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Aker Clean HydrogenANNUAL
REPORT 2017
AWAC, one of the
world's largest bauxite and
alumina producers.
The quality of Alumina Limited's
assets and improved markets
delivered outstanding returns
for shareholders in 2017.
Structural reforms within China
signal a new phase for global bauxite
and alumina markets.
CONTENTS
04
06
12
14
20
36
38
62
97
99
At a Glance
Chairman and CEO Report
Sustainability
Director's Report
Operating and Financial Review
Letter by Chair of the
Compensation Committee
Remuneration Report
Financial Report
Shareholder Information
Financial History
Alumina Limited Annual Report 2017
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2¬
About Alumina Limited
Alumina Limited is a leading Australian company listed on the
Australian Securities Exchange (ASX).
Alumina Limited is the 40 per cent partner in the Alcoa World
Alumina and Chemicals (AWAC) joint venture whose assets
comprise globally leading bauxite mines and alumina refineries
in Australia, Brazil, Spain, Saudi Arabia and Guinea. AWAC also
has a 55 per cent interest in the Portland aluminium smelter in
Victoria, Australia.
AWAC’s joint partner and operator is Alcoa Corporation. The
AWAC joint venture was formed in 1994 and our relationship
with Alcoa dates back to the early 1960's when Western Mining
Corporation (now Alumina Limited) began to explore bauxite
deposits and other resources in the Darling Ranges of Western
Australia. Alcoa Inc. was invited to join the project to provide
technology, aluminium expertise and finance.
Over the following years the venture grew to include refineries
and smelter interests as the partners sought to take opportunities
to expand the business. By 1990, WMC Limited’s interests in
Alcoa of Australia had grown through acquiring the interests of
other minority participants, other than Alcoa.
Alumina Limited provides a unique
opportunity for a pure investment
in AWAC, one of the world's largest
bauxite and alumina producers.
WMC Limited (now Alumina Limited) and Alcoa Inc. combined
their respective bauxite, alumina and alumina-based chemicals
businesses and investments and some selected smelting
operations to create Alcoa World Alumina and Chemicals (AWAC
in January 1995.
Alumina Limited Annual Report 2017
¬ 3
At a Glance
In 2017 Alumina Limited recorded a profit after tax of $339.8
million compared to a net loss of $30.2 million in 2016.
Index pricing for alumina quickly translated more favourable
market outcomes to Alumina Limited's bottom line.
Improvements in realised alumina prices resulted in significantly
improved operating performance by Alcoa World Alumina and
Chemicals (AWAC).
AWAC’s financial performance reflected the underlying strengths
of its tier one assets, improvements in the quality of its asset
portfolio and a new phase of policy-making in China.
ALUMINA LIMITED RESULTS (AAS)
$339.8m
NET PROFIT AFTER TAX
US$339.8 MILLION
$343.1m
CASH RECEIPTS OF
US$343.1 MILLION
(2016: NET LOSS AFTER TAX: US$(30.2) MILLION)
(2016: CASH US$232.8 MILLION)
13.5 US cents per share
2017 DIVIDENDS OF
US13.5 CENTS PER SHARE
$58.4m
NET DEBT
US$58.4 MILLION
(2016: DIVIDEND: US6.0 CENTS PER SHARE)
(2016: US$83.8 MILLION)
4¬
AWAC - a Global Business
In 2017 AWAC recorded a net profit after tax of $901.3 million
compared to a net profit after tax of $49.0 million in 2016. AWAC’s
results were impacted by alumina price fundamentals. Also, the sea
borne bauxite market saw third party bauxite sales increase to 6.6
million bone dry tonnes (BDT). AWAC’s EBITDA, excluding significant
items rose to $1,685.3 million compared to $757.2 million in 2016.
Cash from operations spurred by the higher alumina sales price
increased to $1,102.4 million up from negative $26.2 million. The
2017 average realised alumina price was $335 per tonne, a year on
year improvement of $93 per tonne (38%). With approximately
85% of shipments priced on spot or an index basis, AWAC was
well positioned to capitalise on the steep upward price movement.
AWAC RESULTS (US GAAP)
$901.3m
AWAC NET PROFIT AFTER TAX
US$901.3 MILLION
(2016 NET PROFIT AFTER TAX: US$49.0 MILLION)
$1,102.4m
AWAC CASH FROM OPERATIONS
US$1,102.4 MILLION
(2016: US$(26.2) MILLION)
US$335/tonne
REALISED ALUMINA PRICE OF
US$335 PER TONNE
(2016: US$242 PER TONNE)
US$1,685.3m
AWAC EBITDA EXCLUDING SIGNIFICANT ITEMS
US$1,685.3 MILLION
(2016: US$757.2MILLION)
Alumina Limited Annual Report 2017
¬ 5
Chairman and CEO Report
2017 was an outstanding year for Alumina Limited.
AWAC’s tier one assets can withstand the low
points of the cycle and generate excellent returns
when markets are favourable.
In 2017, the alumina industry experienced potentially far reaching
changes. New Chinese Government pollution reduction and
efficiency policies and improved global market fundamentals
saw a 38 per cent increase in alumina prices compared with the
2016 average price. Better prices, together with improvements
in the AWAC asset portfolio resulted in the Company’s net profit
increasing to $340 million. Dividends to shareholders more than
doubled to US13.5 cents per share.
CHANGING MARKETS
In 2017, the Chinese Central and Regional Governments introduced
policies to reduce pollution by mandating significant curtailments
including alumina, aluminium and carbon production in selected
cities during the 2017/18 winter. These policies required the
curtailment of 30 percent of China’s alumina and aluminium
production in the selected cities. There have also been a number
of Chinese Government environmental audits in 2017 which have
led to a reduction in bauxite and alumina production.
The Central Government also introduced supply side reforms
in 2017 to reduce inefficient or obsolete capacity in aluminium
and other industries. This has led initially to the curtailment
of a significant volume of smelting capacity built without
authorisation. A scheme has been introduced which allows
companies to obtain replacement quotas authorising additional
capacity. This is expected to add to Chinese smelting capacity
coming online during 2018 and to restrict smelting growth
beyond 2018–2019.
The alumina supply/demand balance outside China also tightened
in the second half of 2017. Increased costs in producing alumina,
improved aluminium prices and strong demand for alumina
(including from Atlantic smelters), all contributed to a steep rise
in alumina prices.
The alumina spot price increased from an average of $318 per
tonne for the first half of 2017, reaching a 2017 high of $484 and
averaging $390 for the second half. Alumina prices have continued
to trade strongly in early 2018.
OPERATIONAL HIGHLIGHTS
AWAC produced its best cash returns since 2007. AWAC’s full
year net profit after tax was US$901 million. AWAC's realised
alumina prices averaged $335 per tonne in 2017 and its position in
the lowest quartile on the cost curve produced alumina margins
of $137 per tonne in 2017, compared with $51 per tonne in 2016.
AWAC’s high quality refineries at Pinjarra and Wagerup in Australia
and Alumar, Brazil achieved production records in 2017. Total AWAC
alumina production was 12.5 million mtpa in 2017.
AWAC’s bauxite mines in Australia and Brazil also achieved
production records for 2017.
AWAC’s cost of alumina production increased to $198 per tonne
in 2017, a 3.7 percent increase year on year mainly driven by an
increase in caustic soda prices – a key production input.
The ramping up of Ma'aden's Saudi Arabian bauxite mine and
alumina refinery (in which AWAC holds a 25.1 per cent interest)
continued during 2017. The Ma’aden refinery has recently operated
at its full production capacity of 1.8 million mtpa. At full production
it is expected to operate within the lowest quartile on a cash
cost basis.
6 ¬
Alumina Limited Annual Report 2017
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MR G JOHN PIZZEY
MR MIKE FERRARO
6 ¬
Alumina Limited Annual Report 2017
¬ 7
The capacity expansion within China over the last decade and
resulting cost pressures on the existing industry nonetheless
required AWAC to close, mothball or sell the least robust of its
assets. The outcome was a substantial increase of the quality
of the portfolio as a whole. The higher cost Kwinana and San
Ciprian refineries were restructured and significantly improved.
The changes to the alumina and aluminium markets, particularly
within China over the last 12 months are highly significant. They
represent the first evidence of the impact from China reducing
excess capacity and imposing stricter pollution controls. The
permanence of these changes and impacts are still to be seen.
However, AWAC is very well positioned, as a large, low cost
producer, to benefit from these market changes.
AWAC’s long life and low cost
bauxite mines and refineries in
Western Australia, and joint venture
investment in the Saudi Arabia
refinery are clearly tier one assets.
GROWING AWAC
AWAC’s bauxite mining business unit consolidated its position
during 2017. AWAC supplied 6.6 million bone dry tonnes (BDT)
to the third party bauxite market in 2017. The Juruti mine in Brazil
has undergone two separate expansions from 2016, which will
increase production capacity to 5.7 million mtpa during 2018.
These expansions have been made at a very low capital investment
by utilising existing infrastructure.
AWAC is also supplying bauxite from its Huntly mine in Western
Australia to China. This is an important step forward in leveraging
the existing resource and infrastructure of the Western Australian
bauxite operations. AWAC has committed to a capital project
to provide increased bauxite export capability through Western
Australia. The project includes bauxite unloading facilities, a new
rail loop and a train unloading facility.
With higher alumina prices and margins in 2017, AWAC’s cash
from operations increased from $26 million to $1,102.4 million.
Alumina Limited received a higher level of cash distributions of
$343m from AWAC. The changes to the AWAC Agreements on
distributions agreed in September 2016 ensured that the benefits
of strong cash flow were quickly distributed to Alumina Limited.
This enabled payment of a final dividend of US9.3 cents per share,
bringing the total declared dividend for the year to US13.5 cents
per share. This is a substantial increase on the US6.0 cents per
share for 2016.
ALUMINA LIMITED STRATEGY
The AWAC joint venture has existed for over 55 years, when
Alumina Limited (then known as Western Mining Corporation)
explored in the Darling Ranges in Western Australia and sought
partners to develop bauxite. The business and its partners have
seen many changes over that time. Alumina Limited and its
majority joint venture partner Alcoa re-negotiated the terms of
the AWAC agreements in 2016 resulting in significantly better
alignment on achieving the best outcomes for AWAC. Alcoa and
Alumina are deeply focussed on achieving the best outcomes
for AWAC.
New Chinese Government pollution
reduction and efficiency policies and
improved global market fundamentals
saw a 38 per cent increase in alumina
prices compared with the 2016
average price.
Alumina Limited’s objective is to manage its joint venture interest
to enhance the joint venture’s value, whilst also protecting its
shareholders' interests. The Company’s strategy is to invest in
long-life, low-cost bauxite mining and alumina refining operations
through its 40 percent ownership of AWAC, one of the world’s
largest alumina and bauxite producers.
The expansion by China to constitute nearly 55 per cent of the
world alumina industry has challenged the rest of the world
industry and their returns.
AWAC’s strategy in response has been to actively manage its
asset portfolio, drive down its cost position, and achieve alumina
pricing based on alumina market fundamentals. AWAC’s long life
and low cost bauxite mines and refineries in Western Australia,
and joint venture investment in the Saudi Arabia refinery are
clearly tier one assets. The quality of AWAC's assets has enabled
it to withstand challenging industry conditions.
8 ¬
Alumina Limited Annual Report 2017
¬9
PORTLAND'S FUTURE
In 2017, Alcoa of Australia entered into a new 4 year power
supply agreement, and arrangements with the Victorian and
Australian Governments for the restart of the Portland smelter.
Power prices paid by the smelter are very high compared to its
Western World competitors.
Portland’s future is secured only for the medium term. The supply
of affordable energy in Eastern Australia is of significant national
interest. AWAC is exploring long term, reliable and competitively-
priced energy solutions for the Portland smelter. However,
Eastern Australia’s energy competitiveness has deteriorated
significantly in recent years. There is an enormous challenge
for energy intensive users such as Portland to plan and operate
competitively in that environment.
Portland’s future is secured only
for the medium term.
CAPITAL MANAGEMENT/SHAREHOLDER RETURNS
Alumina’s dividend policy is that the Board intends on an annual
basis to distribute cash from operations after debt servicing
and corporate costs and capital commitments have been met.
