customer requirements.

Alcoa Corporation’s energy assets enjoy several competitive advantages, when compared to other power suppliers:

 

    Reliability: In the United States, we have operated our thermal energy assets for over 50 years and our hydro energy assets for over 95 years with a high degree of reliability and expect to continue this level of performance. In Brazil, our ownership provides for assured energy from hydroelectric operations through 2032 to 2037.

 

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    Low cost production: Our thermal energy assets’ cost advantages include a captive fuel supply and efficiently managed capital and maintenance programs conducted by a highly skilled and experienced work force.

 

    Access and proximity to markets: Our U.S. assets are positioned to take advantage of sales into some of the more liquid power markets, including sales of both energy and capacity.

 

    Sustainable (green) energy sources: A majority of our generating assets use renewable (hydroelectric) sources of fuel for generation. In addition, our U.S. assets have been upgraded to allow for sales of renewable energy credits.

Research and Development

Expenditures for research and development (“R&D”) activities were $69 million in 2015, $95 million in 2014 and $86 million in 2013.

Environmental Matters

Alcoa Corporation is subject to extensive federal, state and local environmental laws and regulations, including those relating to the release or discharge of materials into the air, water and soil, waste management, pollution prevention measures, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, greenhouse gas emissions, and the health and safety of our employees. Alcoa Corporation participates in environmental assessments and cleanups at 39 locations. These include owned or operating facilities and adjoining properties, previously owned or operating facilities and adjoining properties, and waste sites, including Superfund (Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”)) sites. Approved capital expenditures for new or expanded facilities for environmental control are approximately $80 million for 2016 and approximately $130 million for 2017. Additional information relating to environmental matters is included in Note N to the Combined Financial Statements under the caption “Contingencies and Commitments—Environmental Matters.”

Employees

Alcoa Corporation’s total worldwide employment at the end of 2015 was approximately 16,000 employees in 15 countries. Approximately 11,000 of these employees are represented by labor unions. The company believes that relations with its employees and any applicable union representatives generally are good.

In the U.S., approximately 2,500 employees are represented by various labor unions. The largest collective bargaining agreement is the master collective bargaining agreement with the United Steelworkers (“USW”). The USW master agreement covers approximately 1,950 employees at six U.S. locations. There are three other collective bargaining agreements in the U.S. with varying expiration dates. On a regional basis, collective bargaining agreements with varying expiration dates cover approximately 2,200 employees in Europe, 2,100 employees in Canada, 1,200 employees in Central and South America, and 2,900 employees in Australia.

Legal Proceedings

Italian Energy Matter

Before 2002, ParentCo purchased power in Italy in the regulated energy market and received a drawback of a portion of the price of power under a special tariff in an amount calculated in accordance with a published resolution of the Italian Energy Authority, Energy Authority Resolution n. 204/1999 (“204/1999”). In 2001, the Energy Authority published another resolution, which clarified that the drawback would be calculated in the same manner, and in the same amount, in either the regulated or unregulated market. At the beginning of 2002,

 

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ParentCo left the regulated energy market to purchase energy in the unregulated market. Subsequently, in 2004, the Energy Authority introduced regulation no. 148/2004 which set forth a different method for calculating the special tariff that would result in a different drawback for the regulated and unregulated markets. ParentCo challenged the new regulation in the Administrative Court of Milan and received a favorable judgment in 2006. Following this ruling, ParentCo continued to receive the power price drawback in accordance with the original calculation method, through 2009, when the European Commission declared all such special tariffs to be impermissible “state aid.” In 2010, the Energy Authority appealed the 2006 ruling to the Consiglio di Stato (final court of appeal). On December 2, 2011, the Consiglio di Stato ruled in favor of the Energy Authority and against ParentCo, thus presenting the opportunity for the energy regulators to seek reimbursement from ParentCo of an amount equal to the difference between the actual drawback amounts received over the relevant time period, and the drawback as it would have been calculated in accordance with regulation 148/2004. On February 23, 2012, ParentCo filed its appeal of the decision of the Consiglio di Stato (this appeal was subsequently withdrawn in March 2013). On March 26, 2012, ParentCo received a letter from the agency (Cassa Conguaglio per il Settore Eletrico (CCSE)) responsible for making and collecting payments on behalf of the Energy Authority demanding payment in the amount of approximately $110 million (€85 million), including interest. By letter dated April 5, 2012, ParentCo informed CCSE that it disputes the payment demand of CCSE since (i) CCSE was not authorized by the Consiglio di Stato decisions to seek payment of any amount, (ii) the decision of the Consiglio di Stato has been appealed (see above), and (iii) in any event, no interest should be payable. On April 29, 2012, Law No. 44 of 2012 (“44/2012”) came into effect, changing the method to calculate the drawback. On February 21, 2013, ParentCo received a revised request letter from CCSE demanding ParentCo’s subsidiary, Alcoa Trasformazioni S.r.l., make a payment in the amount of $97 million (€76 million), including interest, which reflects a revised calculation methodology by CCSE and represents the high end of the range of reasonably possible loss associated with this matter of $0 to $97 million (€76 million). ParentCo rejected that demand and formally challenged it through an appeal before the Administrative Court on April 5, 2013. The Administrative Court scheduled a hearing for December 19, 2013, which was subsequently postponed until April 17, 2014, and further postponed until June 19, 2014. On that date, the Administrative Court listened to ParentCo’s oral argument, and on September 2, 2014, rendered its decision. The Administrative Court declared the payment request of CCSE and the Energy Authority to ParentCo to be unsubstantiated based on the 148/2004 resolution with respect to the January 19, 2007 through November 19, 2009 timeframe. On December 18, 2014, the CCSE and the Energy Authority appealed the Administrative Court’s September 2, 2014 decision; however, a date for the hearing has not been scheduled. ParentCo management recorded a partial reserve for this matter of $37 million (€34 million) during the quarter ended December 31, 2015 (see Note N to the Combined Financial Statements under the caption “Contingencies and Commitments—Agreement with Alumina Limited”). At this time, we are unable to reasonably predict an outcome for this matter.

Environmental Matters

ParentCo is involved in proceedings under the Comprehensive Environmental Response, Compensation and Liability Act, also known as Superfund (CERCLA) or analogous state provisions regarding the usage, disposal, storage or treatment of hazardous substances at a number of sites in the U.S. ParentCo has committed to participate, or is engaged in negotiations with federal or state authorities relative to its alleged liability for participation, in clean-up efforts at several such sites. The most significant of these matters are discussed in the Environmental Matters section of Note N to the Combined Financial Statements under the caption “Contingencies and Commitments—Environmental Matters.”

In August 2005, Dany Lavoie, a resident of Baie Comeau in the Canadian Province of Québec, filed a Motion for Authorization to Institute a Class Action and for Designation of a Class Representative against Alcoa Canada Ltd., Alcoa Limitée, Societe Canadienne de Metaux Reynolds Limitée and Canadian British Aluminum in the Superior Court of Québec in the District of Baie Comeau. Plaintiff seeks to institute the class action on behalf of a putative class consisting of all past, present and future owners, tenants and residents of Baie Comeau’s St. Georges neighborhood. He alleges that defendants, as the present and past owners and operators of an aluminum smelter in Baie Comeau, have negligently allowed the emission of certain contaminants from the

 

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smelter, specifically Polycyclic Aromatic Hydrocarbons or “PAHs,” that have been deposited on the lands and houses of the St. Georges neighborhood and its environs causing damage to the property of the putative class and causing health concerns for those who inhabit that neighborhood. Plaintiff originally moved to certify a class action, sought to compel additional remediation to be conducted by the defendants beyond that already undertaken by them voluntarily, sought an injunction against further emissions in excess of a limit to be determined by the court in consultation with an independent expert, and sought money damages on behalf of all class members. In May 2007, the court authorized a class action suit to include only people who suffered property damage or personal injury damages caused by the emission of PAHs from the smelter. In September 2007, plaintiffs filed the claim against the original defendants, which the court had authorized in May. ParentCo filed its Statement of Defense and plaintiffs filed an Answer to that Statement. ParentCo also filed a Motion for Particulars with respect to certain paragraphs of plaintiffs’ Answer and a Motion to Strike with respect to certain paragraphs of plaintiffs’ Answer. In late 2010, the court denied these motions. The Soderberg smelting process that plaintiffs allege to be the source of emissions of concern has ceased operations and has been dismantled. Plaintiffs filed a motion seeking appointment of an expert to advise the court on matters of sampling of homes and standards for interior home remediation. ParentCo opposed the motion. After a March 25, 2016 hearing on the motion, the court granted, in a ruling dated April 8, 2016, the motion and directed the parties to confer on potential experts and protocols for sampling of residences. The court has identified a sampling expert. The parties are advising the expert on their respective views on the appropriate protocol for sampling. Further proceedings in the case will await the independent expert’s report. At this stage of the proceeding, we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

In October 2006, in Barnett, et al. v. Alcoa and Alcoa Fuels, Inc., Warrick Circuit Court, County of Warrick, Indiana; 87-C01-0601-PL-499, forty-one plaintiffs sued ParentCo and one of its subsidiary, asserting claims similar to those asserted in Musgrave v. Alcoa, et al., Warrick Circuit Court, County of Warrick, Indiana; 87-C01-0601-CT-006. In November 2007, ParentCo and its subsidiary filed a motion to dismiss the Barnett cases. In October 2008, the Warrick County Circuit Court granted ParentCo’s motions to dismiss, dismissing all claims arising out of alleged occupational exposure to wastes at the Squaw Creek Mine, but in November 2008, the trial court clarified its ruling, indicating that the order does not dispose of plaintiffs’ personal injury claims based upon alleged “recreational” or non-occupational exposure. Plaintiffs also filed a “second amended complaint” in response to the court’s orders granting ParentCo’s motion to dismiss. On July 7, 2010, the court granted the parties’ joint motions for a general continuance of trial settings. Discovery in this matter remains stayed. We are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss because plaintiffs have merely alleged that their medical condition is attributable to exposure to materials at the Squaw Creek Mine but no further information is available due to the discovery stay.

In 1996, ParentCo acquired the Fusina, Italy smelter and rolling operations and the Portovesme, Italy smelter (both of which are owned by ParentCo’s subsidiary, Alcoa Trasformazioni S.r.l.) from Alumix, an entity owned by the Italian Government. ParentCo also acquired the extrusion plants located in Feltre and Bolzano, Italy. At the time of the acquisition, Alumix indemnified ParentCo for pre-existing environmental contamination at the sites. In 2004, the Italian Ministry of Environment (MOE) issued orders to Alcoa Trasformazioni S.r.l. and Alumix for the development of a clean-up plan related to soil contamination in excess of allowable limits under legislative decree and to institute emergency actions and pay natural resource damages. On April 5, 2006, Alcoa Trasformazioni S.r.l.’s Fusina site was also sued by the MOE and Minister of Public Works (MOPW) in the Civil Court of Venice for an alleged liability for environmental damages, in parallel with the orders already issued by the MOE. Alcoa Trasformazioni S.r.l. appealed the orders, defended the civil case for environmental damages and filed suit against Alumix, as discussed below. Similar issues also existed with respect to the Bolzano and Feltre plants, based on orders issued by local authorities in 2006. Most, if not all, of the underlying activities occurred during the ownership of Alumix, the governmental entity that sold the Italian plants to ParentCo.

