Alumina. Earnings and target price revision. Price catalyst. Action and recommendation

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1 AUSTRALIA AWC AU Price (at 10:25, 16 Aug 2012 GMT) Outperform A$0.73 Volatility index High 12-month target A$ month TSR % Valuation A$ - DCF (WACC 10.3%, beta 1.3, ERP 5.0%, RFR 6.5%) 2.25 GICS sector Materials Market cap A$m 1, day avg turnover A$m 15.4 Number shares on issue m 2,440 Investment fundamentals Year end 31 Dec 2011A 2012E 2013E 2014E Revenue m EBIT m Reported profit m Adjusted profit m Gross cashflow m CFPS CFPS growth % nmf nmf PGCFPS x 15.1 nmf PGCFPS rel x 1.87 nmf EPS adj EPS adj growth % nmf nmf PER adj x 15.1 nmf PER rel x 1.19 nmf Total DPS Total div yield % Franking % 100 nmf ROA % ROE % EV/EBITDA x Net debt/equity % P/BV x AWC AU vs ASX 100, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, August 2012 (all figures in USD unless noted) 16 August 2012 Macquarie Securities (Australia) Limited Balance sheet headwinds Event 1H12 financial results. No dividend declared (pcp US3cps). Impact For what it s worth. AWC underlying NPAT of US$8m loss (pcp US$78m profit) compared with our US$23m loss forecast. However, AWC's share of the reported US$87m AWAC net loss benefited heavily through the conversion process into AIFRS (+US$109m adjustment), most particularly on the tax recognition front. As is often the case (and particularly at current compressed margin levels), we would suggest the AWC earnings result is of little utility in analysing the true underlying business case. Significant cash return into the JV. While AWC received US$66m of headline dividends from the AWAC JV in 1H12, it actually injected US$110m into the JV entities over the same period. Of this US$110m of injections, US$43m was attributable to Ma aden capex and ~US$16m to other growth capex (Brazil). The remainder (~US$50m) represents required working capital injections back into AWAC JV entities during the half. It is this number that was considerably higher than market expectations, and the key driver of AWC s net debt increase of US$154m over the half (along with the final 2011 dividend payment). Further 2H cash drain. Net debt stands at US$602m with gearing (ND/[ND+E]) of 18%. AWC secured a net US$170m increase in total debt facilities during 1H12, which sees total available undrawn facilities of US$315m at half end. Even without the dividend to pay in 2H12, we still expect AWC to be net cashflow negative at current Al/alumina/A$ prices to the tune of around US$120m in 2H12. Earnings and target price revision CY12e eps -US$0.037ps (prev -US$0.025ps) on 1H12 result and mark-tomarket Al pricing; CY13e eps US$0.015ps (U$0.015ps). Note the likely downside risk to our CY13 estimate given current spot aluminium prices. Price catalyst 12-month price target: A$1.30 based on a DCF methodology. Catalyst: Alcoa 3Q12 result in early October. Action and recommendation AWC presents an opportunity for those with a trough view on current aluminium/alumina market pricing (with the likely Chinese cost push dynamic over coming years) and a sufficient risk appetite, given our longer-term view on fundamental value within AWC. Having said that, given spot Al/alumina/A$ prices and AWC s current balance sheet (and notwithstanding +US$300m undrawn facilities), if the expected 3Q12 margin pressure were to sustain for 9-12 months (clearly not our expectation) then the risk of a potential capital raising is sharply heightened. AWC clearly sits at the higher end of the risk/reward spectrum for its given market capitalisation. Outperform. Please refer to the important disclosures and analyst certification on inside back cover of this document, or on our website