The Board will also consider the capital structure of Alumina
Limited, the capital requirements for the AWAC business and
market conditions.
Corporate costs for Alumina Limited in 2017 were lower at US$13.6
million compared with 2016 when expenses were incurred to
reach agreement on the Alcoa Inc Separation.
Alumina’s debt is currently at low levels and gearing is 2.5 per
cent. The Company’s low debt levels enabled distributions from
AWAC to be readily made to shareholders.
SUSTAINABILITY
The impact of AWAC operations extends beyond economic and
financial outcomes and includes social and environmental matters
relevant to the community. AWAC continues to be successful in
developing strategies and utilising innovative new technologies
to minimise environmental impacts. Strategic goals have been
set for a variety of environmental impacts including emissions,
energy, water, land and waste management.
A recent success has been the introduction of pressure filtration
technology at the Kwinana alumina refinery in Western Australia
that uses very large filters to extract water from bauxite residue.
The water obtained via the process is recycled back into the
refinery process. Application of this technology has deferred the
need to construct another 30-hectare residue storage area for
at least 20 years compared to every five years previously. This
technology reduces freshwater use by 1.2 gigalitres per annum
and, importantly, contributes to directly reducing the footprint of
the residue storage areas, reduces dust emission, returns process
material immediately back to the refinery for use and reduces
capital investment and operating costs. This technology will now
be applied at the Pinjarra refinery.
GOVERNANCE
The Remuneration Report reviews the Company’s remuneration
strategy, policy and outcomes. The Company’s 2017 Remuneration
Report provides full details of the personal and corporate objectives
of senior executives and an assessment of performance against
those objectives.
The Company reports its governance practices consistent with
the 3rd Edition of the Corporate Governance Principles and
Recommendations of the ASX Corporate Governance Council.
Alumina’s compliance with the Corporate Governance Principles
and Recommendations is defined in the Appendix 4G lodged
with the ASX.
For Non-Executive Directors, fees had been unchanged since 1
January 2011 until 2017. In 2017, while base Non-Executive Director
fees remain at $150,000, fees for chairing Board Committees
were increased in 2017 and the Chairman’s fee was increased
by 9 percent.
BOARD AND MANAGEMENT
In November 2017, John Pizzey announced his decision to retire
as Non-Executive Director and Chairman of Alumina Limited on
31 March 2018. He has been a Director of the Company since
2007 and Chairman since December 2011. Mr Pizzey exercised his
considerable industry experience and drive to lead the Company
through a major transformation. We acknowledge and thank Mr
Pizzey for his outstanding contribution to the Company.
The Board appointed Peter Day to succeed Mr Pizzey as Chairman
of the Company. Mr Day has been a Non-Executive Director with
the Company since January 2014.
Alumina Limited has continued its process of succession planning
in 2017. Mr John Bevan and Ms Deborah O’Toole joined as
directors and a new CEO was appointed. Mr Bevan was previously
Chief Executive Officer of Alumina Limited from 2008 to 2013.
Mr Bevan will bring a valuable understanding of the markets and
the joint venture in which the Company operates. Ms O’Toole is
a former Chief Financial Officer of MIM and Aurizon and brings
extensive financial knowledge and expertise.
Particular thanks goes to Peter Wasow who retired as Chief
Executive Officer in May 2017 after three and a half years in the
role. Mr Wasow’s leadership of the Company was integral to the
substantive changes to the AWAC joint venture in 2016.
8 ¬
Alumina Limited Annual Report 2017
¬ 9
Bauxite demand is expected to grow along with alumina demand.
However, there is an ample current global supply of bauxite.
Increases in production from Guinea are expected to continue and
further supply from Indonesia and Malaysia is likely in 2018. This will
ensure that bauxite remains well-supplied and prices are likely to
remain flat in 2018. Guinea is expected to be the marginal supplier
of bauxite to China in the near to mid-term at least. However, the
Government’s environmental focus in China is having an impact on
bauxite production and the location of new refining capacity. This
is likely to accelerate the increased demand for imported bauxite
into China from the step-change expected around 2021 as Chinese
domestic bauxite quality depletes.
CONCLUSION
The benefit of AWAC’s tier one assets is not only can they
withstand low points of the cycle, they generate excellent returns
when markets are strong. This is precisely what we have seen
this year. Following difficult years that required a succession of
hard decisions, AWAC’s portfolio is now even more concentrated
on the most competitive assets in the global market. China has
recognised some of the social costs of expansion. Its efforts
to contain these costs have resulted in curtailments of supply,
signalling a new and potentially more positive phase for bauxite,
alumina and aluminium markets worldwide.
The Board thanks the employees of Alumina Limited for their
work in 2017.
Mike Ferraro Chief Executive Officer
—
GJ Pizzey Chairman
—
Mike Ferraro, who has been a Non-Executive Director of Alumina
Limited since 2014, began as Chief Executive Officer on 1 June
2017. Mr Ferraro brings extensive skills and experience as a partner
of Herbert Smith Freehills, a member of its global management
committee and through his previous senior role in the resources
industry with BHP Billiton.
AWAC's portfolio is now even more
concentrated on the most competitive
assets in the global market.
OUTLOOK
Demand for alumina is expected to continue to grow in 2018,
with smelter grade alumina production forecast to reach over 129
million tonnes globally, an annual increase of over 4%. Restoration
of disrupted production and new smelting production is expected
in China, India, USA, Oman, Australia and Bahrain. The Atlantic
market alumina supply remains tight. However, extra alumina
supply is coming online in Jamaica from a previously curtailed
refinery and first alumina is expected from a new refinery in
the UAE in the first half of 2019. The ABI Bécancour smelter in
Canada has been partly curtailed related to industrial action and
its annualised production may drop for some time, decreasing
alumina demand in the Atlantic. The world's largest refinery in
Brazil, Alunorte, may produce less alumina following an incident
in February 2018. The announced imposition of tariffs on the
import of primary aluminium into the USA, may lead to a greater
likelihood of more restarts of curtailed US smelters which would
increase demand for alumina in the USA. These matters may cause
some fluctuations in 2018 in the alumina price. Otherwise alumina
supply/demand is expected to remain reasonably balanced.
The full extent of the Chinese alumina and aluminium curtailments
to combat pollution in heavily-populated areas in China will not be
known until after the end of the Chinese winter heating season in
March 2018. However, the cuts have been significant and because
they appear to have had a positive impact on pollution they may
be repeated, at least in the winter of 2018/19. Furthermore,
environmental audits of bauxite mines, alumina refineries and
aluminium smelters are continuing in China and have led to recent
curtailments due to non-compliance. Also, the environmental
imperative to consume more gas than coal where possible has
led to natural gas shortages in parts of China. This has impacted
China's alumina production.
10 ¬
Alumina Limited Annual Report 2017
¬ 11
Sustainability
“Future positive” well describes Alumina Limited's outlook for 2018. Our confidence
extends from positive financial results for shareholders to our view on the impacts
of AWAC’s operations on the environment and on its protection for future
generations. AWAC's focus on continuous improvement has resulted in better
sustainability outcomes.
AWAC is a modern business in the sense that it is accountable
to both its shareholders and to the broader society to which the
business is a positive contributor. Alumina is acutely aware that
because the AWAC business operates as part of the community,
its operating procedures and impacts must be responsible and
acceptable. Alumina understands that AWAC’s environmental
impacts are critical and that the community expects that
the company will find an appropriate balance for its financial
imperatives and its obligations to future generations through the
sustainability of its activities.
AWAC’s desired sustainability outcomes are incorporated into the
heart of its business strategy, planning and processes. Targeted
outcomes are derived from an assessment of how key material
aspects of the business impact both the social and physical
environment of its operations.
For the AWAC business the key material aspects cover:
• Energy
• Emissions
• Water management
• Waste management
• Land management
• Health and Safety
• Local communities
• Economic considerations.
AWAC takes into account what key stakeholders say about the
key material aspects of its operations. One of the most important
themes stakeholders raise is the need for AWAC to constantly
improve the management of its processing residues. Managing
bauxite residues and waste is a key environmental issue for
AWAC and its local communities and it comes with significant
financial impact. The company is pleased to report that process
and storage improvements in residue management introduced
in the year are indeed future positive.
AWAC takes into account what
key stakeholders say about the key
material aspects of its operations.
At AWAC's Western Australian refineries, bauxite residue is produced
at a rate of approximately two dry tonnes per tonne of alumina. The
residue consists of coarse red sand (approximately 40%) and a
fine silt fraction often referred to as red mud (approximately 60%).
Bauxite residue has raised alkalinity due to the addition of caustic
soda and lime in the refining process. It requires substantial storage
areas. Typical storage areas consist of raised impoundments into
which a thickened residue slurry is pumped progressively in layers to
allow for solar drying. Successive layers are applied over the footprint
of the storage area. An ongoing issue is the control of dust that is
generated off surface residues. Management to minimise dust
generation includes turning over the red mud, using sprinklers
and water carts, spraying exposed banks with a dust suppressant,
planting grasses or other vegetation and applying wood mulch.
12¬
Alumina Limited Annual Report 2017
¬13
Above: Kwinana alumina refinery – pressure filtration facility.
Residue management impacts.
• Site land management – particularly the utilisation
The application of this residue treatment technology
at Pinjarra is expected to deliver multiple benefits including:
of land to store the residue
• Eliminating the need for new greenfield residue storage areas
• Water management – water consumed, alkaline recovery,
process water management and dust suppression activities
• External environment – managing and containing
alkaline material
• Local communities – mitigating dust impacts.
This year AWAC introduced an innovative pressure filtration
system at the Kwinana refinery which produces a residue
cake (70% solids) that can be stacked and does not require
the construction of an impoundment. A similar system is being
constructed at the Pinjarra refinery.
(RSAs) for at least 30 years
• Reduced environmental footprint for residue management
and reduced sustaining capital investment compared to the
current dry stacking process
• Significantly reducing the need to draw additional water to
meet the processing requirements of the refinery
by approximately 2 gigalitres per annum
• Significant reduction in capital expenditure.
• These are positive outcomes that see financial and
sustainability benefits go hand in hand.
For a more comprehensive review of Alumina Limited’s and
AWAC’s sustainability objectives, governance, processes and
results, view the Sustainability Update on the Company web
site at www.aluminalimited.com/sustainability-update-2016.
12 ¬
Alumina Limited Annual Report 2017
¬ 13
Director’s Report
The Directors present their report on the consolidated entity consisting of Alumina
Limited (the Company) and the entities it controlled at the end of, or during,
the year ended 31 December 2017 (together the Group).
DIRECTORS
Unless otherwise indicated, the following persons were
Directors of the Company during the whole of the financial
year and up to the date of this report:
G J Pizzey (Chairman)
P C Wasow (Managing Director and Chief Executive
Officer) (part year – retired 31 May 2017)
E R Stein
C Zeng
W P Day
D O’Toole (part year – appointed 1 December 2017)
M P Ferraro (Non-Executive Director until 31 May
2017; appointed Managing Director and Chief Executive
Officer 1 June 2017)
J A Bevan was appointed a Non-Executive Director
on 1 January 2018.
BOARD OF DIRECTORS
The Company’s Directors in office as at 31 December 2017 were:
—
MR G JOHN PIZZEY
B.E (CHEM), DIP. MGT., FTSE, FAICD
Independent Non-Executive Director and
Chairman
Mr Pizzey was elected a Director of the
Company on 8 June 2007. He is a Non-Executive Director of Orora
Limited (appointed December 2013), Non-Executive Director and
Chairman of Kidman Resources Limited (appointed January 2018)
and former Non-Executive Director and Chairman of Iluka Resources
Ltd (appointed November 2005 and resigned December 2013)
and a former Non-Executive director of Amcor Limited (appointed
September 2003 and resigned December 2013).
Mr Pizzey is a life governor of Ivanhoe Grammar School and a former
chairman and director of the London Metal Exchange. He is a member
of the Audit and Risk Management Committee and of the Nomination
and Compensation Committees and was Chair of the then Audit
Committee to 30 November 2011. Mr Pizzey has extensive business
experience including 33 years as an executive in the alumina and
aluminium industries.