As noted above, in response to the 2006 civil suit by the MOE and MOPW, Alcoa Trasformazioni S.r.l. filed suit against Alumix claiming indemnification under the original acquisition agreement, but brought that suit in the

 

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Court of Rome due to jurisdictional rules. In June 2008, the parties (ParentCo and now Ligestra S.r.l. (Ligestra), the successor to Alumix) signed a preliminary agreement by which they have committed to pursue a settlement. The Court of Rome accepted the request, and postponed the Court’s expert technical assessment, reserving its ability to fix the deadline depending on the development of negotiations. ParentCo and Ligestra agreed to a settlement in December 2008 with respect to the Feltre site. Ligestra paid the sum of 1.08 million Euros and ParentCo committed to clean up the site. Further postponements were granted by the Court of Rome, and the next hearing is fixed for December 20, 2016. In the meantime, Alcoa Trasformazioni S.r.l. and Ligestra reached a preliminary agreement for settlement of the liabilities related to Fusina, allocating 80% and 20% of the remediation costs to Ligestra and ParentCo, respectively. In January 2014, a final agreement with Ligestra was signed, and on February 5, 2014, ParentCo signed a final agreement with the MOE and MOPW settling all environmental issues at the Fusina site. As set out in the agreement between ParentCo and Ligestra, those two parties will share the remediation costs and environmental damages claimed by the MOE and MOPW. The remediation project filed by ParentCo and Ligestra has been approved by the MOE. See Note N to the Combined Financial Statements under the caption “Fusina and Portovesme, Italy.” To provide time for settlement with Ligestra, the MOE and ParentCo jointly requested and the Civil Court of Venice has granted a series of postponements of hearings in the Venice trial, assuming that the case will be closed. Following the settlement, the parties caused the Court to dismiss the proceedings. The proceedings were, however, restarted in April 2015 by the MOE and MOPW because the Ministers had not ratified the settlement of February 5, 2014. The Ministers announced in December 2015 that they will ratify the settlement in the following months.

ParentCo and Ligestra have signed a similar agreement relating to the Portovesme site. However, that agreement is contingent upon final acceptance of the proposed soil remediation project for Portovesme that was rejected by the MOE in the fourth quarter of 2013. ParentCo submitted a revised proposal in May 2014 and a further revised proposal in February 2015, in agreement with Ligestra. The MOE issued a Ministerial Decree approving the final project in October 2015. Work on the soil remediation project will commence in 2016 and is expected to be completed in 2019. ParentCo and Ligestra are now working on a final groundwater remediation project which is expected to be submitted to the MOE for review during 2016. While the issuance of the decree for the soil remediation project has provided reasonable certainty regarding liability for the soil remediation, with respect to the groundwater remediation project ParentCo is unable to reasonably predict an outcome or to estimate a range of reasonably possible loss beyond what is described in Footnote N to the Combined Financial Statements for several reasons. First, certain costs relating to the groundwater remediation are not yet fixed. In connection with any proposed groundwater remediation plan for Portovesme, ParentCo understands that the MOE has substantial discretion in defining what must be managed under Italian law, as well as the extent and duration of that remediation program. As a result, the scope and cost of the final groundwater remediation plan remain uncertain for Portovesme; ParentCo and Ligestra are still negotiating a final settlement for groundwater remediation at Portovesme, for an allocation of the cost based on the new remediation project approved by the MOE. In addition, once a groundwater remediation project is submitted, should a final settlement with Ligestra not be reached, we should be held responsible only for ParentCo’s share of pollution. However, the area is impacted by many sources of pollution, as well as historical pollution. Consequently, the allocation of liabilities would need a very complex technical evaluation by the authorities that has not yet been performed.

On November 30, 2010, Alcoa World Alumina Brasil Ltda. (AWAB) received notice of a lawsuit that had been filed by the public prosecutors of the State of Pará in Brazil in November 2009. The suit names AWAB and the State of Pará, which, through its Environmental Agency, had issued the operating license for ParentCo’s new bauxite mine in Juruti. The suit concerns the impact of the project on the region’s water system and alleges that certain conditions of the original installation license were not met by AWAB. In the lawsuit, plaintiffs requested a preliminary injunction suspending the operating license and ordering payment of compensation. On April 14, 2010, the court denied plaintiffs’ request. AWAB presented its defense in March 2011, on grounds that it was in compliance with the terms and conditions of its operating license, which included plans to mitigate the impact of the project on the region’s water system. In April 2011, the State of Pará defended itself in the case asserting that the operating license contains the necessary plans to mitigate such impact, that the State monitors the performance of AWAB’s obligations arising out of such license, that the licensing process is valid and legal, and

 

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that the suit is meritless. ParentCo’s position is that any impact from the project had been fully repaired when the suit was filed. ParentCo also believes that Jará Lake has not been affected by any project activity and any evidence of pollution from the project would be unreliable. Following the preliminary injunction request, the plaintiffs took no further action until October 2014, when in response to the court’s request and as required by statute, they restated the original allegations in the lawsuit. We are not certain whether or when the action will proceed. Given that this proceeding is in its preliminary stage and the current uncertainty in this case, we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

St. Croix Proceedings

Abednego and Abraham cases. On January 14, 2010, ParentCo was served with a multi-plaintiff action complaint involving several thousand individual persons claiming to be residents of St. Croix who are alleged to have suffered personal injury or property damage from Hurricane Georges or winds blowing material from the St. Croix Alumina, L.L.C. (“SCA”) facility on the island of St. Croix (U.S. Virgin Islands) since the time of the hurricane. This complaint, Abednego, et al. v. Alcoa, et al. was filed in the Superior Court of the Virgin Islands, St. Croix Division. Following an unsuccessful attempt by ParentCo and SCA to remove the case to federal court, the case has been lodged in the Superior Court. The complaint names as defendants the same entities that were sued in a February 1999 action arising out of the impact of Hurricane Georges on the island and added as a defendant the current owner of the alumina facility property.

On March 1, 2012, ParentCo was served with a separate multi-plaintiff action complaint involving approximately 200 individual persons alleging claims essentially identical to those set forth in the Abednego v. Alcoa complaint. This complaint, Abraham, et al. v. Alcoa, et al., was filed on behalf of plaintiffs previously dismissed in the federal court proceeding involving the original litigation over Hurricane Georges impacts. The matter was originally filed in the Superior Court of the Virgin Islands, St. Croix Division, on March 30, 2011.

ParentCo and other defendants in the Abraham and Abednego cases filed or renewed motions to dismiss each case in March 2012 and August 2012 following service of the Abraham complaint on ParentCo and remand of the Abednego complaint to Superior Court, respectively. By order dated August 10, 2015, the Superior Court dismissed plaintiffs’ complaints without prejudice to re-file the complaints individually, rather than as a multi-plaintiff filing. The order also preserves the defendants’ grounds for dismissal if new, individual complaints are filed. As of June 10, 2016, approximately 100 separate complaints had been filed in Superior Court, which alleged claims by about 400 individuals. On June 1, 2016, counsel representing plaintiffs filed a motion seeking additional time to file new complaints. The court has not ruled on that request. No further proceedings have been scheduled, and we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

Glencore Contractual Indemnity Claim. On June 5, 2015, Alcoa World Alumina LLC (“AWA”) and St. Croix Alumina, L.L.C. (“SCA”) filed a complaint in Delaware Chancery Court for a declaratory judgment and injunctive relief to resolve a dispute between ParentCo and Glencore Ltd. (“Glencore”) with respect to claimed obligations under a 1995 asset purchase agreement between ParentCo and Glencore. The dispute arose from Glencore’s demand that ParentCo indemnify it for liabilities it may have to pay to Lockheed Martin (“Lockheed”) related to the St. Croix alumina refinery. Lockheed had earlier filed suit against Glencore in federal court in New York seeking indemnity for liabilities it had incurred and would incur to the U.S. Virgin Islands to remediate certain properties at the refinery property and claimed that Glencore was required by an earlier, 1989 purchase agreement to indemnify it. Glencore had demanded that ParentCo indemnify and defend it in the Lockheed case and threatened to claim against ParentCo in the New York action despite exclusive jurisdiction for resolution of disputes under the 1995 purchase agreement being in Delaware. After Glencore conceded that it was not seeking to add ParentCo to the New York action, AWA and SCA dismissed their complaint in the Chancery Court case and on August 6, 2015 filed a complaint for declaratory judgment in Delaware Superior Court. AWA and SCA filed a motion for judgment on the pleadings on September 16, 2015. Glencore answered AWA’s and SCA’s complaint and asserted counterclaims on August 27, 2015, and on October 2, 2015 filed its own motion for judgment on the pleadings. Argument on the parties’ motions was held by the court on

 

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December 7, 2015, and by order dated February 8, 2016, the court granted ParentCo’s motion and denied Glencore’s motion, resulting in ParentCo not being liable to indemnify Glencore for the Lockheed action. The decision also leaves for pretrial discovery and possible summary judgment or trial Glencore’s claims for costs and fees it incurred in defending and settling an earlier Superfund action brought against Glencore by the Government of the Virgin Islands. On February 17, 2016, Glencore filed notice of its application for interlocutory appeal of the February 8 ruling. AWA and SCA filed an opposition to that application on February 29, 2016. On March 10, 2016, the court denied Glencore’s motion for interlocutory appeal and on the same day entered judgment on claims other than Glencore’s claims for costs and fees it incurred in defending and settling the earlier Superfund action brought against Glencore by the Government of the Virgin Islands. On March 29, 2016, Glencore filed a withdrawal of its notice of interlocutory appeal and also noted its intent to appeal the court’s March 10, 2016 judgment. Briefing is complete; however, the court has not set a date for argument. At this time, we are unable to reasonably predict an outcome for this matter.

Other Matters

Some of ParentCo’s subsidiaries as premises owners are defendants in active lawsuits filed on behalf of persons alleging injury as a result of occupational exposure to asbestos at various facilities. A former affiliate of a ParentCo subsidiary has been named, along with a large common group of industrial companies, in a pattern complaint where ParentCo’s involvement is not evident. Since 1999, several thousand such complaints have been filed. To date, the former affiliate has been dismissed from almost every case that was actually placed in line for trial. ParentCo’s subsidiaries and acquired companies, all have had numerous insurance policies over the years that provide coverage for asbestos based claims. Many of these policies provide layers of coverage for varying periods of time and for varying locations. ParentCo has significant insurance coverage and believes that its reserves are adequate for its known asbestos exposure related liabilities. The costs of defense and settlement have not been and are not expected to be material to the results of operations, cash flows, and financial position of Alcoa Corporation.

On August 2, 2013, the State of North Carolina, by and through its agency, the North Carolina Department of Administration, filed a lawsuit against Alcoa Power Generating Inc. (APGI) in Superior Court, Wake County, North Carolina (Docket No. 13-CVS-10477). The lawsuit asserts ownership of certain submerged lands and hydropower generating structures situated at ParentCo’s Yadkin Hydroelectric Project (the “Yadkin Project”), including the submerged riverbed of the Yadkin River throughout the Yadkin Project and a portion of the hydroelectric dams that APGI owns and operates pursuant to a license from the Federal Energy Regulatory Commission. The suit seeks declaratory relief regarding North Carolina’s alleged ownership interests in the riverbed and the dams and further declaration that APGI has no right, license or permission from North Carolina to operate the Yadkin Project. By notice filed on September 3, 2013, APGI removed the matter to the U.S. District Court for the Eastern District of North Carolina (Docket No. Civil Action No. 5: 13-cv-633). By motion filed September 3, 2013, the Yadkin Riverkeeper sought permission to intervene in the case. On September 25, 2013, APGI filed its answer in the case and also filed its opposition to the motion to intervene by the Yadkin Riverkeeper. The Court denied the State’s Motion to Remand and initially permitted the Riverkeeper to intervene although the Riverkeeper has now voluntarily withdrawn as an intervening party and will participate as amicus.