2 The AWC cashflow and balance sheet outlook There is no better example of the importance of the cashflow statement than for Ltd in our view. With all of the GAAP/AIFRS adjustments that swing through the P&L, in our view it is the only genuine indicator of operating performance. While AWC received US$66m of headline dividends from the AWAC JV in 1H12, it actually injected US$110m into the JV entities over the same period. Of this US$110m of injections, US$43m was attributable to Ma aden capex and ~US$16m to other growth capex (Brazil). The remainder (~US$50m) represents required working capital injections back into AWAC JV entities during the half. It is this number that was considerably higher than market expectations, and the key additional driver of AWC s net debt increase of US$154m over the half. As the table below highlights, even without any dividend to pay in 2H12 (1H12 US$73m) we still expect AWC to be net cashflow negative at current Al/alumina/A$ prices to the tune of around US$120m in 2H12. In simple terms we believe AWC is running at a +US$100m net debt drawdown requirement per half (even with further reductions in growth capital), at current prices. Fig 1 High-level 2H12 AWC cashflow estimate Fig 2 AWC debt maturity profile 2H12 AWC cashflow estimate US$m AWAC JV dividends 15 Net interest -15 G&A -9 Operating CF -9 Ma'aden contribution -33 Other growth contribution (Brazil) -5 Working capital injection (at 1H run rate) -50 Free CF -97 BNDES repayment -26 Dividend 0 Net CF -123 Source: Ltd, Macquarie Research, August 2012 Source: Ltd, Macquarie Research, August 2012 Net debt stands at US$602m with gearing (ND/[ND+E]) of 18%. AWC secured a net US$170m increase in total debt facilities during 1H12, which sees total available undrawn facilities of US$315m at half end. Aside from the monthly amortisation of the Brazilian debt facility (US$52m pa), the first major bank maturity is November 2013 (US$105m). Fig 3 The AWC balance sheet outlook under various pricing scenarios 1000 AWC net debt (US$m) Current Macq base case US80c/lb $1.05 A$ US90c/lb $1.05 A$ US$1/lb $1.05 A$ US$1.10/lb $1.05 A$ Max facilities 400 Jun-12 Dec-12 Jun-13 Dec-13 Source: Macquarie Research, AWC, August August

3 The chart above highlights the forecast AWC net debt balance under various pricing scenarios over the next 18 months (it incorporates the further transition to index pricing over this time). To us, it appears a reasonable conclusion that if current margin pressures (based on low 80 s aluminium) were to sustain for 9-12 months then pressures for, and the risk of, a potential equity raising is sharply heightened (notwithstanding the fact that some balance sheet capacity would theoretically still remain at this point). Our understanding of the structure around AWC s debt covenants suggests current coverage ratios are unlikely to present a major issue in the potential drawdown of most of the remaining undrawn facilities management has stated that coverage is based solely on AWAC dividends coming in AWC s door, as opposed to the net JV dividend/contribution outcome between AWC and the AWAC JV entities. Additionally, the willingness of syndicated lenders to actually increase AWC total borrowing capacity during the half would also suggest that coverage covenants are likely not a concern at this time. Equally, in the absence of asset impairments, present gearing of 18% provides significant headroom for further debt drawdowns. However, we would caution that the potential magnitude of the fall in AWAC JV dividends in 2H12 (or possibly beyond) might lend some caution to a blanket view that coverage covenants are not a potential issue to further large debt drawdowns by AWC going forward. The key challenge facing AWAC/AWC right now relates to the two thirds of its sales book that remains LME-link priced this year this is likely to drop next year again, but is still likely to remain at least 40-50% of total sales in CY13. While spot alumina prices continue to hold firm above US$300/t, linked pricing (closer to US$250/t) is suffering at the hands of a sharply depressed LME aluminium price (~US82c/lb). However, we are not witnessing the magnitude of the typical supply response one would expect from aluminium producers in the current LME price environment (ie not seeing more curtailments). A key reason for this is metal premiums at all time highs, predominantly as a result of the limited availability and accessibility of the large LME stockpiles of aluminium caught up in carry trade activity. As a result, many aluminium smelters are being kept afloat (or losses sufficiently minimised) by the LME + metal premium realisation. Unfortunately for link-priced alumina suppliers (such as AWAC), there is no exposure to the metal premium but there is of course a direct and sole one to the ongoing pressure this dynamic places on LME aluminium prices. Fig 4 Record high aluminium premiums provide some relief from the depth to which the fall in the LME price is cutting into the industry cost curve Source: CRU, LME, Wood Mackenzie, Macquarie Research, August August