—
MS EMMA R STEIN
BSC (PHYSICS) HONS, MBA, FAICD,
HON FELLOW WSU
Independent
Non-Executive Director
Ms Stein was elected as a Director of the Company on 3 February
2011.
Ms Stein is currently a Non-Executive Director of Cleanaway
Waste Management Limited (formerly known as Transpacific
Industries Group Ltd (appointed August 2011)) and Infigen
Energy Limited (appointed September 2017). She is a former
Non-Executive Director of Programmed Maintenance Services
Ltd (appointed June 2010 and resigned October 2017),
Diversified Utilities Energy Trust (appointed June 2004 and
resigned May 2017) and Clough Limited (appointed July 2008
and resigned December 2013). Formerly the UK Managing
Director for French utility Gaz de France’s energy retailing
operations, Ms Stein moved to Australia in 2003. Before joining
Gaz de France, she was UK Divisional Managing Director for
British Fuels.
Ms Stein is Chair of the Compensation Committee (since 1
January 2014), current member and former Chair of the Audit
and Risk Management Committee (Chair from 28 November
2013 to 31 December 2013) and current member and Chair
of the Nomination Committee. As a senior executive, she
gained considerable international experience in management
and leadership, strategy development and implementation in
global industrial, energy and utilities markets. She has over a
decade of experience as a listed Non-Executive director and
board committee chair for capital intensive companies spanning
resources, oil and gas and related sectors.
14¬
Alumina Limited Annual Report 2017
¬15
—
MR CHEN ZENG
MIF
Non-Executive
Director
Mr Zeng was appointed as a Director of the Company on 15 March
2013. He is a member of the Nomination, Compensation and Audit
and Risk Management Committees (appointed 7 August 2014).
Mr Zeng is also currently a director of CITIC Pacific Limited, Chief
Executive Officer of CITIC Pacific Mining and Chief Executive Officer
of CITIC Mining International, the holding company of CITIC Pacific
Mining. He is a former director of CITIC Limited (listed on the
Hong Kong Exchange), CITIC Dameng (listed on the Hong Kong
Exchange), Macarthur Coal Limited (2007 to 2011) and Marathon
Resources Limited (resigned 31 January 2014). Mr Zeng also served
as a director on the Board of CITIC Group between 2010 and 2011.
Before joining CITIC Pacific Mining, Mr Zeng was the Vice Chairman
and CEO of CITIC Resources, a CITIC Group controlled Hong Kong
listed company focused on crude oil production, metal mining and
refining, and commodity trading. Mr Zeng is also the Chairman
of CITIC Australia. Mr Zeng has over 27 years of experience in
project development, management, and a proven record in leading
cross-cultural professionals in the resources sector. He has been
working in Australia since 1994 and has extensive experience in
various industries including aluminium smelting and coal mining.
—
MR W PETER DAY
LLB (HONS), MBA, FCA, FCPA, FAICD
Independent
Non-Executive Director
Mr Day was appointed as a Director of the
Company on 1 January 2014, and was appointed Deputy Chairman
of the Board on 21 August 2017. He is a member of the Nomination
and Compensation Committees and is Chair of the Audit and Risk
Management Committee. Mr Day is also currently a Non-Executive
Director of Ansell (appointed August 2007), Non-Executive
Chairman of Australian Unity Office Fund (appointed September
2015), and a former director of: Boart Longyear (February 2014–
September 2017), Federation Centres (October 2009–February
2014), Orbital Corporation (August 2007–February 2014) and SAI
Global (August 2008–December 2016).
Mr Day brings extensive experience in the resource, finance and
manufacturing sectors, having held a number of senior positions
with Bonlac Foods, Rio Tinto, CRA, Comalco and the Australian
Securities and Investments Commission. He is a former CFO of
Amcor Limited. He also supports initiatives in disability services
and mentoring.
—
MS DEBORAH O’TOOLE
LLB, MAICD
Independent
Non Executive Director
Ms O’Toole was appointed as a director on 1
December 2017. She has been appointed as a member of the Audit
and Risk Management Committee, the Nomination Committee
and the Compensation Committee. Ms O’Toole is a Non-Executive
Director of Sims Metal Management Limited (appointed November
2014), the Asciano Rail Group of Companies operating as Pacific
National Rail (appointed October 2016), Credit Union Australia
Ltd (appointed March 2014) and the Wesley Research Institute
(appointed March 2013). She is a former Non-Executive Director
of Boart Longyear Limited (appointed 1 October 2014 and resigned
September 2017), CSIRO, Norfolk Group, various companies
in the MIM and Aurizon Groups and Government and private
sector advisory boards. She has acted as Chairperson of the Audit
Committees of CSIRO, Norfolk Group and Pacific Aluminium.
Ms O’Toole has extensive executive experience across a number of
sectors including over 20 years in the mining industry and, more
recently, in transport and logistics which included managerial,
operational and financial roles. She has been Chief Financial
Officer of three ASX listed companies: MIM Holdings Limited,
Queensland Cotton Holdings Limited and, most recently, Aurizon
Holdings Limited.
—
MR JOHN A BEVAN
BCom
Independent
Non-Executive Director
Mr Bevan was appointed Non-Executive Director on 1 January
2018. He has been appointed a member of the Audit and Risk
Management Committee, the Compensation Committee and
the Nomination Committee. Mr Bevan is currently a director and
Chairman of BlueScope Steel Limited (appointed March 2014), a
director and Deputy Chairman of Ansell (appointed August 2012)
and a former director of Nuplex Industries Limited (September
2015–September 2016).
Mr Bevan was formerly the Chief Executive Officer and Executive
Director of Alumina Limited (2008–2013). Prior to his 2008
appointment to Alumina Limited, he spent 29 years in the BOC
Group Plc where he was a member of the Board of Directors and
held a variety of senior management positions in Australia, Korea,
Thailand, Singapore and the United Kingdom. Mr Bevan brings
to the Board extensive commercial and operational experience
gained through operating joint ventures in many parts of the
world, particularly Asia.
14¬
Alumina Limited Annual Report 2017
¬ 15
—
MR MIKE FERRARO
LLB (HONS)
Managing Director
and Chief Executive Officer
Prior to his appointment as CEO and Managing Director Mr
Ferraro was a Non-Executive Director of Alumina Limited from 5
February 2014 to 31 May 2017 and Partner, Client Development-
Asia Pacific at Herbert Smith Freehills, a global law firm. He was
also formerly head of the firm’s Corporate Group and a member
of its executive management team. Mr Ferraro is also currently a
Non-Executive Director of Helloworld Travel Limited (appointed
January 2017).
Between 2008 and 2010 Mr Ferraro was Chief Legal Counsel at
BHP Billiton Ltd. Mr Ferraro has considerable experience in the
resources sector and has over 35 years of experience in joint
ventures, mergers and acquisitions, fund raising and regulatory
issues across a wide range of sectors and countries. He also has
considerable experience in the commercial and financing aspects
of large transactions gained from a number of years in investment
banking as a corporate adviser.
—
COMPANY SECRETARY
MR STEPHEN FOSTER
BCOM LLB (HONS) GDIPAPPFIN
(SEC INST) GRADDIP CSP, ACIS
The role of Company Secretary/General Counsel for Alumina
Limited includes:
• Providing legal advice to the Board and management as
required
• Advising the Board on corporate governance principles
• Generally attending all Board meetings and preparing the
minutes
• Monitoring that the Board and Committee policies and
procedures are followed
• Facilitating the induction of Directors
• Managing compliance with regulatory requirements.
MEETINGS OF DIRECTORS
Particulars of the number of meetings of the Company’s Directors
(including meetings of committees of Directors) during the financial
year, and the number of those meetings attended by each Director
(as applicable), are detailed in the table on page 17.
INTERESTS OF DIRECTORS
Particulars of relevant interests in shares in the Company, or in
any related body corporate held by the Directors as at the date
of this report are set out in the Remuneration Report on page 61
of this report. Particulars of rights or options over shares in the
Company, or in any related body corporate, held by the Directors
as at the date of this report are set out in the Remuneration Report
on page 61 of this report.
General Counsel/ Company Secretary
INSURANCE OF OFFICERS
Mr Foster is responsible for legal, company secretarial, shareholder
services, insurance and human resources. He has a wide range
of legal and commercial experience gained over 30 years, more
recently at Village Roadshow and WMC Limited, after working
with the legal firm of Arthur Robinson & Hedderwicks (now
Allens). The appointment of the Company Secretary/General
Counsel is ratified by the Board. As defined in the Board Charter,
the Company Secretary is accountable directly to the Board,
through the Chair, on all matters to do with the proper functioning
of the Board.
During or since the end of the financial year, the Group has paid
the premiums in respect of a contract to insure Directors and
other officers of the Group against liabilities incurred in the
performance of their duties on behalf of the Group. The officers
of the Group covered by the insurance policy include any natural
person acting in the course of duties for the Group who is or was
a Director, secretary or executive officer as well as senior and
executive staff. The Company is prohibited, under the terms of
the insurance contract, from disclosing details of the nature of
liability insured against and the amount of the premium.
INDEMNITY OF OFFICERS
Rule 75 of the Company’s Constitution requires the Company to
indemnify each officer of the Company (and, if the Board of the
Company considers it appropriate, any officer of a wholly owned
subsidiary of the Company) out of the assets of the Company
against any liability incurred by the officer in or arising out of the
conduct of the business of the Company or the relevant wholly-
owned subsidiary or in or arising out of the discharge of the duties
of the officer, where that liability is owed to a person other than
the Company or a related body corporate of the Company. This
requirement does not apply to the extent that the liability arises out
of conduct on the part of the officer which involved a lack of good
faith, or to the extent that the Company is otherwise precluded
16 ¬
Alumina Limited Annual Report 2017
¬17
ALUMINA LIMITED DIRECTORS’ ATTENDANCE AT MEETINGS JANUARY TO DECEMBER 2017
Board
Meeting
Board
Committee
meetings
Audit and Risk
Management
Committee
meetings
Compensation
Committee
meetings
Nominations
Committee
meetings
Directors
G J Pizzey
E R Stein
C Zeng1
P Day2
M Ferraro3
P Wasow4
D O’Toole5
Eligible
to attend
Attended
Eligible
to attend
Attended
Eligible
to attend
Attended
Eligible
to attend
Attended
Eligible
to attend
Attended
9
9
9
9
9
4
1
9
9
9
9
9
4
1
0
0
0
0
0
0
0
0
0
0
0
0
0
0
7
7
7
7
3
na
1
7
7
7
7
3
na
1
6
6
6
6
3
na
1
6
6
5
5
2
na
1
5
5
5
5
3
na
1
5
5
5
5
3
na
1
Notes:
1 Mr Zeng was an apology for one meeting of the Compensation Committee
2 Mr Day was an apology for one meeting of the Compensation Committee
3 Mr Ferraro was appointed Managing Director and CEO effective 1 June 2017 and therefore ceased to attend Committees in the capacity of a
member/Non-Executive Director of the Board. Mr Ferraro was granted Leave of Absence for a meeting of the Compensation Committee
4 Mr Wasow retired as Managing Director and CEO effective 31 May 2017
5 Ms O’Toole was appointed a Non-Executive Director effective 1 December 2017
by law from providing an indemnity. It also does not apply to the
extent and for the amount that the officer is not otherwise entitled
to be indemnified and is not actually indemnified by another
person (such as an insurer under any insurance policy). ‘Officer’
in this context means: a director, secretary, senior manager or
employee; or a person appointed as a trustee by, or acting as
a trustee at the request of, the Company or a wholly owned
subsidiary of the Company, and includes a former officer. The
Constitution also permits the Company, where the Board considers
it appropriate, to enter into documentary indemnities in favour
of such officers. The Company has entered into such Deeds of
Indemnity with each of the Directors, which indemnify them
consistently with rule 75 of the Constitution.
DIVIDENDS
Details of the dividends paid to members of the Company during
the financial year are referred to in Note 6 of the Consolidated
Financial Statements found on page 79.