On July 21, 2014, the parties each filed a motion for summary judgment. On November 20, 2014, the Court denied APGI’s motion for summary judgment and denied in part and granted in part the State of North Carolina’s motions for summary judgment. The Court held that under North Carolina law, the burden of proof as to title to property is shifted to a private party opposing a state claim of property ownership. The court conducted a trial on navigability on April 21-22, 2015, and, after ruling orally from the bench on April 22, 2015, on May 5, 2015, entered Findings of Fact and Conclusions of Law as to Navigability, ruling in APGI’s favor that the state “failed to meet its burden to prove that the Relevant Segment, as stipulated by the parties, was navigable for commerce at statehood.” Subsequently, APGI filed a motion for summary judgment as to title; the state filed opposition papers. On September 28, 2015, the Court granted summary judgment in APGI’s favor and found that the evidence demonstrates that APGI holds title to the riverbed. The Court further directed judgment to be entered in APGI’s favor and closed the case. The court has set argument for October 27, 2016.

 

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On October 19, 2015, a subsidiary, Alúmina Española S.A., received a request by the Court of Vivero, Spain to provide the names of the “manager,” as well as those of the “environmental managers,” of the San Ciprián alumina refinery from 2009 to the present date. Upon reviewing the documents filed with the Court, ParentCo learned for the first time that the request is the result of a criminal proceeding that began in 2010 after the filing of a claim by two San Ciprián neighbors alleging that the plant’s activities had adverse effects on vegetation, crops and human health. In 2011 and 2012, some neighbors claimed individually in the criminal court for caustic spill damages to vehicles, and the judge decided to administer all issues in the court proceeding (865/2011). Currently, that court proceeding is in its first phase (preliminary investigation phase) led by the judge. The purpose of that investigation is to determine whether there has been a criminal offense for actions against natural resources and the environment. The Spanish public prosecutor is also involved in the case, having requested technical reports. To date, only “Alcoa-Alúmina Española S.A.” has been identified as a potential defendant and no ParentCo representative has yet been required to appear before the judge. No other material step has been taken during this preliminary investigation phase. Monetary sanctions for an offense in the form of a fine could range from 30 to 5,000 euros per day, for a maximum period of three years. Given that this proceeding is in its preliminary stage and the current uncertainty in the case, we are unable to reasonably predict an outcome or to estimate a range of reasonably possible loss.

Tax

Between 2000 and 2002, Alcoa Alumínio (Alumínio) sold approximately 2,000 metric tons of metal per month from its Poços de Caldas facility, located in the State of Minas Gerais (the “State”), to Alfio, a customer also located in the State. Sales in the State were exempted from value-added tax (VAT) requirements. Alfio subsequently sold metal to customers outside of the State, but did not pay the required VAT on those transactions. In July 2002, Alumínio received an assessment from State auditors on the theory that Alumínio should be jointly and severally liable with Alfio for the unpaid VAT. In June 2003, the administrative tribunal found Alumínio liable, and Alumínio filed a judicial case in the State in February 2004 contesting the finding. In May 2005, the Court of First Instance found Alumínio solely liable, and a panel of a State appeals court confirmed this finding in April 2006. Alumínio filed a special appeal to the Superior Tribunal of Justice (STJ) in Brasilia (the federal capital of Brazil) later in 2006. In 2011, the STJ (through one of its judges) reversed the judgment of the lower courts, finding that Alumínio should neither be solely nor jointly and severally liable with Alfio for the VAT, which ruling was then appealed by the State. In August 2012, the STJ agreed to have the case reheard before a five-judge panel. A decision from this panel is pending, but additional appeals are likely. At December 31, 2015, the assessment totaled $35 million (R$135 million), including penalties and interest. While we believe we have meritorious defenses, we are unable to reasonably predict an outcome.

Alumina Limited Litigation

On May 27, 2016, ParentCo filed a complaint in the Delaware Court of Chancery seeking a declaratory judgment on an expedited basis to forestall what the complaint alleges are continuing threats by Alumina Limited and certain related parties to attempt to interfere with the separation and distribution. Alumina Limited has claimed that it has certain consent and other rights under certain agreements governing Alcoa World Alumina and Chemicals (AWAC), a global joint venture between Alcoa Corporation and Alumina Limited, in connection with the separation and distribution.

On September 1, 2016, ParentCo, Alumina Limited, Alcoa Corporation and certain of their respective subsidiaries entered into a settlement and release agreement (the “settlement agreement”) providing for a full settlement and release by each party of claims arising from or relating to the Delaware litigation. The settlement agreement also provides for certain changes to the governance and financial policies of the AWAC joint venture effective upon the completion of the separation, as well as certain additional changes to their AWAC agreements that become effective only in the event of a change in control of Alumina Limited or Alcoa Corporation. The settlement agreement is not expected to have a material effect, adverse or otherwise, on the future operating results of Alcoa Corporation. See “Business—Certain Joint Ventures—AWAC.”

 

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Other Contingencies

In addition to the matters discussed above, various other lawsuits, claims, and proceedings have been or may be instituted or asserted against ParentCo and/or Alcoa Corporation, including those pertaining to environmental, product liability, safety and health, and tax matters. While the amounts claimed in these other matters may be substantial, the ultimate liability cannot now be determined because of the considerable uncertainties that exist. Therefore, it is possible that our liquidity or results of operations in a particular period could be materially affected by one or more of these other matters. However, based on facts currently available, management believes that the disposition of these other matters that are pending or asserted will not have a material adverse effect, individually or in the aggregate, on the financial position of Alcoa Corporation.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) in conjunction with the audited Combined Financial Statements and corresponding notes and the Unaudited Pro Forma Combined Condensed Financial Statements and corresponding notes included elsewhere in this information statement. This MD&A contains forward-looking statements. The matters discussed in these forward-looking statements are subject to risk, uncertainties, and other factors that could cause actual results to differ materially from those projected or implied in the forward-looking statements. Please see “Risk Factors” and “Cautionary Statement Concerning Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

All amounts discussed are in millions of U.S. dollars, unless otherwise indicated.

Overview

The Separation

The Proposed Separation. On September 28, 2015, ParentCo announced that its Board of Directors approved a plan (the “separation”) to separate into two independent, publicly-traded companies: Alcoa Upstream Corporation (“Alcoa Corporation”), which will primarily comprise the historical bauxite mining, alumina refining, aluminum production and energy operations of ParentCo, as well as the rolling mill at the Warrick, Indiana, operations and ParentCo’s 25.1% stake in the Ma’aden Rolling Company in Saudi Arabia; and a value-add company, that will principally include the Global Rolled Products (other than the Warrick and Ma’aden rolling mills), Engineered Products and Solutions, and Transportation and Construction Solutions segments (collectively, the “Value-Add Businesses”) of ParentCo.

The separation will occur by means of a pro rata distribution by ParentCo of at least 80.1% of the outstanding shares of Alcoa Corporation. ParentCo, the existing publicly traded company, will continue to own the Value-Add Businesses, and will become the value-add company. In conjunction with the Separation, ParentCo will change its name to Arconic Inc. (“Arconic”) and Alcoa Upstream Corporation will change its name to Alcoa Corporation.

The separation transaction, which is expected to be completed in the second half of 2016, is subject to a number of conditions, including, but not limited to: final approval by ParentCo’s Board of Directors; the continuing validity of the private letter ruling from the Internal Revenue Service regarding certain U.S. federal income tax matters relating to the transaction; receipt of an opinion of legal counsel regarding the qualification of the distribution, together with certain related transactions, as a transaction that is generally tax-free for U.S. federal income tax purposes; and the U.S. Securities and Exchange Commission (the “SEC”) declaring effective the registration statement of which this information statement forms a part. Upon completion of the separation, ParentCo shareholders will own at least 80.1% of the outstanding shares of Alcoa Corporation, and Alcoa Corporation will be a separate company from Arconic. Arconic will retain no more than 19.9% of the outstanding shares of common stock of Alcoa Corporation following the distribution.

Alcoa Corporation and Arconic will enter into an agreement (the “Separation Agreement”) that will identify the assets to be transferred, the liabilities to be assumed and the contracts to be transferred to each of Alcoa Corporation and Aronic as part of the separation of ParentCo into two companies, and will provide for when and how these transfers and assumptions will occur.

ParentCo may, at any time and for any reason until the proposed transaction is complete, abandon the separation plan or modify its terms.

For purposes of the following sections of the MD&A, we use the terms “Alcoa Corporation,” “we,” “us,” and “our,” when referring to periods prior to the distribution, to refer to the Alcoa Corporation Business of ParentCo.

 

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Our Business

Alcoa Corporation is the world leader in the production and management of primary aluminum and alumina combined, through its active participation in all major aspects of the industry: technology, mining, refining, smelting, and recycling. Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily. The price of aluminum influences the operating results of Alcoa Corporation.

Alcoa Corporation is a global company operating in ten countries. Based upon the country where the point of sale occurred, the United States and Europe generated 48% and 26%, respectively, of Alcoa Corporation’s sales in 2015. In addition, Alcoa Corporation has investments and operating activities in, among others, Australia, Canada, Brazil, Guinea, and Saudi Arabia. Governmental policies, laws and regulations, and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates, affect the results of operations in these countries.

Results of Operations

Earnings Summary

Net loss attributable to Alcoa Corporation for 2015 was $863 compared with Net loss attributable to Alcoa Corporation of $256, in 2014. The increased loss of $607 was primarily due to a lower average realized price for both aluminum and alumina, a charge for legal matters in Italy, discrete income tax charge for valuation allowances on certain deferred tax assets and nondeductible items, lower energy sales, and higher costs. These negative impacts were partially offset by net favorable foreign currency movements, net productivity improvements, and lower charges and expenses related to a number of portfolio actions (such as capacity reductions and divestitures).

Net loss attributable to Alcoa Corporation for 2014 was $256, compared with a Net loss of $2,909, in 2013. The improvement in results of $2,653 was primarily due to the absence of an impairment of goodwill and charges for the resolution of a legal matter. Other significant changes in results included the following: higher energy sales, a higher average realized price for primary aluminum, net productivity improvements, and net favorable foreign currency movements. These other changes were mostly offset by higher charges related to a number of portfolio actions (such as capacity reductions and divestitures), and higher overall input costs.

Sales—Sales for 2015 were $11,199 compared with sales of $13,147 in 2014, a reduction of $1,948, or 14.8%. The decrease was primarily due to the absence of sales related to capacity that was closed, sold or curtailed (see Primary Metals in Segment Information below), a lower average realized price for aluminum and alumina, and lower energy sales (as a result of lower pricing and unfavorable foreign currency movements). These negative impacts were partially offset by higher volumes of alumina and rolled products.

Sales for 2014 were $13,147 compared with sales of $12,573 in 2013, an improvement of $574, or 4.6%. The increase was mainly the result of higher volumes of alumina, higher energy sales resulting from excess power due to curtailed smelter capacity, and a higher average realized price for primary aluminum. These positive impacts were partially offset by lower primary aluminum volumes, including those related to curtailed and shutdown smelter capacity.

