DBRS Places Alcoa Under Review with Negative Implications

DBRS has today placed the ratings of Alcoa Inc. (Alcoa or the Company) Under Review with Negative Implications following the announcement of the Company’s first quarter results and in light of weak aluminum markets, both of which were worse than DBRS had expected. Alcoa’s high year-end net leverage (41%) has shown only modest improvement at the end of the first quarter (38%), despite the receipt of proceeds from the Company’s recent equity issue ($876 million) and sale of investments ($506 million). Very weak product shipments in all segments and a continued drop in realized prices for alumina and aluminum have resulted in an after-tax loss from operations of $143 million for the quarter. Alcoa’s financial metrics do not support its A (low) Senior Unsecured Debt and R-1 (low) Commercial Paper ratings. Following a more detailed analysis of the quarterly results, the state of the aluminum markets and the Company’s prospects for meeting the challenges of a deeper and longer downturn than expected, DBRS will determine the appropriate rating action. A downgrade of Alcoa’s ratings can be expected.

Alcoa reported, on April 7, 2009, a first quarter 2009 net loss of $497 million and a 27% drop in revenue from the fourth quarter of 2008, as the impact of the economic downturn on the Company’s core industrial and commercial markets reduced sales from all divisions. Realized primary aluminum prices for the quarter were $0.71 per pound, down 26% from the fourth quarter 2008 and 44% from the first quarter of 2008. Alcoa’s third-party alumina, primary aluminum, flat-rolled product and engineered products shipment volumes fell 18%, 15 %, 12 % and 30 %, respectively, from fourth quarter 2008 sales levels, reflecting the impact of the economic downturn on the automotive, transportation, building and construction and aerospace markets, all of which are important to Alcoa.

Weak operating cash flow was insufficient to support relatively high capital expenditures ($471 million) and dividends ($214 million), resulting in negative net free cash flow for the quarter of $956 million. During the quarter Alcoa received $500 million of the 1.0 billion proceeds from Chinalco for exiting its stake in the Shining Prospect venture and is expected to receive the remainder of the proceeds by July of this year. The cash received from investment sales, combined with proceeds of an equity issue ($876 million), did serve to reduce Alcoa’s leverage, but not to the extent expected by DBRS.

Aluminum markets remain very weak. Alcoa will continue to face capital expenditures above sustaining levels for the second quarter of this year as it completes expansion projects in Brazil. In addition, many key aluminum markets remain very weak and the important U.S. automobile sector could be considered in peril, so weak shipments are expected to continue into the fall of 2009. DBRS believes that at current spot aluminum prices ($0.65 per pound), much of the industry is unable to generate cash from operations and that further capacity shutdowns, combined with any economic recovery, will lead to somewhat higher aluminum prices in the second half of 2009. DBRS does not expect Alcoa to generate sufficient cash to materially improve its financial metrics in the near term, despite a wide range of cost-cutting measures announced by the Company. With (1) high net leverage (38%) at the end of the quarter, (2) minimal operating cash generation (after-tax operating earnings before income taxes and depreciation earnings) expected and (3) continuing higher-than-sustaining capital expenditures to at least mid-year, the outlook for the Company is poor.

Alcoa’s liquidity, however, does remain sound. Total debt as at March 31, 2009, was $10.2 billion, including $0.3 billion in commercial paper. The Company had $1.1 billion cash on hand at the end of the first quarter and long-term debt maturities for 2009 are minor at $56 million. Alcoa had $1.9 billion in revolving credit facilities maturing October 12, 2009, and $3.25 billion revolving credit facilities maturing October 2, 2012, which were undrawn as at March 31, 2009.

DBRS will determine the appropriate ratings for Alcoa’s debt obligations in the coming weeks, following a more detailed analysis of its quarterly results, the state of the aluminum markets and the Company’s prospects for meeting the challenges of a deeper and longer downturn than expected.

Notes:
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.

The ratings of Alcoa are based on public information.