part 2: bfs & ipo

A new world in the alumina market

We have entered a new paradigm which alters the relationship between alumina and aluminium. Alumina markets are now more sensitive to changes in its enduse
(aluminium production). In our view, the market has focussed on the potential for a revenue uplift due to changing pricing dynamic as low priced contracted
volumes are replaced with higher priced spot sales. However we believe little consideration has been given to the possibility that in weak markets the spot price
may move toward (and potentially below) the contract price.

Recent Developments add weight to our
curtailment thesis. Another production cut on the horizon

Alcoa has announced that it plans to review the future viability (options) at its Point Henry aluminium smelter (Victoria) as it faces continuing global economic
conditions in the smelter industry. AWC has noted the carbon tax would be an additional cost to an already loss making smelter (although it expects to receive
protection). Losses have been primarily driven by low metals prices, high AUD and rising input costs. A review and decision about the smelter's future will be completed by end of June.

While the company is committed to minimise costs and improving margins, current economic headwinds makes it difficult for Point Henry to be globally competitive. We note Point Henry produces ~190ktpa of aluminium (consumes
365kt of alumina which is sourced from AWAC’s WA refineries).

BHP flagging aluminium assets are in structural decline
BHP has flagged that the aluminium industry is in structural decline rather than in a cyclical downturn. While BHP has not written-down any of its aluminium assets,
it is watching this space carefully. From a BHP perspective there would likely be curtailments i.e. "if cant make money or cant sell product then will cut capacity." it is worth noting that this view
would also be carried over to other assets if conditions changed.

Chinese alumina market
In response to weaker aluminium prices and uncertainty surrounding global economic conditions, China’s largest alumina producer (Chalco) has cut its alumina prices by 6% to RMB2,800/t (from RMB3,000/t). Lower aluminium prices have led to production cuts on high cost domestic smelters (those located on the east coast of China). Most domestic producers are now loss making.

AWC’s competitive advantages in alumina refining

We note AWC’s refineries are some of the best in terms of its industry-leading technologies, strategic location of its mines, infrastructure and ports. In particular,
its WA operations have access to cheap gas and refining innovations have enabled AWC to produce alumina competitively. We see the following as AWC’s competitive advantages in alumina refining:

- WA bauxite mine is low in silica content which reduces the consumption of
caustic soda this offsets the low grade ore to keep costs down
- Economies of scale (34mtpa production at the mine level)
- Integrated mining system which reduces costs - large conveying system improves mining efficiency
- Equipment reliability
- WA refineries are seen as global leaders in R&D for Alcoa’s refinery divisions. During our recent site visit late last year, R&D technology programs continue to seek improvements in flow and yield. This has led to 1-2%
production creep at all 3 WA refineries.

Now, lets take a look at ORDs proposition:
- Ore is low silica, grade is low and similar to AWC. Low input costs
- Bolaven plateau should give rise to over 1.2Mtpa.
- NFC providing engineering, and mine design/construction services at low cost (600K per ton). The lowest cost I have seen to date!
- NFC have contracted and built refineries world wide. Indicates confidence in quality. 60% of China's 30mtpa refinery capacity was constructed by NFC!
- Transport costs will be low due to close end-users (China). i.e Shipping from LOAS
- Energy costs will be some of the lowest in the world pKW.
- Opex will be in or around the lowest against other comparable alumina producers.
- NFC have already signed an MOU to facilitate offtake.
- US, EU, Asia, are all going to need alumina. And they are going to source it from the cheapest providers. Less and less this is not going to come from the majors. Its going to come from producers such as SARCO.