Cost of Goods Sold—COGS as a percentage of Sales was 80.7% in 2015 compared with 80.2% in 2014. The percentage was negatively impacted by a lower average realized price for both aluminum and alumina, lower energy sales, higher inventory write-downs related to the decisions to permanently shut down and/or curtail capacity (difference of $35 – see Restructuring and Other Charges below), and higher costs. These negative impacts were mostly offset by net favorable foreign currency movements due to a stronger U.S. dollar, net productivity improvements, a favorable last in, first out (LIFO) adjustment (difference of $103) due to lower prices for aluminum and alumina, and the absence of costs related to a new labor agreement that covers employees at seven locations in the United States (see below).

 

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COGS as a percentage of Sales was 80.2% in 2014 compared with 87.8% in 2013. The percentage was positively impacted by net productivity improvements across all segments, both the previously mentioned higher energy sales and higher average realized price for primary aluminum, net favorable foreign currency movements due to a stronger U.S. dollar, lower costs for caustic and carbon, and the absence of costs related to a planned maintenance outage in 2013 at a power plant in Australia. These positive impacts were partially offset by higher costs for bauxite, energy, and labor; higher inventory write-downs related to the decisions to permanently shut down and/or curtail capacity (difference of $47 – see Restructuring and Other Charges below); less favorable LIFO adjustment (difference of $15); and costs related to a new labor agreement that covers employees at seven locations in the United States (see below).

On June 6, 2014, the United Steelworkers ratified a new five-year labor agreement covering approximately 6,100 employees at 10 U.S. locations of ParentCo (of which seven are part of Alcoa Corporation); the previous labor agreement expired on May 15, 2014. In 2014, as a result of the preparation for and ratification of the new agreement, Alcoa Corporation recognized $7 in COGS for, among other items, business contingency costs and a one-time signing bonus for employees.

Selling, General Administrative, and Other Expenses—SG&A expenses were $353, or 3.2% of Sales, in 2015 compared with $383, or 2.9% of Sales, in 2014. The decline of $30 was principally the result of favorable foreign currency movements due to a stronger U.S. dollar and the absence of SG&A ($15) related to closed and sold locations, partially offset by expenses for professional and consulting services related to the planned separation discussed above ($12).

SG&A expenses were $383, or 2.9% of Sales, in 2014 compared with $406, or 3.2% of Sales, in 2013. The decline of $23 was attributable to favorable foreign currency movements and decreases in various expenses, including legal and consulting fees and contract services, partially offset by higher stock-based compensation expense ($6).

Research and Development Expenses—R&D expenses were $69 in 2015 compared with $95 in 2014 and $86 in 2013. The decrease in 2015 as compared to 2014 primarily resulted from lower spending associated with inert anode and carbothermic technology for the Primary Metals segment. The increase in 2014 as compared to 2013 was primarily caused by additional spending related to inert anode and carbothermic technology for the Primary Metals segment.

Provision for Depreciation, Depletion, and Amortization —The provision for DD&A was $780 in 2015 compared with $954 in 2014. The decrease of $174, or 18.2%, was mostly due to favorable foreign currency movements due to a stronger U.S. dollar, particularly against the Australian dollar and Brazilian real, and the absence of DD&A ($55) related to the divestiture and/or permanent closure of five smelters, one refinery, and one rod mill (see Alumina and Primary Metals in Segment Information below), all of which occurred from March 2014 through June 2015.

The provision for DD&A was $954 in 2014 compared with $1,026 in 2013. The decrease of $72, or 7.0%, was principally the result of favorable foreign currency movements due to a stronger U.S. dollar, particularly against the Australian dollar and Brazilian real, and a reduction in expense ($20) related to the permanent shutdown of smelter capacity in Australia, Canada, the United States, and Italy that occurred at different points during both 2013 and 2014 (see Primary Metals in Segment Information below).

Impairment of Goodwill—In 2013, Alcoa Corporation recognized an impairment of goodwill in the amount of $1,731 ($1,719 after noncontrolling interest) related to the annual impairment review of the Primary Metals reporting unit (see Goodwill in Critical Accounting Policies and Estimates below).

 

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Restructuring and Other Charges—Restructuring and other charges for each year in the three-year period ended December 31, 2015 were comprised of the following:

 

     2015      2014      2013  

Asset impairments

   $ 311       $ 328       $ 100   

Layoff costs

     199         157         152   

Legal matters in Italy

     201         —           —     

Net loss on divestitures of businesses

     25         214         —     

Resolution of a legal matter

     —           —           391   

Other*

     254         181         73   

Reversals of previously recorded layoff and other exit costs

     (7      (17      (4
  

 

 

    

 

 

    

 

 

 

Total Restructuring and other charges

   $ 983       $ 863       $ 712   
  

 

 

    

 

 

    

 

 

 

 

* Includes $32, $23, and $14 in 2015, 2014, and 2013, respectively, related to the allocation of restructuring charges to Alcoa Corporation based on segment revenue.

Layoff costs were recorded based on approved detailed action plans submitted by the operating locations that specified positions to be eliminated, benefits to be paid under existing severance plans, union contracts or statutory requirements, and the expected timetable for completion of the plans.

2015 Actions. In 2015, Alcoa Corporation recorded Restructuring and other charges of $983, which were comprised of the following components: $418 for exit costs related to decisions to permanently shut down and demolish three smelters and a power station (see below); $238 for the curtailment of two refineries and two smelters (see below); $201 related to legal matters in Italy (see Note N to the Combined Financial Statements); a $24 net loss primarily related to post-closing adjustments associated with two December 2014 divestitures (see Note F to the Combined Financial Statements); $45 for layoff costs, including the separation of approximately 465 employees; $33 for asset impairments related to prior capitalized costs for an expansion project at a refinery in Australia that is no longer being pursued; a net credit of $1 for other miscellaneous items; $7 for the reversal of a number of small layoff reserves related to prior periods; and $32 related to Corporate restructuring allocated to Alcoa Corporation.

During 2015, management initiated various alumina refining and aluminum smelting capacity curtailments and/or closures. The curtailments were composed of the remaining capacity at all of the following: the São Luís smelter in Brazil (74 kmt-per-year); the Suriname refinery (1,330 kmt-per-year); the Point Comfort, TX refinery (2,010 kmt-per-year); and the Wenatchee, WA smelter (143 kmt-per-year). All of the curtailments were completed in 2015 except for 1,635 kmt-per-year at the Point Comfort refinery, which is expected to be completed by the end of June 2016. The permanent closures were composed of the capacity at the Warrick, IN smelter (269 kmt-per-year) (includes the closure of a related coal mine) and the infrastructure of the Massena East, NY smelter (potlines were previously shut down in both 2013 and 2014 – see 2013 Actions and 2014 Actions below), as the modernization of this smelter is no longer being pursued. The shutdown of the Warrick smelter is expected to be completed by the end of March 2016.

The decisions on the above actions were part of a separate 12-month review in refining (2,800 kmt-per-year) and smelting (500 kmt-per-year) capacity initiated by management in March 2015 for possible curtailment (partial or full), permanent closure or divestiture. While many factors contributed to each decision, in general, these actions were initiated to maintain competitiveness amid prevailing market conditions for both alumina and aluminum. Demolition and remediation activities related to the Warrick smelter and the Massena East location will begin in 2016 and are expected to be completed by the end of 2020.

Separate from the actions initiated under the reviews described above, in mid-2015, management approved the permanent shutdown and demolition of the Poços de Caldas smelter (capacity of 96 kmt-per-year) in Brazil and the Anglesea power station (includes the closure of a related coal mine) in Australia. The entire capacity at

 

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Poços de Caldas had been temporarily idled since May 2014 and the Anglesea power station was shut down at the end of August 2015. Demolition and remediation activities related to the Poços de Caldas smelter and the Anglesea power station began in late 2015 and are expected to be completed by the end of 2026 and 2020, respectively.

The decision on the Poços de Caldas smelter was due to management’s conclusion that the smelter was no longer competitive as a result of challenging global market conditions for primary aluminum, which led to the initial curtailment, that have not dissipated and higher costs. For the Anglesea power station, the decision was made because a sale process did not result in a sale and there would have been imminent operating costs and financial constraints related to this site in the remainder of 2015 and beyond, including significant costs to source coal from available resources, necessary maintenance costs, and a depressed outlook for forward electricity prices. The Anglesea power station previously supplied approximately 40 percent of the power needs for the Point Henry smelter, which was closed in August 2014 (see 2014 Actions below).

In 2015, costs related to the shutdown and curtailment actions included asset impairments of $226, representing the write-off of the remaining book value of all related properties, plants, and equipment; $154 for the layoff of approximately 3,100 employees (1,800 in the Primary Metals segment and 1,300 in the Alumina segment), including $30 in pension costs (see Note W to the Combined Financial Statements); accelerated depreciation of $85 related to certain facilities as they continued to operate during 2015; and $222 in other exit costs. Additionally in 2015, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $90, which was recorded in Cost of goods sold on the accompanying Statement of Combined Operations. The other exit costs of $222 represent $72 in asset retirement obligations and $85 in environmental remediation, both of which were triggered by the decisions to permanently shut down and demolish the aforementioned structures in the United States, Brazil, and Australia (includes the rehabilitation of a related coal mine in each of Australia and the United States), and $65 in supplier and customer contract-related costs.

As of December 31, 2015, approximately 740 of the 3,600 employees were separated. The remaining separations for 2015 restructuring programs are expected to be completed by the end of 2016. In 2015, cash payments of $26 were made against layoff reserves related to 2015 restructuring programs.

2014 Actions. In 2014, Alcoa Corporation recorded Restructuring and other charges of $863, which were comprised of the following components: $526 for exit costs related to decisions to permanently shut down and demolish three smelters (see below); a $216 net loss for the divestitures of three operations (see Note F to the Combined Financial Statements); $61 for the temporary curtailment of two smelters and a related production slowdown at one refinery (see below); $33 for asset impairments related to prior capitalized costs for a modernization project at a smelter in Canada that is no longer being pursued; $9 for layoff costs, including the separation of approximately 60 employees; a net charge of $4 for an environmental charge at a previously shut down refinery; $9 primarily for the reversal of a number of layoff reserves related to prior periods; and $23 related to Corporate restructuring allocated to Alcoa Corporation.

In early 2014, management approved the permanent shutdown and demolition of the remaining capacity (84 kmt-per-year) at the Massena East, NY smelter and the full capacity (190 kmt-per-year) at the Point Henry smelter in Australia. The capacity at Massena East was fully shut down by the end of March 2014 and the Point Henry smelter was fully shut down in August 2014. Demolition and remediation activities related to both the Massena East and Point Henry smelters began in late 2014 and are expected to be completed by the end of 2020 and 2018, respectively.

The decisions on the Massena East and Point Henry smelters were part of a 15-month review of 460 kmt of smelting capacity initiated by management in May 2013 (see 2013 Actions below) for possible curtailment. Through this review, management determined that the remaining capacity of the Massena East smelter was no longer competitive and the Point Henry smelter had no prospect of becoming financially viable. Management

 

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also initiated the temporary curtailment of the remaining capacity (62 kmt-per-year) at the Poços de Caldas smelter and additional capacity (85 kmt-per-year) at the São Luís smelter, both in Brazil. These curtailments were completed by the end of May 2014. As a result of these curtailments, 200 kmt-per-year of production at the Poços de Caldas refinery was reduced by the end of June 2014.