PRINCIPAL ACTIVITIES
The principal activities of the Group relate to its 40 per cent
interest in the series of operating entities forming Alcoa World
Alumina and Chemicals (AWAC). AWAC has interests in bauxite
mining, alumina refining and aluminium smelting. There have been
no significant changes in the nature of the principal activities of
the Group during the financial year.
REVIEW OF OPERATIONS AND RESULTS
The financial results for the Group include the 12 month results of
AWAC and associated corporate activities. The Group’s net profit
after tax for the 2017 financial year attributable to members of
the Company was US$339.8 million profit (2016: US$30.2 million
net loss). Excluding significant items, there would have been a
net profit after tax of US$363.1 million (2016: US$88.3 million).
For further information on the operations of the Group during
the financial year and the results of these operations refer to the
Operating and Financial Review on pages 20 to 35 of this report.
MATTERS SUBSEQUENT TO THE END OF THE
FINANCIAL YEAR
Other than as reported in Note 15 of the Consolidated Financial
Statements (refer to page 88), there are no significant matters,
circumstances or events that have arisen since the end of the
financial year that have significantly affected, or may significantly
affect, the Group’s operations, the results of those operations,
or the Group’s state of affairs, in the financial years subsequent
to the financial year ended 31 December 2017.
LIKELY DEVELOPMENTS
In the opinion of the Directors, it would prejudice the interests of
the Group to provide additional information, except as reported
in this Directors’ Report, relating to likely developments in
the operations of the Group and the expected results of those
operations in the financial years subsequent to the financial year
ended 31 December 2017
16 ¬
Alumina Limited Annual Report 2017
¬ 17
ROUNDING OF AMOUNTS
CORPORATE GOVERNANCE STATEMENT
The Company has, for the 2017 reporting year, elected to disclose
the Corporate Governance Statement only on the Company web
site. The Corporate Governance Statement can be found at www.
aluminalimited.com/governance/.
AUDITOR’S INDEPENDENCE DECLARATION
As lead auditor for the audit of Alumina Limited for the year
ended 31 December 2017, I declare that to the best of my
knowledge and belief, there have been:
a) no contraventions of the auditor independence
requirements of the Corporations Act 2001 in relation
to the audit; and
b) no contraventions of any applicable code of professional
conduct in relation to the audit.
This declaration is in respect of Alumina Limited and the entities
it controlled during the period.
John O’Donoghue
Partner
PricewaterhouseCoopers
Melbourne
22 March 2018
—
PricewaterhouseCoopers, ABN 52 780 433 757
2 Riverside Quay, SOUTHBANK VIC 3006,
GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
The Company is of a kind referred to in the Australian Securities and
Investments Commission Corporations (Rounding in Financial/
Directors’ Reports) Instrument 2016/191. Amounts shown in the
Financial Report and this Directors’ Report have been rounded off
to the nearest hundred thousand dollars, except where otherwise
required, in accordance with that legislative instrument.
SIGNIFICANT CHANGE IN THE STATE OF AFFAIRS
There have been no significant changes in the state of affairs
of the Group during the financial year.
AUDITOR
PricewaterhouseCoopers continues in office, in accordance with
the Corporations Act 2001 (Cth) (Corporations Act). A copy of
the Auditor’s Independence Declaration as required under section
307C of the Corporations Act is set out on this page of this report.
NON-AUDIT SERVICES
The Group may decide to employ the auditor on assignments
additional to their statutory audit duties where the auditor’s
expertise and experience with the Company and/or the Group
are important. Details of the amounts paid or payable to the
auditor (PricewaterhouseCoopers) for audit and non-audit
services provided by (or on behalf of) the auditor and its related
practices are disclosed in Note 13 of the Notes to the Consolidated
Statements in the Financial Report on page 87.
The Board of Directors has considered the position and,in
accordance with advice received from the Audit and Risk
Management Committee, is satisfied that the provision of
non-audit services during the financial year by (or on behalf
of) the auditor and its related practices, is compatible with the
general standard of independence for auditors imposed by the
Corporations Act. The Directors are satisfied that the provision
of those non-audit services did not compromise the auditor
independence requirements of the Corporations Act for the
following reasons:
• All non-audit services have been reviewed by the Audit and
Risk Management Committee to ensure they do not impact
the impartiality and objectivity of the auditor
• None of the services undermine the general principles relating
to auditor independence as set out in APES 110 Code of Ethics
for Professional Accountants. The fees paid or payable during
the financial year for services provided by (or on behalf of)
the auditor of the parent entity are disclosed in Note 13 of the
Notes to the Consolidated Statements in the Financial Report
on page 87.
18 ¬
Alumina Limited Annual Report 2017
¬ 19
Operating and Financial Review
NOTE REGARDING NON-IFRS FINANCIAL INFORMATION
The Operating and Financial Review contains certain non-IFRS financial
information. This information is presented to assist in making appropriate
comparisons with prior year periods and to assess the operating performance
of the business.
Alcoa World Alumina & Chemicals (AWAC) financial information, except
as stated below, is extracted from audited financial statements prepared
in conformity with accounting principles generally accepted in the
United States of America.
CONTENTS
1.
STRATEGY AND BUSINESS MODEL
2. PRINCIPAL RISKS
3. REVIEW OF AWAC OPERATIONS
4. AWAC FINANCIAL REVIEW
5. ALUMINA LIMITED FINANCIAL REVIEW
6. MARKET OUTLOOK AND GUIDANCE
21
23
25
29
32
34
20 ¬
20 ¬
20 ¬
Alumina Limited Annual Report 2017
Alumina Limited Annual Report 2017
¬21
¬21
1. STRATEGY AND BUSINESS MODEL
BUSINESS MODEL
Alumina Limited represents a unique investment in globally leading
bauxite mines and alumina refineries through its 40% investment
in Alcoa World Alumina and Chemicals (AWAC). AWAC also
has a 55% interest in the Portland smelter in Victoria, Australia.
The Company provides the cleanest look-through to AWAC’s
underlying performance. This is possible because the financial
policies of both Alumina Limited and AWAC ensure there is
modest leverage in both the Company and AWAC, the Company’s
own costs are minimal and the distribution policies of Alumina
Limited and AWAC require free cash flows to be paid to their
respective shareholders.
Alumina Limited’s net profit/(loss) is principally comprised of a
return on its equity investment, and revenues are limited to small
amounts of interest income and occasional one-off revenues.
AWAC was formed on 1 January 1995 by Alumina Limited and
Alcoa Inc combining their respective global bauxite, alumina and
alumina-based chemicals business and investments and their
respective aluminium smelting operations in Australia. Following
the separation of Alcoa Inc. into Alcoa Corporation and Arconic
Inc. on 1 November 2016, Alcoa Corporation (Alcoa) replaced
Alcoa Inc as Alumina Limited’s partner in the AWAC joint venture.
Alcoa owns the 60% interest in the joint venture and manages
the day-to-day operations.
San Ciprian
CBG
Al Ba’itha
Ras Al Khair
Point Comfort
Afobaka
MRN
Juruti
Alumar
Kwinana
Huntly
Pinjarra
Willowdale
Wagerup
Portland
AWAC operations
Bauxite mine
Refinery
Smelter
Location
Energy
Equity interest
Bauxite mine
Refinery
2 0¬
2 0¬
Alumina Limited Annual Report 2017
Alumina Limited Annual Report 2017
Alumina Limited Annual Report 2017
¬ 21
¬ 21
¬ 21
The Strategic Council is the principal forum for Alcoa and Alumina
Limited to provide direction and counsel to the AWAC entities in
respect of strategic and policy matters. The Alcoa and Alumina
Limited representatives on the boards of the AWAC entities are
required, subject to their general fiduciary duties, to carry out
the directions and the decisions of the Strategic Council. The
Strategic Council has five members, three appointed by Alcoa (of
which one is Chairman) and two by Alumina Limited (of which
one is the Deputy Chairman). Decisions are made by majority
vote except for matters which require a “super-majority” vote,
which is a vote of at least 80% of the members appointed to the
Strategic Council.
The following matters require a super-majority vote:
Also effective immediately on and from a change of control of
Alcoa or Alumina Limited there is an increased opportunity for
development projects and expansions, whereby if either Alumina
Limited or Alcoa Corporation wishes to expand an existing AWAC
operation, develop a new project on AWAC tenements or pursue
a project outside of AWAC, it is entitled to do so on a sole basis
after providing 180 days for the other party to explore joint
participation in the proposed project. A partner that avails itself of
such an opportunity would pay for all costs related to the project,
including for AWAC resources and shared facilities used, and
would be entitled to all of the project’s resulting off-take.
If there is a change of control of Alumina then, from a date
nominated by Alumina:
• change of the scope of AWAC
• change in the dividend policy
• equity calls on behalf of AWAC totalling, in any one year, in
excess of $1 billion
• acquisitions, divestitures, expansions and curtailments
exceeding 2 million tonnes per annum of bauxite or 0.5
million tonnes per annum of alumina or which have a sale
price, acquisition price, or project total capital cost of US$50
million or greater
• Future alumina off-take rights, whereby from a date
nominated by Alumina Limited or its acquirer will be entitled
to buy, subject to its 40% ownership cap:
– its net short position (calculated as total consumption less
total owned production per annum) of alumina at market
price for its internal consumption; plus
– up to 1 million tonnes per annum alumina off-take, at
market prices, which it may market and sell as it sees fit;
– in all cases subject to AWAC third party customer
• implementation of related party transactions in excess of
contracts being satisfied;
US$50 million
• implementation of financial derivatives, hedges and other
commodity price or interest rate protection mechanisms
• decision to file for insolvency in respect of any AWAC
company.
Under the general direction of the Strategic Council, Alcoa is
the “industrial leader” and provides the operating management
of AWAC and of all affiliated operating entities within AWAC.
Alumina Limited is entitled to representation in proportion to
its ownership interest on the board of each entity in the AWAC
structure and is currently represented on the boards of Alcoa of
Australia Ltd (AofA), Alcoa World Alumina Brazil Ltda (AWA
Brazil) and Alcoa World Alumina LLC (AWA LLC). In addition to
the Strategic Council meetings, Alumina Limited’s Management
and Board visit and review AWAC’s operations regularly.
Subject to the exclusivity provisions of the AWAC agreements,
AWAC is the exclusive vehicle for the pursuit of Alumina Limited’s
and Alcoa’s (and their related corporations as defined) interests in
the bauxite, alumina and inorganic industrial chemicals businesses,
and neither party can compete with AWAC so long as they
maintain an ownership interest in AWAC. In addition, Alumina
Limited may not compete with the businesses of the integrated
operations of AWAC (being the primary aluminium smelting and
fabricating facilities and certain ancillary facilities that existed
at the formation of AWAC). The exclusivity provisions would
terminate immediately on and from a change in control of either
Alumina Limited or Alcoa.
• Future bauxite off-take rights, whereby from a date
nominated by Alumina Limited or its acquirer will be entitled
to buy, at market prices, up to its net short position of bauxite
for internal consumption, subject to its 40% ownership cap.
STRATEGY ANALYSIS
AWAC is primarily focused on bauxite and alumina assets, and this
is the key investment concern of Alumina Limited. That is, to invest
in long-life, low cost bauxite and alumina assets through AWAC.
Alumina Limited and Alcoa are different companies with different
shareholders and different governance requirements. While
AWAC is governed by constitutional documents, in a practical
sense, the reconciliation of the differing interests requires
challenge, debate and negotiation. To do this well, Alumina
Limited needs to have (and has) an independent understanding
of the bauxite, alumina and aluminium market and views on the
impact of changes in the market, in particular around capacity
investment, pricing and the development of the Chinese industry.
Through the role of Alumina Limited representatives on the
Strategic Council and AWAC entity boards and working with
Alcoa, Alumina Limited contributes to the strategic and high-level
commercial actions of AWAC.
22¬
Alumina Limited Annual Report 2017
¬23
2. PRINCIPAL RISKS
The risk management processes are summarised in the Corporate
Governance Statement located on the Company web site at www.
aluminalimited.com/governance/.