4 The key result takeaways and operating outlook AWC underlying NPAT of US$8m loss compares with our US$23m loss forecast. However, AWC's share of the reported US$87m AWAC net loss has benefited heavily through the conversion process into AIFRS (+US$109m adjustment), most particularly on the tax recognition front. As is often the case (and particularly at current margin compressed profitability levels), we would suggest the AWC reported earnings result is of little utility in analysing the true underlying business case. Fig 5 AWC 1H12 earnings result Fig 6 AWC 1H12 cashflow result Source: Ltd, Macquarie Research, August 2012 Source: Ltd, Macquarie Research, August 2012 We do not believe the market was surprised by the removal of the AWC dividend it appeared inevitable from our perspective. The AWAC EBITDA and NPAT results were slightly weaker than expected (although not hugely so in the context of such compressed AWAC profitability). The AWAC earnings result included a previously disclosed US$45m provision relating to the Alba litigation. AWC continues to reserves its right to contest whether this charge should fall within the AWAC JV structure. As expected, the AWAC JV appears to have just washed its face in a cashflow sense post sustaining capital but not ex growth capital and other spend (net free cashflow was negative US$136m including US$108m of Ma aden spend). As such, the dividends paid from the JV during the half were not really surplus cashflow in an aggregate JV sense and were effectively financed by JV partner injections (over and above their required growth capital contributions) into the weaker JV asset entities over the same period. The payment of the AWAC dividends remains the most tax effective method for the JV partners of moving funds around the JV entities. 16 August

5 Fig 7 AWAC earnings result Fig 8 AWAC cashflow result Source: Ltd, Macquarie Research, August 2012 Source: Ltd, Macquarie Research, August 2012 AWAC alumina shipments were 7.7mt compared to production of 7.8mt, with the shortfall mainly due to weather related delays in June. The average 1H12 alumina production cash cost (estimated ~US$278/t FOB) was up by US$11/t versus 1H11 and ~US$5/t versus 2H11 predominantly driven by higher caustic soda prices. Exchange rate impacts were relatively modest compared to prior periods. Management guidance is for broadly flat cash costs into 2H12. As expected, the two AWAC aluminium smelters cumulatively incurred a significant operating loss in 1H12. AWC stated that the carbon pricing framework from 1 July 2012 is not expected to have a significant impact on AWAC underlying earnings for 2H AWAC sustaining capital for CY12 remains unchanged at ~US$300m, as does growth capital at ~US$50m. Separately, the expected Ma aden contribution for this year also remains unchanged at ~US$190m. 16 August