Additionally, in August 2014, management approved the permanent shutdown and demolition of the capacity (150 kmt-per-year) at the Portovesme smelter in Italy, which had been idle since November 2012. This decision was made because the fundamental reasons that made the Portovesme smelter uncompetitive remained unchanged, including the lack of a viable long-term power solution. Demolition and remediation activities related to the Portovesme smelter will begin in 2016 and are expected to be completed by the end of 2020 (delayed due to discussions with the Italian government and other stakeholders).

In 2014, costs related to the shutdown and curtailment actions included $149 for the layoff of approximately 1,290 employees, including $24 in pension costs (see Note W to the Combined Financial Statements); accelerated depreciation of $146 related to the Point Henry smelter in Australia as they continued to operate during 2014; asset impairments of $150 representing the write-off of the remaining book value of all related properties, plants, and equipment; and $152 in other exit costs. Additionally in 2014, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value, resulting in a charge of $55, which was recorded in Cost of goods sold on the accompanying Statement of Combined Operations. The other exit costs of $152 represent $87 in asset retirement obligations and $24 in environmental remediation, both of which were triggered by the decisions to permanently shut down and demolish the aforementioned structures in Australia, Italy, and the United States, and $41 in other related costs, including supplier and customer contract-related costs.

As of December 31, 2015, the separations associated with 2014 restructuring programs were essentially complete. In 2015 and 2014, cash payments of $34 and $87, respectively, were made against layoff reserves related to 2014 restructuring programs.

2013 Actions. In 2013, Alcoa Corporation recorded Restructuring and other charges of $712, which were comprised of the following components: $391 related to the resolution of a legal matter (see Government Investigations under Litigation in Note N to the Combined Financial Statements); $244 for exit costs related to the permanent shutdown and demolition of certain structures at three smelter locations (see below); $38 for layoff costs, including the separation of approximately 370 employees, of which 280 relates to a global overhead reduction program; $23 for asset impairments related to the write-off of capitalized costs for projects no longer being pursued due to the market environment; a net charge of $2 for other miscellaneous items; and $14 related to Corporate restructuring allocated to Alcoa Corporation.

In May 2013, management approved the permanent shutdown and demolition of two potlines (capacity of 105 kmt-per-year) that utilize Soderberg technology at the Baie Comeau smelter in Québec, Canada (remaining capacity of 280 kmt-per-year composed of two prebake potlines) and the full capacity (44 kmt-per-year) at the Fusina smelter in Italy. Additionally, in August 2013, management approved the permanent shutdown and demolition of one potline (capacity of 41 kmt-per-year) that utilizes Soderberg technology at the Massena East, NY smelter (remaining capacity of 84 kmt-per-year composed of two Soderberg potlines). The aforementioned Soderberg lines at Baie Comeau and Massena East were fully shut down by the end of September 2013 while the Fusina smelter was previously temporarily idled in 2010. Demolition and remediation activities related to all three facilities began in late 2013 and are expected to be completed by the end of 2016 for Massena East and by the end of 2017 for both Baie Comeau and Fusina.

The decisions on the Soderberg lines for Baie Comeau and Massena East were part of a 15-month review of 460 kmt of smelting capacity initiated by management in May 2013 for possible curtailment, while the decision on the Fusina smelter was in addition to the capacity being reviewed. Factors leading to all three decisions were in general focused on achieving sustained competitiveness and included, among others: lack of an economically viable, long-term power solution (Italy); changed market fundamentals; other existing idle capacity; and restart costs.

 

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In 2013, exit costs related to the shutdown actions included $113 for the layoff of approximately 550 employees (Primary Metals segment), including $78 in pension costs (see Note W to the Combined Financial Statements); accelerated depreciation of $58 (Baie Comeau) and asset impairments of $19 (Fusina and Massena East) representing the write-off of the remaining book value of all related properties, plants, and equipment; and $54 in other exit costs. Additionally in 2013, remaining inventories, mostly operating supplies and raw materials, were written down to their net realizable value resulting in a charge of $8, which was recorded in Cost of goods sold on the accompanying Statement of Combined Operations. The other exit costs of $54 represent $47 in asset retirement obligations and $5 in environmental remediation, both of which were triggered by the decisions to permanently shut down and demolish these structures, and $2 in other related costs.

As of December 31, 2015, the separations associated with 2013 restructuring programs were essentially complete. In 2015, 2014, and 2013, cash payments of $6, $24, and $23, respectively, were made against layoff reserves related to 2013 restructuring programs.

Alcoa Corporation does not include Restructuring and other charges in the results of its reportable segments. The pretax impact of allocating such charges to segment results would have been as follows:

 

     2015      2014      2013  

Bauxite

   $ 16       $ —         $ —     

Alumina

     212         283         10   

Aluminum

     610         559         296   

Cast Products

     2         (2      —     

Energy

     84         —           —     

Rolled Products

     9         —           —     
  

 

 

    

 

 

    

 

 

 

Segment total

     933         840         306   
  

 

 

    

 

 

    

 

 

 

Corporate

     50         23         406   
  

 

 

    

 

 

    

 

 

 

Total restructuring and other charges

   $ 983       $ 863       $ 712   
  

 

 

    

 

 

    

 

 

 

Interest Expense—Interest expense was $270 in 2015 compared with $309 in 2014. The decrease of $39, or 12.6%, was largely due to a lower allocation to Alcoa Corporation of ParentCo’s interest expense, which is primarily a function of the lower ratio in 2015 (as compared to 2014) of capital invested in Alcoa Corporation to the total capital invested by ParentCo in both Alcoa Corporation and Arconic, partially offset by higher interest expense at ParentCo subject to allocation.

Interest expense was $309 in 2014 compared with $305 in 2013. The increase of $4, or 1.3%, was primarily driven by a higher allocation to Alcoa Corporation of ParentCo’s interest expense, due mainly to higher interest expense at ParentCo subject to allocation.

Other Expenses (Income), net— Other expenses, net was $42 in 2015 compared with $58 in 2014. The decrease of $16 was mainly the result of net favorable foreign currency movements ($23) and lower equity losses ($5), partially offset by an unfavorable change in mark-to-market derivative contracts ($13).

Other expenses, net was $58 in 2014 compared with $14 in 2013. The change of $44 was mostly due to an unfavorable change in mark-to-market derivative aluminum contracts ($49) and a higher equity loss related to Alcoa Corporation’s share of the joint venture in Saudi Arabia due to start-up costs of the entire complex, including restart costs for one of the smelter potlines that was previously shut down due to a period of instability. These items were partially offset by a gain on the sale of a mining interest in Suriname ($28).

Income Taxes — Alcoa Corporation’s effective tax rate was 119% (provision on a loss) in 2015 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate mainly due to U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation, a $141 discrete

 

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income tax charge ($107 after noncontrolling interest) for valuation allowances on certain deferred tax assets in Iceland and Suriname (see Income Taxes in Critical Accounting Policies and Estimates below) and a $201 charge for legal matters in Italy (see Restructuring and Other Charges above) that are nondeductible for income tax purposes, and restructuring charges related to the curtailment of a refinery in Suriname (see Restructuring and Other Charges above), a portion for which no tax benefit was recognized.

Alcoa Corporation’s effective tax rate was 451% (provision on a loss) in 2014 compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate mainly due to U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation, restructuring charges related to operations in Italy (no tax benefit) and Australia (benefit at a lower tax rate) (see Restructuring and Other Charges above), a $52 ($31 after noncontrolling interest) discrete income tax charge related to a tax rate change in Brazil (see below), and a $27 ($16 after noncontrolling interest) discrete income tax charge for the remeasurement of certain deferred tax assets of a subsidiary in Spain due to a November 2014 enacted tax rate change (from 30% in 2014 to 28% in 2015, and from 28% to 25% in 2016). These items were somewhat offset by foreign income taxed in lower-rate jurisdictions.

In December 2011, one of Alcoa Corporation’s subsidiaries in Brazil applied for a tax holiday related to its expanded mining and refining operations. During 2013, the application was amended and re-filed and, separately, a similar application was filed for another one of ParentCo’s subsidiaries in Brazil that has significant operations of Alcoa Corporation. The deadline for the Brazilian government to deny the application was July 11, 2014. Since Alcoa Corporation did not receive notice that its applications were denied, the tax holiday took effect automatically on July 12, 2014. As a result, the tax rate for these entities decreased significantly (from 34% to 15.25%), resulting in future cash tax savings over the 10-year holiday period (retroactively effective as of January 1, 2013). Additionally, a portion of the Alcoa Corporation subsidiary’s net deferred tax asset that reverses within the holiday period was remeasured at the new tax rate (the net deferred tax asset of the other entity was not remeasured since it could still be utilized against the subsidiary’s future earnings not subject to the tax holiday). This remeasurement resulted in a decrease to that entity’s net deferred tax asset and a noncash charge to earnings in Alcoa Corporation’s combined statement of operations of $52 ($31 after noncontrolling interest).

Alcoa Corporation’s effective tax rate was 4% in 2013 (provision on a loss) compared with the U.S. federal statutory rate of 35%. The effective tax rate differs from the U.S. federal statutory rate primarily due to a $1,731 impairment of goodwill (see Impairment of Goodwill above), U.S. losses and tax credits with no tax benefit realizable in Alcoa Corporation and a $209 charge for a legal matter (see Restructuring and Other Charges above) that are nondeductible for income tax purposes, a $128 discrete income tax charge for valuation allowances on certain deferred tax assets in Spain (see Income Taxes in Critical Accounting Policies and Estimates below), restructuring charges related to operations in Canada (benefit at a lower tax rate) and Italy (no tax benefit) (see Restructuring and Other Charges above).

Management anticipates that the effective tax rate in 2016 will be approximately 60% (provision on a loss). However, changes in the current economic environment, tax legislation or rate changes, currency fluctuations, ability to realize deferred tax assets, and the results of operations in certain taxing jurisdictions may cause this estimated rate to fluctuate.

Noncontrolling Interests—Net income attributable to noncontrolling interests was $124 in 2015 compared with Net loss attributable to noncontrolling interests of $91 in 2014 and Net income attributable to noncontrolling interests of $39 in 2013. These amounts are related to Alumina Limited’s 40% ownership interest in AWAC. In 2015, AWAC generated income compared to a loss in both 2014 and 2013.

In 2015, the change in AWAC’s results was principally due to improved operating results, the absence of restructuring and other charges related to both the permanent shutdown of the Point Henry smelter in Australia (see Restructuring and Other Charges above) and the divestiture of an ownership interest in a mining and refining

 

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joint venture in Jamaica (see Alumina in Segment Information below), and the absence of a combined $79 ($32 was noncontrolling interest’s share) discrete income tax charge related to a respective tax rate change in both Brazil and Spain (see Income Taxes above). These positive impacts were somewhat offset by restructuring charges related to the curtailment of both the refinery in Suriname and in Point Comfort, TX and the permanent closure of the Anglesea power station and coal mine (see Restructuring and Other Charges above), an $85 ($34 was noncontrolling interest’s share) discrete income tax charge for a valuation allowance on certain deferred tax assets (see Income Taxes above), and the absence of a $28 gain ($11 was noncontrolling interest’s share) on the sale of a mining interest in Suriname. The improvement in AWAC’s operating results was largely attributable to net favorable foreign currency movements, net productivity improvements, and lower input costs, slightly offset by a lower average realized price (see Alumina in Segment Information below).

