DBRS Downgrades Alcoa Inc. to A (low)

DBRS has today downgraded the Senior Unsecured Debt rating of Alcoa Inc. (Alcoa or the Company) to A (low) from “A” and confirmed Alcoa’s Commercial Paper rating as R-1 (low). The trend for both ratings is Stable. The downgrade of Alcoa’s Senior Unsecured Debt rating reflects the Company’s high and rising debt levels in part brought on by cyclically-reduced earnings, high capital investment, share buyback programs and a $1.2 billion investment in the shares of Rio Tinto.

Alcoa’s leverage has increased with gross debt in its capital structure rising to 36% at September 30, 2008, above the Company’s target level of 35% and above historic levels of around 30% due to an ambitious investment program.

Alcoa’s leverage, cash flow-to-debt and EBITDA coverage ratios are low in comparison to other international mining companies with similar DBRS ratings and the Company no longer has a financial profile consistent with an “A” rating.

Alcoa may have a difficult time in keeping debt at or below September 2008 levels over the coming quarters. DBRS expects Alcoa to have reduced cash from operations in the fourth quarter of 2008 and throughout 2009, brought on by a deterioration of aluminum market fundamentals due to a worldwide economic slowdown. The Company is also expected to reduce ongoing capital expenditures to minimum levels other than the $500 million committed for the first half of 2009 to complete near-finished expansion projects in Brazil.

In 2008, Alcoa invested $1.2 billion in a partnership with Chalco, formed to acquire an interest in Rio Tinto plc. The Company has not provided direction as to how the Rio Tinto investment program will proceed and this lack of clarity also adds to the increased financial risk.

DBRS is maintaining the trend on Alcoa’s A (low) rating as Stable. Over the long term, Alcoa’s capital investments will improve competitiveness and cash flow by lowering production costs of alumina and aluminum and increasing output capacity. Additionally, the sale of low-margin businesses and investments will improve overall profitability. Alcoa has suspended its share buyback program and, following the completion of the Company’s Brazilian projects during the first half in 2009, Alcoa’s sustaining capital needs should be reduced to a level where even reduced operating cash flows are not expected to lead to additional debt.

For more information on Alcoa Inc., please see the DBRS press releases published on July 14, 2008, November 17, 2007 and the November 14, 2007 rating report.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Mining which can be found on our website under Methodologies.

This is a Corporate rating.