1. Valuation of Alcoa Inc. Advanced Corporate Finance Teodora Spasova 04/25/06

2. Outline Industry Profile Company Profile Business Environment Strategic Plans Financial Performance Valuation

3. Industry Profile A procyclical industry- follows the overall performance of the economy Aluminum is a commodity that is traded on the London Metal Exchange (LME) and priced daily based on market supply and demand Serves a number of growing markets-alumina, aluminum, aerospace, packaging and consumer, industrial products, automotive, building and construction, commercial transportation Very high barriers to entry

4. Industry Performance Aluminum production depends on factors like energy and raw material costs, demand, price of aluminum/ alumina, seasonal fluctuations in markets, fluctuation in foreign currency exchange rates, R&D, technology, and the overall state of the economy Industry Performance Source: SmartMoney.com

5. Company Profile Sector: Basic Materials Industry: Aluminum (6 segments): –Alumina-the mining of bauxite –Primary Metals-aluminum ingot –Flat Rolled Products –Engineered Products –Extruded and End Products –Packaging and Consumer Full time employees: 129,000 in 42 countries

6. Key Statistics Market Cap- 30.79 B Total Revenue-26.2 B Total Assets-33,696,000 Source: Yahoo!Finance Quote: AA Index membership: DJIA, DJComposite, S&P500, S&P100, S&P1500 SuperComp Exchange: NYSE

7. Company Profile – Cont. Trademarks (Packaging & Consumer): Alcoa® wheels, Reynolds Wrap®, Baco® household wrap, Howmet® metal, Huck® fasteners During 2005, it acquired remaining 30% minority interest in Alcoa Closure Systems International (Tianjin) Co and remaining 40% interest in the Alcoa (Shanghai) Aluminum Producs 2005 During 2005 it discontinued the business of Southern Graphic Systems Inc

8. Business Environment Alcoa is the world’s leading producer of aluminum, fabricated aluminum, and alumina The company is active in all major aspects of the industry: technology, mining, refining, smelting, fabricating, and recycling Aluminum and alumina represent app. ¾ of Alcoa’s revenues The price of aluminum influences the operating results of Alcoa

9. Business Environment-Cont. A global company with largest market in North America (61% of 2005 Revenues), followed by Europe (23%) Investments in China, Russia, Brazil, Australia - opportunities for growth Factors that affect its revenue from these countries include: governmental policies and other economic factors, including inflation and fluctuations in foreign currency exchange rates and interest rates – hedging through int. rate swaps and currency exchange contracts

10. Some industry trends in 2005 Continued strong demand for aluminum Pressure on prices driven by tight aluminum markets High material and energy costs

11. Financial Performance 2005 Revenue growth of $2,923, or 13%over 2004 Income from continuing operations of $1.23 B Debt-capital ratio of 30.8%, within the target range of 25%-35% Mitigation of cost inflation through structural cost savings Continued execution of an aggressive growth strategy

12. Portfolio Management Highlights Divested/Restructured Smelting HAW Eastalco Elkem Equity Aluminum Downstream Automotive Casting Cast Auto Wheels Non-aluminum Integris Southern Graphics AFL-Telecommunications Other restructuring 7% headcount reduction Acquired/Invested Refining Suriname Pinjarra Energy Three Oaks Mine, Friendsville mine U.S. hydro, Latin America hydro Warrick power plant Smelting Iceland, Alumar stubline Ghana restart European modernization Rolling Russia, Bohai. Shanghai, Aerospace

13. Financial Performance- Cont. Positive factors - Higher realized prices for aluminum and alumina - Higher demand in downstream markets - The sale of Alcoa’s stake in Elkem ASA - Income tax benefit resulting from tax reviews and audits - Sale of railroad assets Challenges - Higher than expected costs for energy and raw materials - Restructuring costs driven by a new global business structure - Integration of the acquired Russian facilities - Gulf Coast hurricanes impact - Business interruptions due to unplanned outages and labor strikes in Europe

14. Industry Comparison Source: The WSJ Five-year price performance of stock, its DJ Industry group and the DJ U.S. Total Market Index, reindexed to zero.