In 2014, AWAC generated a smaller loss compared to 2013 mainly driven by the absence of a $384 charge for a legal matter (see below), improved operating results, and a $28 gain ($11 was noncontrolling interest’s share) on the sale of a mining interest in Suriname. These positive impacts were mostly offset by restructuring and other charges associated with both the decision to permanently shut down the Point Henry smelter in Australia (see Restructuring and Other Charges above) and the divestiture of an ownership interest in a mining and refining joint venture in Jamaica (see Alumina in Segment Information below) and a combined $79 ($32 was noncontrolling interest’s share) discrete income tax charge related to a tax rate change in both Brazil and Spain (see Income Taxes above). The improvement in AWAC’s operating results was principally due to net favorable foreign currency movements and net productivity improvements, partially offset by an increase in input costs. Even though AWAC generated an overall loss in both 2014 and 2013, the noncontrolling interest’s share resulted in income in 2013 due to the manner in which the charges and costs related to a legal matter were allocated, as discussed below.

The noncontrolling interest’s share of AWAC’s charge for a legal matter in 2013 and 2012 was $58 (related to the aforementioned $384) and $34 (an $85 charge related to the civil portion of the same legal matter), respectively. In 2012, the $34 was based on the 40% ownership interest of Alumina Limited, while, in 2013, the $58 was based on 15%. The application of a different percentage was due to the criteria in a 2012 allocation agreement between ParentCo and Alumina Limited related to this legal matter being met. Additionally, the $34 charge, as well as costs related to this legal matter, was retroactively adjusted to reflect the terms of the allocation agreement, resulting in a credit to Noncontrolling interests of $41 in 2013. In summary, Noncontrolling interests included a charge of $17 and $34 related to this legal matter in 2013 and 2012, respectively.

Segment Information

Alcoa Corporation is primarily a producer of bauxite, alumina, aluminum ingot, and aluminum sheet. Alcoa Corporation’s segments are organized by product on a worldwide basis. Segment performance under Alcoa Corporation’s management reporting system is evaluated based on a number of factors; however, the primary measure of performance is the after-tax operating income (ATOI) of each segment. Certain items such as the impact of LIFO inventory accounting; metal price lag; interest expense; non-controlling interests; corporate expense (primarily comprising general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; intersegment profit elimination; the impact of discrete tax items, any deferred tax valuation allowance adjustments and other differences between tax rates applicable to the segments and the combined effective tax rate; and other non-operating items such as foreign currency transaction gains/losses and interest income are excluded from segment ATOI.

Effective January 1, 2015, Alcoa Corporation redefined its operating segments concurrent with an internal reorganization for certain of its businesses. Following this reorganization, Alcoa Corporation’s operations consist of six segments: Bauxite, Alumina, Aluminum, Cast Products, Energy and Rolled Products. Under the applicable reporting guidance, when a Company changes its organizational structure, it should generally prepare its segment information based on the new segments and provide comparative information for related periods. However, in

 

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certain instances, changes to the structure of an internal organization could change the composition of its reportable segments and it may not be practical to retrospectively revise prior periods. In connection with the January 1, 2015 reorganization, Alcoa Corporation fundamentally altered the commercial nature of how certain internal businesses transact with each other, moving from a cost-based transfer pricing model to one based on estimated market pricing. As a result, certain operations (such as bauxite mining, aluminum smelting and casting) that had previously been measured and evaluated primarily based on costs incurred were transformed into separate businesses with full profit and loss information. In addition, this reorganization involved converting regional-based management responsibility to global responsibility for each business, which had a further impact on overall cost structures of the segments.

As a result of the significant changes associated with the reorganization (including substantial information system modifications), which were implemented on a prospective basis only, Alcoa Corporation does not have all of the information that would be necessary to present certain segment data, specifically ATOI, income taxes and total assets, for periods prior to 2015. This information is not available to Alcoa Corporation management for its own internal use, and it is impracticable to obtain or generate this information, as underlying commercial transactions between the segments, which are necessary to determine these income-based and asset-based segment measures, did not take place prior to 2015.

The following discussion includes amounts for 2015 related to Alcoa Corporation’s current six segments. In addition, comparative information for 2015, 2014 and 2013 is provided on a supplemental basis for the segments that were in effect for periods prior to 2015: Alumina, Primary Metals and Rolled Products.

ATOI for all segments under the current segment reporting totaled $1,010 in 2015. The following information provides shipments (where appropriate), sales, and ATOI data for each segment, as well as certain production, realized price, and average cost data, for the period ended December 31, 2015. See Note Q to the Combined Financial Statements of this information statement for additional information.

Bauxite

 

     2015  

Bauxite production (bone dry metric tons, or bdmt), in millions

     45.3   

Alcoa Corporation’s average cost per bdmt of bauxite*

   $ 19   

Third-party sales

   $ 71   

Intersegment sales

     1,160   
  

 

 

 

Total sales

   $ 1,231   
  

 

 

 

ATOI

   $ 258   
  

 

 

 

 

* Includes all production-related costs, including conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

During 2015, mines operated by Alcoa Corporation (owned by Alcoa Corporation and AWAC) produced 38.3 million bdmt and separately mines operated by third parties (with Alcoa Corporation and AWAC equity interests) produced 7.0 million bdmt on a proportional equity basis for a total bauxite production of 45.3 million bdmt.

Based on the terms of its bauxite supply contracts, AWAC bauxite purchases from Mineração Rio do Norte S.A. (MRN) and Compagnie des Bauxites de Guinée (CBG) differ from its proportional equity in those mines. Therefore during 2015, AWAC had access to 47.8 million bdmt of production from its portfolio of mines.

During 2015, AWAC sold 1.5 million bdmt of bauxite to third parties and purchased 0.2 million bdmt from third parties. The bauxite delivered to Alcoa Corporation and AWAC refineries amounted to 46.8 million bdmt during 2015.

 

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Alcoa Corporation is growing its third-party bauxite sales business. During the third quarter of 2015, Alcoa Corporation received permission from the Government of Western Australia to export trial shipments from its Western Australia mines.

In 2016, management will continue to focus on expanding its third-party bauxite business while also leveraging the strategic advantage of it close proximity to its owned refinery operations.

Alumina

 

     2015  

Alumina production (kmt)

     15,720   

Third-party alumina shipments (kmt)

     10,755   

Alcoa Corporation’s average realized price per metric ton of alumina

   $ 311   

Alcoa Corporation’s average cost per metric ton of alumina*

   $ 266   

Third-party sales

   $ 3,343   

Intersegment sales

     1,687   
  

 

 

 

Total sales

   $ 5,030   
  

 

 

 

ATOI

   $ 476   
  

 

 

 

 

* Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

In March 2015, Alcoa Corporation initiated a 12-month review of 2,800,000 mtpy in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of Alcoa Corporation’s target to lower its refining operations on the global alumina cost curve to the 21st percentile by the end of 2016. As part of this review, in March 2015, Alcoa Corporation decided to curtail 443,000 mtpy (one digester) of capacity at the Suralco refinery; this action was completed by the end of April 2015.

Additionally, in September, Alcoa Corporation decided to curtail the remaining capacity (887,000 mtpy—two digesters) at Suralco; Alcoa Corporation completed it by the end of November 2015 (877,000 mtpy of capacity at Suralco had previously been curtailed). Alcoa Corporation is currently in discussions with the Suriname government to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative.

During 2015, Alcoa Corporation undertook curtailment of the remaining 2,010,000 mtpy of capacity at the Point Comfort, Texas refinery (295,000 mtpy had previously been curtailed). This action is expected to be completed by the end of June 2016 (375,000 mtpy was completed by the end of December 2015).

In 2016, alumina production will be approximately 2,500 kmt lower, mostly due to the curtailment of the Point Comfort and Suralco refineries. Also, the continued shift towards alumina index and spot pricing is expected to average 85% of third-party smelter-grade alumina shipments. Additionally, net productivity improvements are anticipated.

Aluminum

 

     2015  

Aluminum production (kmt)

     2,811   

Alcoa Corporation’s average cost per metric ton of aluminum*

   $ 1,828   

Third-party sales

   $ 14   

Intersegment sales

     5,092   
  

 

 

 

Total sales

   $ 5,106   
  

 

 

 

ATOI

   $ 1   
  

 

 

 

 

* Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

 

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In March 2015, Alcoa Corporation initiated a 12-month review of 500,000 mtpy of smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of Alcoa Corporation’s target to lower its smelting operations on the global aluminum cost curve to the 38th percentile by 2016. As part of this review, in March 2015, Alcoa Corporation decided to curtail the remaining capacity (74,000 mtpy) at the Alumar smelter; this action was completed in April 2015.

Separate from the smelting capacity review described above, in June 2015, Alcoa Corporation decided to permanently close the Poços de Caldas smelter (96,000 mtpy) in Brazil effective immediately. The Poços de Caldas smelter had been temporarily idle since May 2014 due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved.

In November 2015, Alcoa Corporation announced that it would curtail 503,000 mtpy of aluminum smelting capacity amid prevailing market conditions by idling capacity at the Massena West (130,000 mtpy), Intalco (230,000 mtpy) and Wenatchee (143,000 mtpy) smelters. The curtailment of the remaining capacity at Wenatchee was completed by the end of December 2015. Later in November 2015, Alcoa Corporation announced that it had entered into a three-and-a-half year agreement with New York State to increase the competitiveness of the Massena West smelter. As a result, the Massena West smelter will continue to operate.

In January 2016, Alcoa Corporation announced it would delay the curtailment (230,000 mtpy) of its Intalco smelter in Ferndale, Washington until the end of the second quarter of 2016. Recent decreases in energy and raw material costs had made it more cost effective in the near term to keep the smelter operating. In May 2016, Alcoa Corporation announced that it had entered into a one-and-a-half year agreement with the Bonneville Power Administration (BPA) that will help improve the competitiveness of the Intalco smelter. As a result, the smelter will not be curtailed at the end of the second quarter of 2016 as previously announced.

In January 2016, Alcoa Corporation announced that it will permanently close its 269,000 mtpy Warrick Operations smelter in Evansville, Indiana by the end of the first quarter of 2016. The rolling mill and power plant at Warrick Operations will continue to operate.

In 2016, aluminum production and third party sales in the Aluminum segment will be lower reflecting the 2015 curtailment and closure actions.

Cast Products

 

     2015  

Third-party aluminum shipments (kmt)

     2,957   

Alcoa Corporation’s average third party realized price per metric ton of aluminum*

   $ 2,092   

Alcoa Corporation’s average cost per metric ton of aluminum**

   $ 2,019   

Third-party sales

   $ 6,186   

Intersegment sales

     46   
  

 

 

 

Total sales

   $ 6,232   
  

 

 

 

ATOI

   $ 110   
  

 

 

 

 

* Average realized price per metric ton of aluminum includes three elements: a) the underlying base metal component, based on quoted prices from the LME; b) the regional premium, which represents the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (for example the Midwest premium for metal sold in the United States); and c) the product premium, which represents the incremental price for receiving physical metal in a particular shape (such as billet, slab, rod, etc.) or alloy.

 

** Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

 

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In 2015, casting production was impacted by smelter curtailments (see Aluminum above). The casthouses associated with the 2015 smelter curtailments were also curtailed with the exception of the Massena West casthouse, which will continue to operate.

In 2016, casting production and third party sales will be lower due to the curtailment of the Wenatchee smelter (see Aluminum above) and lower product premiums and mix.