Alumina Limited’s risk management framework provides for
the production of a Group risk matrix, which sets out Alumina
Limited’s most significant risks and the steps taken to mitigate
those risks. These risks are rated on the basis of their potential
impact on the current operations and profitability and/or the
long term value of the Group. Set out below are some of the key
risks faced by Alumina Limited. However, there are other risks not
listed below associated with an investment in Alumina Limited.
Movements in the market prices of bauxite, alumina and
aluminium – AWAC’s, and hence Alumina Limited’s, performance
is predominantly affected by the market price of alumina, and to
some extent the market prices of bauxite and aluminium. Market
prices are affected by numerous factors outside of Alumina
Limited’s control. These include the overall performance of
world economies, the related cyclicality of industries that are
significant consumers of aluminium and movement in production
disproportionate to demand (whether as a result of changes to
production levels at existing facilities or the development of
new facilities). A fall in the market prices of bauxite, alumina
and aluminium can adversely affect Alumina Limited’s financial
performance. AWAC seeks to identify ways in which to lower costs
of production and thus achieving a low position on the cost curve.
Achieving a low position on the cost curve allows AWAC to remain
competitive in the event of unfavourable market movements.
AWAC and Alumina Limited generally do not undertake hedging
to manage this risk.
Fluctuations in exchange rates – while a significant proportion
of AWAC’s costs are incurred in Australian dollars, its sales are
denominated in US dollars. Accordingly, AWAC and Alumina’s
Limited’s future profitability can be adversely affected by a
strengthening of the Australian dollar against the US dollar and
a strengthening against the US dollar of other currencies in which
operating or capital costs are incurred by AWAC outside Australia,
including the Brazilian Real. Also, given that China is a significant
part of the world alumina and aluminium markets, fluctuations
in the Chinese Renminbi against the US dollar could have some
impact on other parts of the industry. AWAC and Alumina Limited
generally do not undertake hedging activities to manage this risk.
Increases in AWAC’s production costs or a decrease in production
– AWAC’s operations are subject to conditions beyond its control
that may increase its costs or decrease its production, including
increases in the cost of key inputs (including energy, raw materials,
labour, caustic and freight), the non-availability of key inputs
(including secure energy), weather and natural disasters, fires
or explosions at facilities, unexpected maintenance or technical
problems, key equipment failures, disruptions to or other problems
with infrastructure and supply. In addition, industrial disruptions,
work stoppages, refurbishments and accidents at operations may
adversely affect profitability. Some cost inputs are subject to long
term contracts to increase the certainty of input pricing. AWAC’s
operating and maintenance systems and business continuity
planning seek to minimise the impact of non-availability of
key inputs. AWAC’s portfolio restructuring and repositioning
continues to ensure that operations as a whole remain competitive.
AWAC also invests in capital expenditure projects that will reduce
cash costs over the long term. Planned development and capital
expenditure projects may not result in anticipated construction
costs or production rates being achieved.
AWAC structure – Alumina Limited does not hold a majority
interest in AWAC, and decisions made by majority vote may not
be in the best interests of Alumina Limited. There is also a risk that
Alumina Limited and Alcoa may have differing priorities. During
2016, the joint venture agreements were modified to ensure
that certain key decisions require Alumina Limited’s consent by
a super-majority vote.
Greenhouse gas emission regulation – energy, specifically
electricity, is a significant input in a number of AWAC’s operations,
making AWAC an emitter of greenhouse gases. The introduction
of regulatory change by governments in response to greenhouse
gas emissions may represent an increased cost to AWAC and
may affect Alumina Limited’s profitability. AWAC and Alumina
Limited monitor regulatory changes, and understand their effect
on AWAC.
Political, legal and regulatory impacts – AWAC and Alumina
Limited operate across a broad range of legal, regulatory or
political systems. The profitability of those operations may be
adversely impacted by changes in the regulatory regimes. AWAC
and Alumina Limited’s financial results could be affected by
new or increasingly stringent laws, regulatory requirements or
interpretations, or outcomes of significant legal proceedings or
investigations adverse to AWAC or Alumina Limited.
2 2¬
Alumina Limited Annual Report 2017
¬ 23
This may include a change in effective tax rates or becoming
subject to unexpected or rising costs associated with business
operations or provision of health or welfare benefits to employees,
regulations or policies.
AWAC is also subject to a variety of legal compliance risks. These
risks include, among other things, potential claims relating to
product liability, health and safety, environmental matters,
intellectual property rights, government contracts, taxes and
compliance with US and foreign export laws, anti-bribery laws,
competition laws and sales and trading practices. Failure to
comply with the laws regulating AWAC’s businesses may result
in sanctions, such as fines or orders requiring positive action by
AWAC, which may involve capital expenditure or the removal
of licenses and/or the curtailment of operations. This relates
particularly to environmental regulations. Alumina Limited and
AWAC undertake a variety of compliance training and governance
functions to mitigate these risks. Furthermore, AWAC maintains
a spread of assets and customers across a portfolio of countries
and regions to minimise disruption and concentration risk.
Closure/impairment of assets – Alumina Limited may be required
to record impairment charges as a result of adverse developments
in the recoverable values of its assets. To the extent that the
carrying value of an asset is impaired, such impairment may
negatively impact Alumina Limited’s profitability during the
relevant period. Closure, curtailment or sale of AWAC’s operations
may result in a change in the timing of required remediation
activities and/or an impairment being incurred as a result of
the carrying value of an asset exceeding its recoverable value,
but may be necessary to ensure the ongoing competitiveness
of AWAC operations.
Customer risks – AWAC’s relationships with key customers for
the supply of alumina (including Alcoa) are important to AWAC’s
financial performance. The loss of key customers or changes to
sales agreements could adversely affect AWAC’s and Alumina
Limited’s financial performance. AWAC mitigates customer risk by
having a broad customer base across many countries and regions.
Debt refinancing – Alumina Limited’s ability to refinance its
debt on favourable terms as it becomes due or to repay its debt,
its ability to raise further finance on favourable terms, and its
borrowing costs, will depend upon a number of factors, including
AWAC’s operating performance, general economic conditions,
political, capital and credit market conditions, external credit
ratings and the reputation, performance and financial strength of
Alumina Limited’s business. If a number of the risks outlined in this
section eventuate (including the cyclicality of the alumina industry
and adverse movements in the market prices of aluminium and
alumina) and Alumina Limited’s operating performance, external
credit rating or profitability is negatively impacted as a result of
these risks, there is a risk that Alumina Limited may not be able
to refinance expiring debt facilities or the costs of refinancing its
debt may increase substantially.
Other risks include:
• an alumina and/or aluminium market in supply surplus may lead
to downward price pressure;
• Chinese growth slowing and affecting aluminium consumption
and hence aluminium and alumina demand;
• Greater Chinese aluminium production at lower cost,
combined with lower demand in China, may lead to a
greater level of Chinese primary aluminium and semi-
finished product exports, depressing the world prices
of aluminium;
• Alcoa and its subsidiaries have a variety of obligations to Alumina
Limited and AWAC, the fulfilment of which depends on their
financial position. Adverse changes to the financial position of
Alcoa and its subsidiaries could result in such obligations not
being met;
• a greater outflow of aluminium stocks from warehouses’
inventories could impact the world alumina market;
• a sustained increase in the supply of cheap bauxite from Asia to
China, could lower Chinese alumina production costs;
• a technology breakthrough could lower Chinese alumina
production costs.
• Emerging competitors entering the alumina market may
cause overcapacity in the industry which may result in AWAC
losing sales.
24 ¬
Alumina Limited Annual Report 2017
¬25
3. REVIEW OF AWAC OPERATIONS
Since the beginning of this decade, AWAC has undergone business
improvement and transformation, which have significantly
improved the competitiveness of its portfolio of assets in
a global market. Industry fundamentals now also look to be
improving through measures such as the China supply-side
reforms. AWAC will continue to look for further opportunities
of portfolio optimisation with emphasis on growth opportunities.
The current refining portfolio is comprised mostly of tier one
assets that allows AWAC to generate returns during the highs
and lows of the commodity cycle.
The significant improvement in AWAC’s 2017 earnings and cash
generation was mainly due to higher realised prices for alumina.
In addition to consumption within its own refineries, AWAC’s
bauxite resources in Australia, Brazil and Guinea are also able to
cater for third party customers in both the Pacific and the Atlantic
regions. A continuing focus on third party bauxite sales provides
AWAC with an additional earnings stream that is expected to grow.
D
E
P
P
I
H
S
3
T
D
B
L
A
T
O
T
E
H
T
F
O
%
9
3
1
.
2.4%
16.4%
76.9%
46.8%
MINING1
Huntly &
Willowdale
97.6%
REFINING1
Pinjarra
Wagerup
Kwinana
PORTLAND &
ALCOA SMELTERS
30.2%
Juruti
MRN2
CBG2
83.6%
Alumar
23.1%
53.2%
San
Ciprian
THIRD PARTY
ALUMINA SALES
69.8%
I
S
E
L
A
S
E
T
X
U
A
B
Y
T
R
A
P
D
R
H
T
I
MINING HIGHLIGHTS:
• Third party sales from all AWAC operated mines
• Near completion of Juruti’s expansion to 5.7 million BDT
• WA infrastructure expansion underway
• CBG’s Phase 1 expansion underway
ALUMINA HIGHLIGHTS:
• Production records at three largest refineries:
Pinjarra, Wagerup & Alumar
• Second best annual production result at San Ciprian
• Phase 1 debottlenecking project completed at Alumar
• Pinjarra press filtration project underway
AWAC operated asset
Non-AWAC operated asset
1Excludes Al Ba’itha mine and Ras Khair refinery 2AWAC equity share
3Bone dry tonnes (BDT)
2 4¬
Alumina Limited Annual Report 2017
¬ 25
MINING
AWAC’s mining operations made significant progress in 2017 with third party bauxite sales from all mines for the first time and the
near completion of Juruti’s capacity increase to 5.7 million BDT.
31 DEC 2017
31 DEC 2016
CHANGE
CHANGE (%)
AWAC operated mines
Production (million BDT)
Cash cost ($/BDT of bauxite produced)
Non-AWAC operated mines
38.8
11.1
37.5
9.8
1.3
1.3
AWAC equity share of production (million BDT)1
4.6
5.2
(0.6)
Third party sales
Shipments to third parties (million BDT)
Total third party revenue, inclusive of freight ($ million)
6.6
334.0
6.3
315.8
0.3
18.2
3.5
13.3
(11.5)
4.8
5.8
1 Based on the terms of its bauxite supply contracts, AWAC bauxite purchases from Mineração Rio do Norte S.A. (“MRN”) and Compagnie des Bauxites de
Guinée (CBG) differ from their proportional equity in those mines.
AWAC OPERATED MINES
AWAC operated mines increased production for the year by
3.5%. The growth in production was facilitated by creep at the
Huntly and Willowdale mines in Western Australia and the near
completed capacity increase of the Juruti mine to 5.7 million BDT.
All AWAC operated mines achieved record production in 2017.
Whilst production increased at Juruti, operations were affected by
heavy rainfall in Brazil during the first half of 2017 and particularly
by drought during the second half. Insufficient water levels in
the tailings dam during the drought reduced the effectiveness of
the beneficiation process (washing of bauxite to remove organic
material), thus reducing bauxite quality for some shipments to
the downstream Alumar refinery.
AWAC’s cash cost per BDT of bauxite produced increased by
13.3% to $11.1 per BDT. Contributors to this increase included
higher royalty costs at Australian mines, a weaker US dollar
against the Australian dollar and Brazilian real, fleet overhaul
costs and higher maintenance to address Juruti’s tailings dam
and washing plant issues.
The 2017 EBITDA margin for AWAC’s bauxite unit, which includes
intersegment sales but excludes freight, was 38.2% (2016: 38.0%).
Cash cost per BDT of bauxite produced
$1.0
$11.1
Bauxite production: change by mine (million BDT)
$9.8
$0.1
$0.2
–
0.4
38.8
0.9
37.5
2016
Huntly
& Willowdale
Juruti
2017
* Other includes: maintenance, contracted services, supplies, royalties and other
2016
Labor
Fuel
Energy
Other*
2017
* Other includes: maintenance, contracted services, supplies, royalties and other
During 2018, AWAC’s mining operations are expected to complete
a further capacity increase of the Juruti mine to 6.5 million BDT
per annum, and to continue to invest in infrastructure development
to facilitate further exports from Western Australia.