15. Industry Comparison-Cont. Past Performance Alcoa IncAluminum DJ U.S. Total Market Index 3 Months 20.73% 4.46% 6 Months 48.84% 12.84% Year-to-Date 17.59% 5.94% 12 Months 20.31% 17.79% 2 Years 5.11%5.68%20.94% 5 Years -13.83%-13.38%11.66% Performance data reflects previous day's closing price, updated by 12 a.m. ET. Data is based on price appreciation only. Calculations do not include returns from dividend reinvestment. Historical data is displayed for the selected stock and its specified DJ U.S. Industry Index. The DJ U.S. Total Market Index measures the performance of the broad U.S. equity market and includes over 1800 company stocks.

16. Alcoa Stock Performance vs. S&P 500 Source: Yahoo! Finance

17. Outlook for 1Q 2006 Positives Continued strong demand for aluminum Aluminum prices strengthened for 15 yrs highs Strong aerospace markets Continued operating development Continued progress on growth projects: Russia, China, and Upstream Negatives Seasonal declines in consumer products, building and construction

18. Strategic Goals and Priorities 2006 Managerial Excellence - Focus on volume and cost savings via the Alcoa Business System (ABS), centralized purchasing, consolidation, LCC - Increase overhead productivity while managing overhead expenses through ABS and low-cost country sourcing (by 2009, more than 40% of the production will originate from low-cost countries) - Focus on product mix, pricing and new product application - Successfully manage capital expenditures and projects

19. Strategic goals-Cont. Portfolio Management -Monitor the progress of underperforming assets and make appropriate adjustments to strengthen the portfolio Profitable Growth -Capitalize on strong markets where the company is well located -Use technology as an advantage -Continue to integrate investments in Russia and China -Continue to focus on value-creating organic growth projects

20. Major Markets Trends Aluminum and alumina –The world’s largest producer of alumina –Alumina production in ’05 rose 2% to 14.6 M mtpy –In ’05 54% of Alcoa’s refinery production was supplied to outside customers –Alcoa has app. 9% of the worldwide aluminum capacity

21. Major Market Trends-Cont. Packaging and Consumer –Alcoa segments: Flat-Rolled Products, Packaging and Consumer –The Reynolds Wrap® brand placed #1 in the U.S. Harris EquiTrend® as the greatest brand equity for the second straight year Industrial Products –Alcoa segments: Flat- Rolled products, Engineered Solutions, Extruded and End Products –Heavy-duty gas turbine build rates start to increase due to increased power demand in the Asian and Middle Eastern markets –Growth opportunities for the supply of spare parts

22. Valuation- DCF Model Assumptions: CAPM Risk-free rate: 4.86% Market Risk premium: 6.40% Beta: 1.91 Tax Rate: 22.8% WACC: 15.18% Projection 5-year non-constant growth: 10% Constant growth: 3%

23. Valuation-Cont. Results: Price per share: $34.80 Current Price (as of 04/21/06): $35.39 Recommendation: hold

24. Comparative Analysis Competitors Strengths / comparative advantage Weaknesses

25. Main Competitors Alcoa IncAlcan IncCentury Aluminum Company Aluminum Corporation of China Market Cap $30.79B$19.47B$1.61B$11.41B Current Price $35.39$52.09$49.93$103.22 5-year CAGR Revenues 2.7%10.40%12.08%N/A P/E19.60160.20n/a14.24 PEG0.911.290.930.63 Price/Sales1.060.961.37n/a Current Ratio 1.181.100.63n/a Quick Ratio0.710.630.39n/a

26. Competitive Advantage Competitive Advantage Most aggressive growth strategy in the industry (builds on high competency and technology) In alumina – low-cost brownfield projects (refining projects will increase the existing base with 40%, and will lower the refining cost by 15%) In aluminum – global system of smelters; strategic raw materials, construction costs, best-in-class manufacturing Investments in Russia and China- opportunities to capture growth in Eastern Europe and Asia Large project management capabilities Experience in dealing with governments around the world The Alcoa brand

27. Weaknesses Not sufficient use of underperforming assets Need better control of cost savings and increase of productivity Better focus on product mix, pricing and new product application

28. And Finally… Thank you!