Energy

 

     2015  

Third-party sales (GWh)

     6,604   

Third-party sales

   $ 426   

Intersegment sales

     297   
  

 

 

 

Total sales

   $ 723   
  

 

 

 

ATOI

   $ 145   
  

 

 

 

In 2015, third party sales volume of electricity was principally comprised of the Brazil hydro facilities and the Warrick, IN power plant. During the year, management elected to permanently shut down the Anglesea power station and associated coal mine in Victoria, Australia. The power station previously provided electricity to the Pt. Henry smelter.

In 2016, energy sales in Brazil will be negatively impacted (as compared to 2015) by a decline in energy prices and net unfavorable foreign currency movements due to a stronger U.S. dollar against the Brazilian real. The sales volume at Warrick will decline by approximately 40% as a result of the closure of the Warrick smelter.

Rolled Products

 

     2015  

Third-party aluminum shipments (kmt)

     266   

Alcoa’s average realized price per metric ton of aluminum

   $ 3,728   

Third-party sales

   $ 993   

Intersegment sales

     18   
  

 

 

 

Total sales

   $ 1,011   
  

 

 

 

ATOI

   $ 20   
  

 

 

 

In 2015, third-party sales for the Rolled Products segment were impacted by unfavorable pricing, mostly due to a decrease in metal prices (both LME and regional premium components) as well as pricing pressure in the packaging end market.

In 2016, as a result of the planned closure of the Warrick smelter, additional costs are expected to secure alternative metal supply as the Warrick, IN rolling facility transitions to a cold metal rolling mill. Productivity improvements are anticipated to help offset some of these costs.

 

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Reconciliation of ATOI to Combined Net Income (Loss) Attributable to Alcoa Corporation

Items required to reconcile total segment ATOI to combined net income (loss) attributable to Alcoa Corporation include: the impact of LIFO inventory accounting; metal price lag; interest expense; non-controlling interests; corporate expense (primarily comprising general administrative and selling expenses of operating the corporate headquarters and other global administrative facilities, along with depreciation and amortization on corporate-owned assets); restructuring and other charges; intersegment profit elimination; the impact of any discrete tax items, deferred tax valuation allowance adjustments and other differences between tax rates applicable to the segments and the combined effective tax rate; and other non-operating items such as foreign currency transaction gains/losses and interest income.

The following table reconciles total segment ATOI to combined net (loss) income attributable to Alcoa Corporation:

 

     2015  

Net (loss) income attributable to Alcoa Corporation:

  

Total segment ATOI(1)

   $ 1,010   

Unallocated amounts:

  

Impact of LIFO

     107   

Metal price lag

     (30

Interest expense

     (270

Non-controlling interest (net of tax)

     (124

Corporate expense

     (180

Restructuring and other charges

     (983

Income taxes

     (41

Other

     (352
  

 

 

 

Combined net loss attributable to Alcoa Corporation

   $ (863
  

 

 

 

 

(1) Segment ATOI information is not available for periods prior to 2015 and it is impracticable to obtain.

Segments Prior to 2015

As discussed above, the following information regarding Alcoa Corporation’s segments in effect prior to January 2015 (Alumina, Primary Metals, and Rolled Products) is being provided on a supplemental basis.

ATOI for all segments in effect prior to January 2015 totaled $902 in 2015, $1,018 in 2014, and $275 in 2013. The following information provides shipments (where appropriate), sales, and ATOI data for each segment, as well as certain production, realized price, and average cost data, for each of the three years in the period ended December 31, 2015. See Note Q to the Combined Financial Statements included in this information statement for additional information.

Alumina

 

     2015      2014      2013  

Alumina production (kmt)

     15,720         16,606         16,618   

Third-party alumina shipments (kmt)

     10,755         10,652         9,966   

Alcoa Corporation’s average realized price per metric ton of alumina

   $ 317       $ 324       $ 328   

Alcoa Corporation’s average cost per metric ton of alumina*

   $ 237       $ 282       $ 295   

Third-party sales

   $ 3,455       $ 3,509       $ 3,326   

Intersegment sales

     1,687         1,941         2,235   
  

 

 

    

 

 

    

 

 

 

Total sales

   $ 5,142       $ 5,450       $ 5,561   
  

 

 

    

 

 

    

 

 

 

ATOI

   $ 746       $ 370       $ 259   
  

 

 

    

 

 

    

 

 

 

 

* Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation, depletion, and amortization; and plant administrative expenses.

 

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This segment represents a portion of Alcoa Corporation’s upstream operations and consists of its worldwide refining system. Alumina mines bauxite, from which alumina is produced and then sold directly to external smelter customers, as well as to the Primary Metals segment (see Primary Metals below), or to customers who process it into industrial chemical products. More than half of Alumina’s production is sold under supply contracts to third parties worldwide, while the remainder is used internally by the Primary Metals segment. Alumina produced by this segment and used internally is transferred to the Primary Metals segment at prevailing market prices. A portion of this segment’s third-party sales are completed through the use of agents, alumina traders, and distributors. Generally, the sales of this segment are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the Australian dollar, the Brazilian real, the U.S. dollar, and the euro.

AWAC is an unincorporated global joint venture between ParentCo and Alumina Limited and consists of a number of affiliated entities, which own, or have an interest in, or operate the bauxite mines and alumina refineries within the Alumina segment (except for the Poços de Caldas refinery in Brazil and a portion of the São Luís refinery in Brazil). ParentCo owns 60% and Alumina Limited owns 40% of these individual entities, which are consolidated for purposes of ParentCo’s and Alcoa Corporation’s financial statements and financial reporting. As such, the results and analysis presented for the Alumina segment are inclusive of Alumina Limited’s 40% interest.

In December 2014, AWAC completed the sale of its ownership stake in Jamalco, a bauxite mine and alumina refinery joint venture in Jamaica, to Noble Group Ltd. Jamalco was 55% owned by a subsidiary of AWAC, and, while owned by AWAC, 55% of both the operating results and assets and liabilities of this joint venture were included in the Alumina segment. As it relates to AWAC’s previous 55% ownership stake, the refinery (AWAC’s share of the capacity was 779 kmt-per-year) generated sales (third-party and intersegment) of approximately $200 in 2013, and the refinery and mine combined, at the time of divestiture, had approximately 500 employees. See Restructuring and Other Charges in Results of Operations above.

In 2015, alumina production decreased by 886 kmt compared to 2014. The decline was mostly the result of the absence of production at the Jamalco refinery (see above) and lower production at the Suralco (Suriname—see below) and Poços de Caldas (Brazil—see below) refineries, slightly offset by higher production at the San Ciprian (Spain) and Point Comfort (Texas) refineries.

In March 2015, management initiated a 12-month review of 2,800 kmt in refining capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of management’s target to lower Alcoa Corporation’s refining operations on the global alumina cost curve to the 21st percentile by the end of 2016. As part of this review, in 2015, management decided to curtail all of the operating capacity at both the Suralco (1,330 kmt-per-year) and Point Comfort (2,010 kmt-per-year) refineries. The curtailment of the capacity at Suralco was completed by the end of November 2015. Management is currently in discussions with the Suriname government to determine the best long-term solution for Suralco due to limited bauxite reserves and the absence of a long-term energy alternative. The curtailment of the capacity at Point Comfort is expected to be completed by the end of June 2016 (375 kmt-per-year was completed by the end of December 2015). Suralco and Point Comfort have nameplate capacity of 2,207 kmt-per-year and 2,305 kmt-per-year, respectively, of which 877 kmt and 295 kmt, respectively was curtailed prior to the review. See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to these actions.

In 2014, alumina production decreased by 12 kmt compared to 2013. The decline was mainly driven by lower production at the Poços de Caldas, Jamalco, and San Ciprian refineries, mostly offset by higher production at every other refinery in the global system. The Poços de Caldas refinery started to reduce production in early 2014 in response to management’s decision to fully curtail the Poços de Caldas smelter by the end of May 2014 (see Primary Metals below). As a result, management reduced the alumina production at the Poços de Caldas refinery by approximately 200 kmt-per-year by mid-2014. This reduction was replaced by an increase in

 

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production at lower cost refineries within Alcoa’s global system. Additionally, the decrease at the refinery in Jamaica was due to the absence of production for one month as a result of the sale of the ownership stake in Jamalco (see above).

Third-party sales for the Alumina segment decreased 2% in 2015 compared with 2014, largely attributable to a 2% decline in average realized price, somewhat offset by a 1% increase in volume. The change in average realized price was mostly driven by a decrease in both the average alumina index/spot price and average LME-based price, somewhat offset by a higher percentage (75% compared to 68%) of smelter-grade alumina shipments linked to an alumina index/spot price instead of an LME-based price.

Third-party sales for this segment improved 6% in 2014 compared with 2013, primarily related to a 7% improvement in volume.

Intersegment sales for the Alumina segment declined 13% in both 2015 compared with 2014 and 2014 compared with 2013. The decrease in both periods was mostly the result of lower demand from the Primary Metals segment, as a result of the closure, curtailment or divestiture of a number of smelters (see Primary Metals below), and a lower average realized price.

ATOI for the Alumina segment increased $376 in 2015 compared with 2014, mainly caused by net favorable foreign currency movements due to a stronger U.S. dollar, especially against the Australian dollar and Brazilian real; net productivity improvements; and lower input costs, including natural gas, fuel oil, and transportation, all of which were slightly offset by higher labor and maintenance costs. These positive impacts were slightly offset by the previously mentioned lower average realized price and the absence of a gain on the sale of a mining interest in Suriname ($18).

ATOI for this segment improved $111 in 2014 compared with 2013, mostly due to net favorable foreign currency movements due to a stronger U.S. dollar, especially against the Australian dollar, net productivity improvements, and a gain on the sale of a mining interest in Suriname ($18). These positive impacts were partially offset by higher input costs, including natural gas (particularly higher prices in Australia), bauxite (mainly due to a new mining site in Suriname), and labor and maintenance, all of which were somewhat offset by lower costs for caustic; and a higher equity loss due to start-up costs of the bauxite mine and refinery in Saudi Arabia.

Primary Metals

 

     2015      2014      2013  

Aluminum production (kmt)

     2,811         3,125         3,550   

Third-party aluminum shipments (kmt)

     2,961         3,261         3,481   

Alcoa Corporation’s average realized price per metric ton of aluminum*

   $ 2,092       $ 2,396       $ 2,280   

Alcoa Corporation’s average cost per metric ton of aluminum**

   $ 2,064       $ 2,252       $ 2,201   

Third-party sales

   $ 6,737       $ 8,601       $ 8,191   

Intersegment sales

     532         614         610   
  

 

 

    

 

 

    

 

 

 

Total sales

   $ 7,269       $ 9,215       $ 8,801   
  

 

 

    

 

 

    

 

 

 

ATOI

   $ 136       $ 627       $ (36
  

 

 

    

 

 

    

 

 

 

 

* Average realized price per metric ton of aluminum includes three elements: a) the underlying base metal component, based on quoted prices from the LME; b) the regional premium, which represents the incremental price over the base LME component that is associated with the physical delivery of metal to a particular region (for example the Midwest premium for metal sold in the United States); and c) the product premium, which represents the incremental price for receiving physical metal in a particular shape (such as billet, slab, rod, etc.) or alloy.

 

** Includes all production-related costs, including raw materials consumed; conversion costs, such as labor, materials, and utilities; depreciation and amortization; and plant administrative expenses.