26 ¬
Alumina Limited Annual Report 2017
¬27
Non-AWAC Operated Mines
Third Party Bauxite Sales
AWAC’s share of production at the CBG mine in Guinea and the
MRN mine in Brazil decreased by 11.5% compared to 2016.
The CBG mine’s production was affected by civil unrest which
caused disruptions to ancillary infrastructure supporting CBG.
CBG continues with its expansion project which is expected to
increase AWAC’s equity share of production by approximately
1.1 million BDT per annum.
The MRN mine was also exposed to weather events, experiencing
similar issues as Juruti.
The equity income derived from CBG and MRN was $23.1 million
(2016: $34.1 million),
AWAC’s shipments to third party customers increased by 4.8%
to 6.6 million BDT in 2017. All AWAC mines (including CBG and
MRN) shipped bauxite to third parties during 2017.
The geographical location of AWAC’s mines allows AWAC to
service customers in the Atlantic and the Pacific regions.
AWAC continues to develop infrastructure in order to support
export of bauxite from Western Australia to third party customers.
In 2018 AWAC is expected to export up to 1.4 million BDT from
Western Australia (2017: 0.8 million BDT).
Total third party bauxite sales are expected to decline to
6.3 million BDT in 2018 due to the expansion works at CBG which
will be partially offset by increases from the Western Australian
mines and Juruti.
REFINING
The refining operations achieved a significant increase in revenue and earnings through higher prices and a concentrated effort on
operational excellence, which more than offset increases in input costs, the weaker US dollar, lower shipments and the operational
issues at the Juruti mine.
31 DEC 2017
31 DEC 2016
CHANGE
CHANGE (%)
AWAC operated refineries
Shipments (million tonnes)
Production (million tonnes)
Average realised alumina price ($/tonne)
Platts FOB Australia - one month lag ($/tonne)
Cash cost per tonne of alumina produced
Margin1 ($/tonne)
Smelter Grade Alumina (“SGA”) shipments on spot or
index basis (%)
Ma’aden joint venture
Production (million tonnes)
AWAC’s share of production (million tonnes)
1 Calculated as average realised price less cash cost of production.
13.1
12.5
335
349
198
137
85
1.5
0.4
13.3
12.6
242
242
191
51
84
1.4
0.4
(0.2)
(0.1)
93
107
7
86
1
0.1
-
(1.5)
(0.8)
38
44
3.7
169
1.2
7.1
-
2 6¬
Alumina Limited Annual Report 2017
¬ 27
AWAC OPERATED REFINERIES
Production from AWAC operated refineries was 12.5 million
tonnes, down 0.1 million tonnes compared to 2016. This was
largely due to the curtailment of the Point Comfort refinery in 2016.
Alumina shipments for 2017 were 13.1 million tonnes
(2016: 13.3 million tonnes). The reduction in shipments is mainly
attributable to the curtailment of the Point Comfort refinery.
Shipments during December 2017 were also affected by operating
inefficiencies at the ship loading facilities at the Bunbury and San
Ciprian ports, resulting in some shipments being deferred to 2018.
Alumina production: change by refinery (KT)
12,644
(211)
16
(4)
8
12,453
2016
Point
Comfort
Pinjarra
Wagerup
Kwinana
Alumar
San
Ciprian
2017
* Other includes: maintenance, contracted services, supplies, royalties and other
The 2017 average realised alumina price was $335 per tonne, a year
on year improvement of $93 per tonne (38%). With approximately
85% of shipments priced on spot or an index basis, AWAC was
well positioned to capitalise on the steep upward price movement.
By comparison, the cash cost per tonne of alumina produced
increased by only 3.7% to $198 per tonne. Whilst the curtailment
of Point Comfort improved the overall cash cost of production by
$4 per tonne, there were unfavourable variances attributable to
caustic soda, energy and other costs.
Cash cost per tonne of Alumina produced
$1
$198
$8
$191
($4)
$2
2016
Point
Comfort
Energy
Caustic
Bauxite Conversion*
2017
* Conversion includes: employee costs, indirect costs and other raw material costs
Approximately 83% of the total caustic cost increase related to price.
The rest of the cost increase is mainly attributable to the severe
weather conditions in Brazil that affected the quality of the bauxite
delivered to the Alumar refinery requiring more caustic usage.
The rise in the price of caustic has been driven by supply and demand
forces affecting the chlor-alkali industry. Due to its low reactive
silica bauxite, AWAC is in a better position than many competitors
to weather the rise in caustic prices.
The rise in energy costs was mainly due to the increase in the
underlying oil reference price for the San Ciprian and Alumar
refineries. This was partially offset by record low energy intensity
achieved across the refining system.
Conversion costs rose because of increased maintenance at all
refineries and the weaker US dollar.
Ma’aden Joint Venture
During 2017, the Ma’aden refinery produced 1.5 million tonnes of
alumina (AWAC’s share of production was 0.4 million tonnes),
representing a 7.1% improvement compared to 2016. In December,
the Ma’aden refinery’s annualised run rate reached nameplate
capacity (1.8 million tonnes per annum). In 2018, the Ma’aden
refinery is expected to operate around its nameplate capacity,
which should exceed the alumina needs of the adjoining smelter
(1.5 million tonnes per annum), which is not an AWAC asset.
The expected excess tonnes will be sold to third parties.
Equity losses relating to the Ma’aden joint venture reduced to
$5 million (2016: $42.6 million). The improvement in performance
is mainly attributable to higher alumina prices.
28 ¬
Alumina Limited Annual Report 2017
¬29
PORTLAND
The Portland smelter is AWAC’s only smelting operation.
AWAC’s 55% Equity Share
Production (thousand tonnes)
LME aluminium cash - 15 day lag ($/tonne)
EBITDA ($ million)
31 DEC 2017
31 DEC 2016
CHANGE
CHANGE (%)
112
1,950
(25.6)
154
1,596
5.5
(42)
354
(31.1)
(27)
22
(565)
Aluminium production decreased by 27% due to a power outage in December 2016.
In January 2017, Alcoa of Australia Limited signed agreements with the State and Federal governments to provide assistance for the
purposes of restarting the Portland operations and maintaining production at the smelter over the next four years.
The smelter gradually rebuilt capacity throughout the year, reaching pre-outage production levels of approximately 167 thousand
tonnes per year (AWAC’s equity share) in October 2017.
4. AWAC FINANCIAL REVIEW
The improvement in AWAC’s net profit was largely due to higher realised alumina prices during 2017 which more than offset higher
input costs and the weaker US dollar. Lower charges for significant items further assisted the results.
The increases in income tax charges were driven by higher taxable income, particularly in AWAC’s Australian operations.
AWAC PROFIT AND LOSS (US GAAP)
Net profit after tax
Add back: Income tax charge
Add back: Depreciation and amortisation
Add back: Net interest
EBITDA
Add back: Significant items (pre-tax)
EBITDA excluding significant items
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
901.3
443.7
274.5
(2.6)
1,616.9
68.4
1,685.3
49.0
72.3
271.8
0.4
393.5
363.7
757.2
2 8¬
Alumina Limited Annual Report 2017
¬ 29
AWAC’s net profit included the following significant items:
SIGNIFICANT ITEMS (US GAAP)
Suralco restructuring charges
Point Comfort restructuring charges
Gain on sale of interest in the Dampier Bunbury Gas Pipeline (DBNGP)
Impairment in an interest in a gas field in Western Australia
Portland impairment charge1
Other2
Total significant items (pre-tax)
Total significant items (after-tax)
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
(8.3)
(48.6)
-
-
-
(11.5)
(68.4)
(65.7)
(132.8)
(31.0)
27.1
(72.3)
(125.8)
(28.9)
(363.7)
(306.2)
1 For US GAAP purposes the Portland impairment charge was fully recognised in 2016. For AAS, the charge was recognised over the period of two years, 2015
and 2016.
2 Other significant items in 2017 include net charges related to Point Henry and Anglesea restructuring, severance and redundancy payments (2016: net
charges related to Point Henry and Anglesea restructuring, severance and redundancy payments and US GAAP pension adjustments).
AWAC BALANCE SHEET (US GAAP)
Cash and cash equivalents
Receivables
Inventories
Property, plant & equipment
Other assets
Total Assets
Short term borrowings
Accounts payable
Taxes payable and deferred
Capital lease obligations & long term debt
Other liabilities
Total Liabilities
Equity
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
631.9
560.3
530.8
3,753.9
2,372.9
251.2
395.7
425.9
3,634.2
2,064.5
7,849.8
6,771.5
4.6
715.1
401.1
17.5
1,261.0
2,399.3
2.2
561.6
184.9
2.7
1,220.4
1,971.8
5,450.5
4,799.7
3 0 ¬
Alumina Limited Annual Report 2017
¬31
The increase in the value of assets and liabilities includes the effect
of the weaker US dollar against the Australian dollar at year-end.
The spike in alumina prices in the fourth quarter of 2017 resulted
in higher cash and cash equivalents and receivables as at year-end.
The increase in inventory includes the effect of the higher input
costs (particularly caustic soda) and the delayed alumina
shipments in December.
The increase in property, plant and equipment was mainly due
to foreign currency rate movement and growth projects such as
the Juruti mine capacity increase.
Other assets increased mainly due to changes in the fair value of
derivative assets associated with Portland’s hedging arrangements.
The rise in taxes payable and deferred is mainly attributable to
an increase in the taxable income for Australian operations and
an increase in the deferred taxes associated with the Portland
hedging arrangements.
AWAC CASH FLOW (US GAAP)
Cash from operations
Capital contributions arising from the allocation agreement1
Capital contributions from partners
Net movement in borrowings
Capital expenditure
Proceeds from sale of 20% interest in the DBNGP
Other financing and investing activities2
Effects of exchange rate changes on cash and cash equivalents
Cash flow before distributions
Distributions paid to partners
Net change in cash and cash equivalents
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
1,102.4
74.0
200.0
17.4
(26.2)
74.0
120.0
(8.0)
(191.6)
(129.9)
-
7.9
27.7
1,237.8
(857.1)
380.7
145.0
123.3
6.8
305.0
(585.6)
(280.6)
1 Contributions by Alcoa in accordance with the allocation agreement whereby Alcoa assumes an additional 25% equity share relating to the Alba
settlement payment and costs.
2 Made up of changes to capital lease obligations, related party notes receivable and other.
Cash from operations in 2017 increased primarily due to higher
average realised alumina prices. The 2016 cash from operations
included the final instalment of $200 million paid for the 12-year
Western Australia gas supply agreement.
In 2017, sustaining capital expenditure was $146.0 million
(2016: $121.1 million). The most significant expenditure was for
the Pinjarra refinery where press filtration is currently being
implemented.
Consequently, distributions paid to partners increased to $857.1
million. In the first two months of 2018, and in accordance with the
distribution policy, AWAC has distributed a further $527 million.
Growth capital expenditure was $45.6 million. The largest growth
project related to the expansion of the Juruti mine.
3 0¬
Alumina Limited Annual Report 2017
¬ 31
5. ALUMINA LIMITED FINANCIAL REVIEW
ALUMINA LIMITED PROFIT AND LOSS
Share of net profit of associates accounted for using the equity method
General and administrative expenses
Finance costs
Foreign exchange losses, tax and other
Profit/(loss) for the year after tax
Total significant items after tax
Net profit after tax excluding significant items
SIGNIFICANT ITEMS (IFRS, POST-TAX)
Suralco restructuring charges and deferred tax assets adjustment
Point Comfort restructuring charges
Portland impairment charge1
Impairment in an interest in a gas field in Western Australia
Gain on sale of interest in the DBNGP
Other (includes severance and redundancy charges)
Total significant items
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
360.4
(13.6)
(8.3)
1.3
339.8
(23.3)
363.1
18.1
(25.7)
(9.1)
(13.5)
(30.2)
(114.9)
84.7
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
(2.2)
(19.5)
-
-
-
(1.6)
(23.3)
(57.5)
(12.4)
(24.7)
(20.2)
2.5
(2.6)
(114.9)
1 For US GAAP purposes the Portland impairment charge was fully recognised in 2016. For AAS, the charge was recognised over the period of two years
2016 and 2015.
