entitlement offer, page-3

1) SUMMARY

AWC has announced plans to raise a minimum of $664m via a fully underwritten institutional placement with the possibility of raising an additional $378m via a retail entitlement offer.

The new shares will be offered for $1.00 each which is 33% lower than last traded price.

For all calculations, it is assumed that there will be a 40% take up in the retail offer which will bring total funds raised to $795.2m

2) DILUTION EFFECT

If AWC does raise the $795.2m, it will increase the number of outstanding shares by 795.2m and will dilute returns for existing shareholders by -35%.

Whilst it will strengthen the balance sheet it will further dilute earnings (and dividends) though dividends are not expected to be paid over the next 2 years.

Management announced that AWAC made a profit of $US27m for the 3 months to March 2009. If extrapolated out for the full 12 months (very simple calc), AWAC will earn $154m ($0.70AUD).

This would see AWC earn $61.6m (40% ownership) and equates to an EPS of $0.027 per share and implies a P/E of 37 based on a $1.00 share price.

It is important to note that the low point in the commodity cycle is expected to occur over the next 6 – 18 months and forecasting needs to look out a little further than the current year.

Therefore I have gone back and assumed FY10 earnings for AWC will be in line with that of 2002 (pre boom) which was $236m or $0.104 per share. This would see AWC trade on a P/E of 9.55.

I have assumed no dividends for FY09 and FY10 as AWAC has discretion over the ability to release dividends to AWC and is unlikely given the current debt position of AWAC.

3) WHAT WILL AWC DO WITH THE PROCEEDS

AWC has stated that they will use the proceeds from the raising to pay down debt and extend debt maturity profile due to credit markets being closed and AWC’s current lower credit rating.

Whilst AWC did provide a summary of what they will do with the proceeds, it assumed a 0% participation in the retail offer where I have assumed 40% participation.

Cash is expected to increase from $66.8m to $232.6m ($165.2m)
Current liabilities to reduce from $418.6m to $57.47m ($360.9m)
Non current liabilities to reduce from $687.2 to $437.7m ($249.5m)

*Assumes $20m expenses for raising*

The equity raising is expected to see net debt to equity fall from 37% to 8.70% which places AWC in a strong financial position in a tight credit environment.

This being said the debt levels of the parent company are much higher and decreases its ability to release cash to AWC to pay as dividends

4) REDUCTION IN REFINANCING RISK

AWC currently has $USD355m ($AUD507m) of credit that needs to be refinanced in FY10.

The equity raising allows AWC to repay ALL FY10 debt and have some left over to contribute to FY11 refinancing.

Whilst AWC is not expected to use all cash to refinance FY10 debt, it does leave it in a strong position to renegotiate with its lenders and if it can not refinance, it does not need to sell equity stakes in AWAC which could be difficult as they are the minority (40%) owner of the company with Alcoa owning 60%.

Overall I see this as a positive move the company over the long term though in the short term existing investors will have their equity diluted (if they dont participate).

I think I will wait to see a bit more of a sustained recovery in the global aluminum market before purchasing AWC.

Good luck to all

Please DYOR