6 Ltd financial forecasts Limited Share Price: A$0.725 Target Price: A$1.30 December year end AWAC AWC Profit and Loss 2009A 2010A 2011A 2012E 2013E 2014E Profit and Loss 2009A 2010A 2011A 2012E 2013E 2014E Sales revenue US$m 4,078 5,434 6,669 5,638 6,717 7,789 Sales revenue US$m Other income US$m Share of AWAC US$m Operating costs US$m 3,732 4,638 5,594 5,510 5,892 6,450 - Corporate costs US$m EBITDA US$m , ,339 EBITDA US$m Depreciation/amortisation US$m Depreciation/amortisation US$m EBIT US$m EBIT US$m Net Interest expense US$m Net Interest expense US$m Pretax profit pre-exceptionals US$m Pretax profit pre-exceptionals US$m Tax expense US$m Tax expense US$m Minorities US$m Minorities US$m Reported profit US$m Reported profit US$m Exceptional items (post tax) US$m Exceptional items (post tax) US$m Adjusted profit US$m Adjusted profit US$m EPS adjusted US ps EPS growth (adjusted) % -95% 946% 32% -150% -202% 145% EPS growth (adjusted) % -171% -1435% 208% -173% -141% 371% DPS US ps Cashflow statement 2009A 2010A 2011A 2012E 2013E 2014E Cashflow statement 2009A 2010A 2011A 2012E 2013E 2014E Operating cash flow US$m ,083 Operating cash flow* US$m Capital expenditure US$m Capital expenditure US$m Asset sales/(purchases) US$m Investment in AWAC US$m Other (includes Ma'aden) US$m Other US$m Investing cash flow US$m Investing cash flow US$m Dividends paid US$m Dividends paid US$m Debt drawdown/(repayment) US$m Debt drawdown/(repayment) US$m Equity funding from partners US$m 1, Equity funding US$m Other US$m Other US$m Financing cash flow US$m Financing cash flow US$m Net cash flow (after fx move) US$m Net cash flow US$m Free cash flow US$m Free cash flow US$m FCFPS US ps * GCFPS Cashflow in the Macq database US ps is calculated based on NetProf & D&A - Excep - please take the Balance sheet 2009A 2010A 2011A 2012E 2013E 2014E Balance sheet 2009A 2010A 2011A 2012E 2013E 2014E Cash US$m Cash US$m Other current assets US$m 1,470 1,406 1,534 1,526 1,526 1,526 Other current assets US$m NC assets US$m 8,286 9,451 9,184 8,934 8,885 8,748 NC assets US$m 3,190 3,416 3,325 3,255 3,243 3,180 Total assets US$m 9,960 11,189 10,923 10,646 10,617 10,460 Total assets US$m 3,504 3,542 3,350 3,295 3,331 3,430 Current liabilities US$m 1,499 1,624 1,546 1,540 1,540 1,540 Current liabilities US$m Total liabilities US$m 2,356 2,554 2,580 2,598 2,598 2,598 Total liabilities US$m Shareholder equity US$m 7,605 8,635 8,343 8,048 8,020 7,862 Shareholder equity US$m 2,918 3,072 2,854 2,545 2,582 2,681 Total debt US$m Total debt US$m Net debt US$m Net debt US$m Average diluted shares m 2, , , , , ,440.2 Production 2009A 2010A 2011A 2012E 2013E 2014E Production 2009A 2010A 2011A 2012E 2013E 2014E kt 13,500 15,200 15,700 15,458 15,479 15,842 kt 5,400 6,080 6,280 6,183 6,191 6,337 Aluminium kt Aluminium kt Profitability and Liquidity Analysis 2009A 2010A 2011A 2012E 2013E 2014E Profitability and Liquidity Analysis 2009A 2010A 2011A 2012E 2013E 2014E ROE (NPAT/Equity) % 0% 4% 5% -3% 3% 7% ROE (NPAT/Equity) % 0% 1% 4% -3% 1% 7% ROCE (EBIT/ Debt + Equity) % 1% 4% 7% -4% 4% 10% ROCE (EBIT/ Debt + Equity) % 0% 2% 5% -3% 2% 6% EBITDA Margin % 10% 15% 16% 2% 12% 17% EBITDA Margin (AWAC) % 10% 15% 16% 2% 12% 17% Net Debt/Equity % 1% -1% -2% -2% -2% -2% Net Debt/Equity % 9% 11% 17% 28% 25% 18% Net Debt/(Net Debt + Equity) % 1% -1% -2% -2% -2% -2% Net Debt/(Net Debt + Equity) % 9% 10% 14% 22% 20% 16% Net interest cover x n/a n/a n/a n/a n/a n/a Net interest cover x Payout ratio % 1004% 183% 140% -77% 164% 128% Payout ratio % 2114% 364% 118% 0% 67% 57% Effective tax rate % -10% 10% 23% 21% 31% 31% Effective tax rate % 1% 0% 1% 0% 0% 0% Key Assumptions 2009A 2010A 2011A 2012E 2013E 2014E Key Investment Ratios 2009A 2010A 2011A 2012E 2013E 2014E AUD/USD spot rate # Adjusted PER x LME spot Aluminium USc/lb PGCF x Aluminium 3MMA USc/lb EVM x Implied linkage % 15.7% 14.2% 14.9% 15.5% 15.5% 15.8% Dividend yield % 2.4% 7.9% 7.9% 0.0% 1.3% 5.3% realised (inc-hedging),us$/t Franking % 100% 100% 100% 100% 100% 100% NPV - AWC share (10.3% WACC) US$m A$m A$/sh refineries 5,313 6, Aluminium smelters AWAC Corporate and other AWC Corporate and other AWAC net debt AWC net debt NPV 4,493 5, Premium/(Discount) to NPV: -68% Market capitalisation, A$m 1,855 kt 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 Australian Other Atlantic Pt Comfort Cost per tonne (RHS) US$/t Prices as at 16 August 2012 Source: Ltd, IRESS, Macquarie Research, August August

7 Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down % in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 30 June 2012 AU/NZ Asia RSA USA CA EUR Outperform 55.67% 61.00% 53.43% 42.58% 69.23% 46.60% (for US coverage by MCUSA, 9.05% of stocks followed are investment banking clients) Neutral 30.50% 22.11% 36.99% 52.41% 28.02% 33.69% (for US coverage by MCUSA, 8.14% of stocks followed are investment banking clients) Underperform 13.83% 16.89% 9.59% 5.01% 2.75% 19.71% (for US coverage by MCUSA, 0.45% of stocks covered are investment banking clients) Company Specific Disclosures: Macquarie Bank Limited makes a market in the securities in respect of Limited. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at Analyst Certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN , AFSL No ) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General Disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN , AFSL No ) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. 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