The Company’s finance costs in 2017 included $1.1 million of
charges related to the renegotiation of the syndicated bank
facility. In 2016, finance costs included an interest expense
adjustment of $2.6 million related to the step up in the fixed
interest rate note’s coupon from 5.5% to 7.25% per annum that
was triggered by a change in credit rating for Alumina Limited.
Excluding the above costs, the 2017 finance costs were marginally
higher than 2016, reflecting higher interest rates and higher use
of facilities throughout the year.
Alumina Limited recorded a net profit after tax of $339.8 million
compared to a loss of $30.2 million in 2016.
The increase in net profit was largely due to AWAC’s higher
average realised alumina price and lower net charges for
significant items which were partially offset by AWAC’s higher
production costs and an unfavourable movement in the US dollar
against the Brazilian real and the Australian dollar.
Excluding significant items, net profit would have been $363.1
million (2016: $84.7 million).
General and administrative expenses in 2017 includes $1.0 million
associated with the previous CEO’s retirement on 31 May 2017
and $0.4 million of costs from the Company’s actions in relation
to Alcoa’s corporate separation (2016: $14.0 million). Excluding
these costs, 2017 general and administrative expenses were
marginally higher than 2016.
3 2¬
Alumina Limited Annual Report 2017
¬33
ALUMINA LIMITED BALANCE SHEET
Cash and cash equivalents
Investment in associates
Other assets
Total assets
Payables
Interest bearing liabilities – non-current
Other liabilities
Total Liabilities
Net Assets
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
40.0
8.6
2,301.0
2,106.0
1.9
3.2
2,342.9
2,117.8
1.3
98.4
9.2
108.9
1.3
92.4
17.2
110.9
2,234.0
2,006.9
The rise in investments in associates was due to AWAC’s improved
operating performance and foreign currency balance sheet
revaluations, partially offset by AWAC’s increased distributions.
Alumina Limited’s net debt as at 31 December 2017 was
$58.4 million.
Alumina Limited has $250 million of committed bank facilities
which expire as follows:
• $150 million in July 2020 (no amounts drawn under these
facilities as at 31 December 2017).
• $100 million in October 2022 (no amounts drawn under
these facilities as at 31 December 2017).
In addition to the bank facilities, Alumina Limited has an
A$125 million face value fixed rate note on issue which matures on
19 November 2019.
ALUMINA LIMITED CASH FLOW
Dividends received
Distributions received
Net finance costs paid
Payments to suppliers and employees
GST refund & other
Cash from operations
Net (payments)/receipts – investments in associates
Free cash flow1
1 Free cash flow calculated as cash from operations less net investments in associates.
US$ MILLION
YEAR ENDED
31 DEC 2017
YEAR ENDED
31 DEC 2016
278.1
1.2
(8.6)
(12.1)
0.9
259.5
(16.2)
243.3
150.2
0.7
(5.7)
(26.3)
1.1
120.0
33.9
153.9
3 2¬
Alumina Limited Annual Report 2017
¬ 33
Alumina Limited’s free cash flow is comprised of the net capital,
dividends and income distributions received from AWAC entities
offset by the Company’s general, administrative and finance costs.
Alumina Limited’s total receipts from AWAC during 2017 were
$343.1 million compared to $232.8 million in 2016.
Alumina Limited’s cash contributions to AWAC during 2017 were
$80.0 million (2016: $48.0 million).
Contributions invested in 2017 were mainly to support one
AWAC entity’s purchases of alumina on a spot basis from other
AWAC entities in order to meet its long term customer supply
commitments which are on different pricing mechanisms.
Higher cash finance costs reflect the note’s increased coupon rate
following the changes in the Company’s credit rating.
As a result, free cash flow was $89.4 million higher in 2017
compared to 2016.
Alumina Limited’s dividend policy is based on distributing the
free cash up until the date of declaration by the Directors of the
Company. Since 31 December 2017, the Company’s net receipts
from AWAC were $198 million which are included in the 9.3 cents
per share 2017 final dividend paid on 15 March 2018.
6. MARKET OUTLOOK AND GUIDANCE
ALUMINA
Global demand for alumina increased by 7% in 2017. China’s
aluminium production growth is forecast to be lower in 2018 due
to curtailments and closures of smelting capacity as a result of
environmental and supply-side reform policies. Nevertheless,
demand for metallurgical alumina is expected to grow by over
4% globally with a significant increase in aluminium production
outside China, particularly in India and the Middle East. Increases
in demand for metallurgical alumina outstripped growth in supply
which was largely restricted to China. Modest increases in alumina
production occurred mainly in Indonesia, Vietnam and Saudi Arabia.
In 2018, further alumina will be produced from the Ma’aden/
AWAC Ras Al Khair refinery in Saudi Arabia which is ramping up
and has recently operated at its full 1.8 million tonne nameplate
capacity. This refinery is expected to operate in the lowest cash
cost quartile.
Also, extra alumina production is expected from the re-started
Alpart refinery in Jamaica. Towards the end of 2018, EGA’s
Shaheen refinery in the UAE is forecast to start producing alumina.
There are other potential greenfields and brownfields refinery
projects around the world, some of which may proceed to meet
the expected increase in demand in the Americas, India and the
Middle East.
In 2017, the Chinese Central and Regional governments
implemented policies to reduce pollution by mandating significant
curtailments in alumina, aluminium and carbon production in
selected cities during the 2017/18 winter heating season. The
curtailments started around November 2017 and continue until
March 2018. These policies required the curtailment of 30 percent
of China’s alumina and aluminium production in the selected
cities. There have also been a number of Chinese Government
environmental audits in 2017 which have led to reduction in
bauxite and alumina production. Some provinces cut production
at different rates and the final cuts, which will be measured in low
pollution days in winter, are yet to be ascertained.
However, the reduction in aluminium production in Shandong
was less than initially expected, as cuts to unauthorised smelting
capacity were able to be treated as winter curtailments. It is
expected that the central Government will repeat the winter cuts
policy at the end of 2018 and could either strengthen or relax
the required curtailments, depending on the overall air quality
improvement achieved over the 2017/2018 winter.
The Government also introduced supply-side reforms in 2017
to consolidate and reduce inefficient or obsolete capacity in
the aluminium and other industries. This has led initially to the
curtailment of a significant volume of smelting capacity built
without authorisation. A scheme has been introduced which
allows companies to obtain replacement quotas authorising
additional capacity. This is expected to add a limited volume of
Chinese smelting capacity coming online during 2018 and 2019.
Alumina supply and demand is expected to continue to grow and
remain reasonably balanced over the next 5 years, and should
underpin price support.
BAUXITE
China imported over 67 million tonnes of bauxite in 2017, including
a record high estimated at approximately 7 million tonnes in
December. The majority of imports came from Guinea and
Australia, two countries in which AWAC has strong bauxite
interests. Other countries supplying China included Malaysia,
Indonesia, India and Brazil. The Pahang Government in Malaysia
has extended its mining ban into 2018. Indonesia has relaxed its
bauxite export ban and modest export volumes have commenced.
Guinea and Australia are expected to continue solid supply to
China.
Third party bauxite prices increased particularly in the last quarter
of 2017 due to supply disruptions inside and outside China. Further
bauxite supply is expected to be added in 2018 and the third
party market is expected to be well supplied in 2018. However,
the Chinese Government’s recent environmental focus in China
is restricting bauxite production. Also, environmental constraints
in China are expected to cause refiners to locate new capacity on
the coast in relatively decentralised provinces and use imported
bauxite. These factors are expected, in the short to medium term,
to accelerate the increase in demand for imported bauxite into
China, which had been seen as a likely step-change expected
around 2021, as Chinese domestic bauxite quality depletes.
Bauxite is expected to remain in ample supply during 2018.
3 4¬
Alumina Limited Annual Report 2017
¬35
AWAC GUIDANCE
The following 2018 guidance is provided to assist the understanding of the sensitivity of AWAC results to key external factors. The
guidance cannot be expected to be predictive of exact results; rather it provides direction and approximate quantum of the impact
on AWAC results. Sensitivity of each element of the guidance has been considered in isolation and no correlation with movements
in other elements within the guidance has been made.
ITEM
Production – alumina
Production – aluminium
Third party bauxite sales
Alumina Price Index sensitivity1: +$10/t
Caustic price sensitivity: +$100/dry metric tonne
Australian $ Sensitivity: + 1¢ USD/AUD
Brazilian $ Sensitivity: + 1¢ BRL/USD
2018 GUIDANCE
Approximately 12.7 million tonnes
Approximately 164,000 tonnes
Approximately 6.3 million BD tonnes
Approximately +$110 million EBITDA
Approximately -$90 million EBITDA
Approximately -$20 million EBITDA
Minimal impact
SGA shipments expected to be based on alumina price indices or spot
Approximately 92% for the year
AWAC sustaining capital expenditure
AWAC growth capital expenditure
AWAC Point Comfort after tax restructuring2
Charges (IFRS)
Cash Flows
AWAC Suralco after tax restructuring2
Charges (IFRS)
Cash Flows
AWAC Point Henry and Anglesea after tax restructuring2
Charges (IFRS)
Cash Flows
1 Excludes equity accounted income/losses for the Ma’aden joint venture.
2 Ongoing costs will be recognised in future financial years relating to the curtailments and closures.
Approximately $180 million
Approximately $80 million
Approximately $40 million
Approximately $40 million
Approximately $10 million
Approximately $50 million
Approximately $1 million
Approximately $30 million
ALUMINA LIMITED GUIDANCE
The financial results of Alumina Limited are dependent upon
AWAC’s operational performance and profitability, and the ability
of Alumina Limited to influence the performance of AWAC to
ensure that the Company’s interests are protected. Alumina
Limited’s objectives are to achieve the position where AWAC
is sustainable in the long term, that it has adequate governance
procedures in place, and that long term capital allocation is
implemented to maximise AWAC’s returns.
Alumina Limited’s expectations for cash receipts from AWAC in
2018 are that total receipts by Alumina Limited should exceed
its corporate needs.
In 2018, Alumina Limited anticipates there could be equity calls
by AWAC entities in relation to working capital support. However,
this is subject to market conditions.
3 4¬
Alumina Limited Annual Report 2017
¬ 35
Letter by Chair of the Compensation Committee
Dear Shareholders,
It gives me pleasure to write to you on Alumina's 2017 remuneration report
and decisions in the context of the company’s performance, achievements
and developments.
2017 COMPANY PERFORMANCE
Alumina Limited (Alumina) performed strongly in 2017 recording
a net profit of $340 million. Alumina’s financial performance
reflected the underlying strengths of AWAC’s Tier 1 assets and
improved commodity prices. Continued work by Alcoa and
Alumina, including difficult decisions made in recent years during
the commodity cycle, have improved the asset portfolio. Following
the changes to the AWAC joint venture secured in 2016, Alumina
senior executives continue to work on additional strategies to
optimise shareholder outcomes.
2017 REMUNERATION OUTCOMES
BASE PAY
After consideration of market and sector trends, company
performance and the broader trading environment, Key
Management Personnel (KMP) base salaries were increased by
2.5 per cent in line with the increase applicable to all staff (2016 nil).
STI OUTCOMES
In line with this strong company performance, I am pleased to
report overall performance against the corporate and personal
scorecards of each executive was measured at an average
scorecard performance of 90 percent of target. This yielded
STIs in the range of 70 per cent of maximum delivering a total
value of $924,653 to executives*.
The Board applies a rigorous approach to assessing final STI awards
and consideration was given to the revised AWAC agreements
impact on distributions and debt financing that were given effect
in 2017 and a variety of strategic initiatives and joint venture
matters that were progressed.