 

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This segment represents a portion of Alcoa Corporation’s upstream operations and consists of its worldwide smelting system. Primary Metals purchases alumina, mostly from the Alumina segment (see Alumina above), from which primary aluminum is produced and then sold directly to external customers and traders, as well as to Arconic. Results from the sale of aluminum powder, scrap, and excess energy are also included in this segment. Primary aluminum produced by Alcoa Corporation and sold to Arconic is sold at prevailing market prices. The sale of primary aluminum represents approximately 90% of this segment’s third-party sales. Generally, the sales of this segment are transacted in U.S. dollars while costs and expenses of this segment are transacted in the local currency of the respective operations, which are the U.S. dollar, the euro, the Norwegian kroner, Icelandic krona, the Canadian dollar, the Brazilian real, and the Australian dollar.

In November 2014, Alcoa Corporation completed the sale of an aluminum rod plant located in Bécancour, Québec, Canada to Sural Laminated Products. This facility takes molten aluminum and shapes it into the form of a rod, which is used by customers primarily for the transportation of electricity. While owned by Alcoa Corporation, the operating results and assets and liabilities of this plant were included in the Primary Metals segment. In conjunction with this transaction, Alcoa Corporation entered into a multi-year agreement with Sural Laminated Products to supply molten aluminum for the rod plant. The aluminum rod plant generated sales of approximately $200 in 2013 and, at the time of divestiture, had approximately 60 employees. See Restructuring and Other Charges in Results of Operations above.

In December 2014, Alcoa Corporation completed the sale of its 50.33% ownership stake in the Mt. Holly smelter located in Goose Creek, South Carolina to Century Aluminum Company. While owned by Alcoa Corporation, 50.33% of both the operating results and assets and liabilities related to the smelter were included in the Primary Metals segment. As it relates to Alcoa Corporation’s previous 50.33% ownership stake, the smelter (Alcoa Corporation’s share of the capacity was 115 kmt-per-year) generated sales of approximately $280 in 2013 and, at the time of divestiture, had approximately 250 employees. See Restructuring and Other Charges in Results of Operations above.

At December 31, 2015, Alcoa Corporation had 778 kmt of idle capacity on a base capacity of 3,401 kmt. In 2015, idle capacity increased 113 kmt compared to 2014, mostly due to the curtailment of 217 kmt combined at a smelter in each the United States and Brazil, partially offset by the permanent closure of the Poços de Caldas smelter in Brazil (96 kmt-per-year). Base capacity declined 96 kmt between December 31, 2015 and 2014 due to the previously mentioned permanent closure of the Poços de Caldas smelter. A detailed description of each of these actions follows below.

At December 31, 2014, Alcoa Corporation had 665 kmt of idle capacity on a base capacity of 3,497 kmt. In 2014, idle capacity increased 10 kmt compared to 2013 due to the curtailment of 159 kmt combined at two smelters in Brazil, mostly offset by the permanent closure of the Portovesme smelter in Italy (150 kmt-per-year). Base capacity declined 540 kmt between December 31, 2014 and 2013 due to the permanent closure of both a smelter in Australia and two remaining potlines at a smelter in the United States (274 kmt combined), the previously mentioned permanent closure of the Portovesme smelter, and the sale of Alcoa Corporation’s ownership stake in the Mt. Holly smelter (see above). A detailed description of each of these actions follows below.

In March 2015, Alcoa Corporation initiated a 12-month review of 500,000 mtpy of smelting capacity for possible curtailment (partial or full), permanent closure or divestiture. This review is part of Alcoa Corporation’s target to lower its smelting operations on the global aluminum cost curve to the 38th percentile by 2016. As part of this review, in March 2015, Alcoa Corporation decided to curtail the remaining capacity (74,000 mtpy) at the Alumar smelter; this action was completed in April 2015.

In November 2015, Alcoa Corporation announced that it would curtail 503,000 mtpy of aluminum smelting capacity amid prevailing market conditions by idling capacity at the Massena West (130,000 mtpy), Intalco (230,000 mtpy) and Wenatchee (143,000 mtpy) smelters. The curtailment of the remaining capacity at

 

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Wenatchee was completed by the end of December 2015. Later in November 2015, Alcoa Corporation announced that it had entered into a three-and-a-half year agreement with New York State to increase the competitiveness of the Massena West smelter. As a result, the Massena West smelter will continue to operate.

In January 2016, Alcoa Corporation announced it would delay the curtailment (230,000 mtpy) of its Intalco smelter in Ferndale, Washington until the end of the second quarter of 2016. Recent decreases in energy and raw material costs had made it more cost effective in the near term to keep the smelter operating. In May 2016, Alcoa Corporation announced that it had entered into a one-and-a-half year agreement with the Bonneville Power Administration (BPA) that will help improve the competitiveness of the Intalco smelter. As a result, the smelter will not be curtailed at the end of the second quarter of 2016 as previously announced.

In January 2016, Alcoa Corporation announced that it will permanently close its 269,000 mtpy Warrick Operations smelter in Evansville, Indiana, which was completed by the end of the first quarter of 2016. The rolling mill and power plant at Warrick Operations will continue to operate.

Separate from the 2015 smelting capacity review described above, in June 2015, management approved the permanent closure of the Poços de Caldas smelter effective immediately. The Poços de Caldas smelter had been temporarily idle since May 2014 (see below) due to challenging global market conditions for primary aluminum and higher operating costs, which made the smelter uncompetitive. The decision to permanently close the Poços de Caldas smelter was based on the fact that these underlying conditions had not improved.

In May 2013, management initiated a 15-month review of 460 kmt in smelting capacity for possible curtailment. This review was aimed at maintaining Alcoa Corporation’s competitiveness despite falling aluminum prices and focused on the highest-cost smelting capacity and those plants that have long-term risk due to factors such as energy costs or regulatory uncertainty. In 2014, an additional 250 kmt of smelting capacity was included in the review. In summary, under this review, management approved the closure of 146 kmt-per-year and 274 kmt-per-year and the curtailment of 131 kmt-per-year and 159 kmt-per-year in 2013 and 2014, respectively. The following is a description of each action.

Also in May 2013, management approved the permanent closure of two potlines (105 kmt-per-year) that utilize Soderberg technology at the Baie Comeau smelter in Quebec, Canada. Additionally, in August 2013, management approved the permanent closure of one potline (41 kmt-per-year) that utilizes Soderberg technology at the Massena East, NY smelter. The shutdown of these three lines was completed by the end of September 2013. The Baie Comeau smelter has a remaining capacity of 280 kmt-per-year composed of two prebake potlines and the Massena East smelter had a remaining capacity of 84 kmt-per-year composed of two Soderberg potlines (see below).

Additionally, in August 2013, management decided to curtail 97 kmt-per-year at the São Luís smelter and 31 kmt-per-year at the Poços de Caldas smelter. This action was also completed by the end of September 2013. An additional 3 kmt-per-year was curtailed at the Poços de Caldas smelter by the end of 2013.

In January 2014, management approved the permanent closure of the remaining capacity (84 kmt-per-year) at the Massena East smelter, which represented two Soderberg potlines that were no longer competitive. This shutdown was completed by the end of March 2014. In February 2014, management approved the permanent closure of the Point Henry smelter (190 kmt-per-year) in Australia. This decision was made as management determined that the smelter had no prospect of becoming financially viable. The shutdown of the Point Henry smelter was completed in August 2014.

Also, in March 2014, management decided to curtail the remaining capacity (62 kmt-per-year) at the Poços de Caldas smelter and additional capacity (85 kmt-per-year) at the São Luís smelter. The curtailment of this capacity was completed by the end of May 2014. An additional 12 kmt-per-year was curtailed at the São Luís smelter during the remainder of 2014.

 

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Separate from the 2013-2014 smelting capacity review described above, in June 2013, management approved the permanent closure of the Fusina smelter (44 kmt-per-year) in Italy as the underlying conditions that led to the idling of the smelter in 2010 had not fundamentally changed, including low aluminum prices and the lack of an economically viable, long-term power solution. In August 2014, management approved the permanent closure of the Portovesme smelter, which had been idle since November 2012. This decision was made because the fundamental reasons that made the Portovesme smelter uncompetitive remained unchanged, including the lack of a viable long-term power solution.

See Restructuring and Other Charges in Results of Operations above for a description of the associated charges related to all of the above actions in 2015, 2014, and 2013.

In 2015, aluminum production declined by 314 kmt, mainly the result of the absence of and/or lower production at the combined four smelters (Point Henry, São Luís, Massena East, and Poços de Caldas) impacted by the 2014 and 2015 capacity reviews and at the smelter divested in 2014 (Mt. Holly), all of which is described above.

In 2014, aluminum production decreased by 425 kmt, mostly due to lower production at the five smelters (São Luís, Massena East, Point Henry, Baie Comeau, and Poços de Caldas) impacted by the 2013-2014 capacity review described above.

Third-party sales for the Primary Metals segment declined 22% in 2015 compared with 2014, primarily due to a 13% drop in average realized price; lower sales to Arconic locations (approximately $700) following the divestiture or closure of several rolling mills in December 2014; the absence of sales (approximately $585) from five smelters and a rod mill that were closed, curtailed or divested in 2014; and lower energy sales in Brazil, due to both a decrease in energy prices and a weaker Brazilian real. These negative impacts were slightly offset by higher volume in the remaining smelter portfolio. The change in average realized price was largely attributable to a 10% lower average LME price (on 15-day lag) and lower regional premiums, which dropped by an average of 39% in the United States and Canada and 44% in Europe.

Third-party sales for the Primary Metals segment increased 5% in 2014 compared with 2013, mainly due to higher energy sales in Brazil resulting from excess power due to curtailed smelter capacity, and a 8% increase in average realized price, mostly offset by lower volumes, including from the five smelters impacted by the 2013 and 2014 capacity reductions. The change in average realized price was driven by higher regional premiums, which increased by an average of 84% in the United States and Canada and 56% in Europe.

ATOI for the Primary Metals segment decreased $491 in 2015 compared with 2014, primarily caused by both the previously mentioned lower average realized aluminum price and lower energy sales, higher energy costs (mostly in Spain as the 2014 interruptibility rights were more favorable than the 2015 structure), and an unfavorable impact related to the curtailment of the São Luís smelter. These negative impacts were somewhat offset by net favorable foreign currency movements due to a stronger U.S. dollar against most major currencies, net productivity improvements, the absence of a write-off of inventory related to the permanent closure of the Portovesme, Point Henry, and Massena East smelters ($44), and a lower equity loss related to the joint venture in Saudi Arabia, including the absence of restart costs for one of the potlines that was previously shut down due to a period of instability.

ATOI for this segment climbed $663 in 2014 compared with 2013, principally related to a higher average realized aluminum price; the previously mentioned energy sales in Brazil; net productivity improvements; net favorable foreign currency movements due to a stronger U.S. dollar against all major currencies; lower costs for carbon and alumina; and the absence of costs related to a planned maintenance outage in 2013 at a power plant in Australia. These positive impacts were slightly offset by an unfavorable impact associated with the 2013 and 2014 capacity reductions described above, including a write-off of inventory related to the permanent closure of the Portovesme, Point Henry, and Massena East smelters ($44), and higher energy costs (particularly in Spain), labor, and maintenance.

 

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Rolled Products

 

     2015      2014      2013  

Third-party aluminum shipments (kmt)

     266         257         261