LTI OUTCOMES
It was satisfying to see the Company’s share price performed well
versus other major Australian and international industry peers,
resulting in vesting through our LTI Plan. The Company’s total
shareholder return was 41.9 per cent in 2017 and 51.19 per cent
over the previous three years. The amount of dividends distributed
to Alumina shareholders increased from US6 cents per share in
2016 to US13.5 cents per share in 2017. Approximately 420,000
shares worth $1.012 million were vested to the senior team in 2017
under the LTI Plan.**
Further detail on company performance and remuneration
outcomes is set out in 43 of the report.
NEW CEO REMUNERATION STRUCTURE
In 2017, Alumina appointed a new CEO, Mike Ferraro, to succeed
Peter Wasow who led the successful joint venture renegotiation.
Mike Ferraro brings an extensive range of relevant skills and
commercial experience to help deliver on Alumina’s strategic
objectives.
The CEO succession presented the Board with the timely opportunity
to reassess the incoming CEO’s remuneration structure in the
context of the company’s present circumstance.
The Board reconsidered the structure of the CEO’s remuneration
given the unique nature of the Company, the cyclicality of the
industry, the requirements of this critical leadership role in creating
long term shareholder value, and the skills and experience necessary
for the role. As a result, the Board decided to evolve further the
structure of the CEO’s remuneration - specifically to increase
the proportion of equity based pay by increasing the quantum of
conditional rights, to cease the annual STI scorecard based award
and, to maintain the LTI. At the same time, the Board considered
and maintained its discipline of setting overall level of remuneration
at modest levels (lowest quartile) together with a structure that
ensures an upswing in the commodity cycle does not generate
excessive rewards.
Further detail on the CEO’s new remuneration structure is set out
on page 42.
* 2017’s STI payments were down by approximately $985,000 compared with
2016 (in which two executives received enhanced payments to reflect their
considerable achievements in the JV transformation and renegotiation). 2017
STI (and 2016) payments included the former CEO & other Key Management
Personnel (KMP).
** Alumina Limited’s LTI plan uses share value at vesting date.
3 6¬
Alumina Limited Annual Report 2017
¬37
OTHER REMUNERATION CHANGES IN 2017
NON-EXECUTIVE DIRECTOR FEES
As foreshadowed in the 2016 remuneration report, the
Compensation Committee had an independent review undertaken
of Non-Executive director fees during the year. As a result of
the review:
• NED base fees remain unchanged (since 2011) as they are
considered competitive to attract appropriately qualified and
skilled NEDs to the Alumina Board,
• The review revealed that Chairman and Audit & Risk and
Compensation Committee Chairs’ fees had fallen below market,
and did not reflect current workloads with the changes to
the joint venture and resultant new relationships. The Board,
therefore, resolved to increase fees for the Chairman and the
fees for chairing these two committees. Further detail is set
out on page 60 of the report.
In closing, I am pleased that the 2017 work of the Compensation
Committee supported the important task of CEO succession,
evolving remuneration structures and making sound remuneration
decisions aligned with Alumina’s investment proposition and
experience of shareholders, Alumina’s role in the AWAC joint
venture and the governance principles established by the Board.
We appreciate the dialogue we have on this remuneration report
and continue to welcome feedback.
Emma Stein Chair
—
3 6¬
Alumina Limited Annual Report 2017
¬ 37
Remuneration Report
This Remuneration Report outlines the Director and executive remuneration
arrangements of Alumina Limited. The information provided is given in accordance
with the requirements of the Corporations Act and has been audited. This report
forms part of the Directors’ Report for the year ended 31 December 2017.
All contracts for key management personnel (KMP) are denominated in Australian
dollars and accordingly all figures in the Remuneration Report are in Australian dollars
unless otherwise shown. References to Senior Executives exclude the Chief Executive
Officer (CEO).
CONTENTS
The Remuneration Report is presented in the following sections:
1
1.1
1.2
REMUNERATION POLICY & FRAMEWORK
Persons covered by this report
Remuneration framework
1.2.1
Remuneration in business context
1.2.2 Remuneration Components
1.2.3
CEO and Senior Executives remuneration mix and comparables
2
2.1
COMPANY PERFORMANCE & EXECUTIVE REMUNERATION OUTCOMES
Remuneration decisions and outcomes for 2017
2.1.1
Performance under the STI
2.1.2 Performance under the LTI Plan
2.1.3
Alumina Limited’s Remuneration Governance Framework
2.1.4 Other Remuneration matters
2.2
2.3
Senior Executive remuneration
Executive KMP remuneration and equity granted in 2017
2.3.1
Executives’ Service Agreements
NON-EXECUTIVE DIRECTORS’ REMUNERATION
Remuneration outcomes
Non–Executive Director share holdings
3
3.1
3.2
3 8 ¬
39
39
39
39
40
42
43
45
46
48
48
49
50
52
59
60
60
61
1. REMUNERATION POLICY & FRAMEWORK
1.1 PERSONS COVERED BY THIS REPORT
This report covers remuneration arrangements and outcomes for the following key management personnel of Alumina Limited:
NAME
ROLE
Non-Executive Directors
John Pizzey
Non-Executive Chairman
Appointed Chairman 1 December 2011
(director since 8 June 2007)
Emma Stein
Chen Zeng
Peter Day
Non-Executive Director
Appointed 3 February 2011
Non-Executive Director
Appointed 15 March 2013
Non-Executive Director
Appointed 1 January 2014
Deborah O'Toole
Non-Executive Director
Appointed 1 December 2017
Mike Ferraro
Non-Executive Director
Appointed 5 February 2014 to 31 May 2017
Executive Director
Peter Wasow
Mike Ferraro
Other KMP
Chris Thiris
Stephen Foster
Andrew Wood
Chief Executive Officer (CEO)
CEO from 1 January 2014 to 31 May 2017
Chief Executive Officer (CEO)
Appointed CEO from 1 June 2017
Chief Financial Officer (CFO)
Appointed 13 December 2011
General Counsel/Company Secretary
Appointed 4 December 2002
Group Executive Strategy &
Development
Employed 1 September 2008
1.2 REMUNERATION FRAMEWORK
1.2.1 REMUNERATION IN BUSINESS CONTEXT
Alumina Limited’s remuneration strategy and policy has been
developed in recognition of the unique nature of the Company,
the complexities of managing a significant but non-controlling
interest in a global joint venture and the significance of external
factors’ influence on the sector and the Company’s performance.
Alumina Limited owns a 40 per cent interest in the multi-billion
dollar global enterprise, AWAC, one of the world’s largest bauxite
and alumina producers. AWAC is a large capital-intensive
business operating in a number of jurisdictions and some in
remote locations. Alumina Limited’s executives are responsible for
protecting and advancing the interests of its 49,000 shareholders
in the management of AWAC. Consistent with the governing
joint venture Agreements, Alumina executives are responsible
for providing strategic input and advice into the joint venture.
To do so, they are required to have a deep understanding of the
complex trends and drivers of the global bauxite, aluminium and
volatile alumina industry.
At the Board’s direction, the CEO and Senior Executives are
required to maintain Alumina Limited’s financial metrics consistent
with an investment grade rating, maximize cash flow from AWAC
and support the joint venture in its efforts to improve its relative
cost position and strategic options.
The latter responsibilities rest with a small team of four key
executive officers. Alumina Limited requires and must retain, high
calibre people with strong skills sets and commercial experience
to ensure the Company and its investment are managed well.
They are charged with:-
• Shaping AWAC’s strategy, competitive position and options
• Maximizing cash flow from AWAC and metrics in a highly
cyclical industry
• Managing Alumina Limited’s investment as a tier one largely
pure play global bauxite and alumina producer
• Building effective working relationships with Alcoa, our joint
venture partner and asset operator.
Alumina Limited Annual Report 2017
¬ 39
More detail on the ‘at risk’ and equity remuneration components
and their link to company performance is included in section 2
of this report.
1.2.2 REMUNERATION COMPONENTS
The following table sets out the different components of
remuneration for the CEO and Senior Executives, the performance
measures used to determine the amount of remuneration
executives will receive and how the performance measures drive
achievement of Alumina Limited’s strategic objectives.
To support the delivery of the business strategy, Alumina Limited's
remuneration strategy has been designed to attract and retain
executives who are highly commercial, strategic and have tactical
experience. Hence, Alumina Limited's remuneration needs to be
competitive, valued and relevant. The Board aims to:-
• Aid alignment between Company, executive and board
and stakeholder interests – as discussed below, the CEO’s
remuneration is equity exposed (through the Conditional Rights
component and his incentive through the LTI scheme which
requires relative outperformance). Other Executive KMPs
(excluding Mr Wood) are required to reinvest half of any short
term incentive payments into equity and Alumina Limited has
a minimum shareholding policy for Non-Executive Directors.
• Ensure remuneration structures are relevant to roles – At
Alumina Limited, executives’ performance is directed
towards delivery of strategic, corporate and commercial
objectives and initiatives with longer term outcomes. When
compared with peers, financial metrics have less prominence
in short term incentives to ensure that executive rewards
do not peak merely because commodities are at the ‘top of
cycle’.
• Appropriately positioned and structured – For the CEO,
the quantum of his overall remuneration, Conditional Rights
and LTI have all been set to produce outcomes with less
upside compared with operating company peers but with,
none the less, “skin in the game” and upside from longer
term value creation.
40 ¬
Alumina Limited Annual Report 2017
¬41
TABLE 1 – COMPONENTS OF EXECUTIVE REMUNERATION
COMPONENT
DELIVERED VIA:
PERFORMANCE MEASURE
STRATEGIC OBJECTIVE
Fixed Remuneration (FAR)
Cash
Equity based award
(CEO only)
Conditional
Rights
Short Term Incentive (STI),
Executive KMP other than
the CEO
A mix of cash and
equity (shares)
for the CFO and
General Counsel)
and cash for
Mr Wood.
Long-term Incentive Plan
(LTI), All Executive KMP
Equity in
the form of
performance
rights
Considerations:
• Individual’s role and responsibilities
• Depth of knowledge and skill set
• Level of expertise and effectiveness
• Market benchmarking
Conditional on length and continuity
of service and value linked directly to
the performance of the Company's
share price
Corporate Scorecard
(50% of STI Award)
Minimum Performance Threshold
To trigger payment under the
Corporate Scorecard, a minimum
threshold of performance is required
being:
• The achievement of a profit before
significant items; and
• declare dividends which provide
a minimum yield of three per cent
based on annual VWAP
Financial objectives based on
controllable metrics:
• Free Cash flow
• Consistent with investment rating
Strategic and individual objectives
Secure, retain and motivate a highly skilled
and experienced executive team.
• Align the CEO’s remuneration with the
experience of shareholders
This reinforces discipline in financial
management and goal setting also
providing determinable outcomes that
are linked to the Company’s performance.
• Cash flow from AWAC is fundamental
to Alumina Limited’s capacity to pay
dividends and to meet the terms of
external financing.
• A sound balance sheet with key banking
relationships is critical to the Company’s
strength, stability and future success.
• Aligned to strategic and growth objectives.
• Improve long-term cost curve positioning
and strategic options to develop the
business.
• Protect Alumina Limited’s interests
through increased clarity on AWAC
governance.
• Ensuring Alcoa treats AWAC transactions
at arm’s length and Alumina Limited’s
shareholders’ interests are protected in
short and long term.
Personal Scorecard
(50% of STI Award)
Implementation of business initiatives
for which individual executives have
defined accountabilities.
• Delivery on commercial and financial
projects that aid AWAC’s and Alumina
Limited’s performance and attribute costs
fairly to the equity owners
Relative TSRs, Three year Company
TSR performance equal to or
outperforming 50 per cent of the two
comparator groups results (half of the
LTI is attributable to each group).
• A result below 50 per cent for a
group will not result in an award of
equity to the Company participants
for that half of the LTI.
• Emphasises the importance for
management to strive to maintain the
share price through the volatility involved
in a capital intensive business heavily
impacted by external factors.
• Linked to long-term business strategy and
focuses executives on key performance
drivers for sustainable growth.
• Links rewards of participants in the LTI
plan to the experience of the shareholders.
40 ¬
Alumina Limited Annual Report 2017
¬ 41
1.2.3 CEO AND SENIOR EXECUTIVES REMUNERATION
MIX AND COMPARABLES
Alumina Limited resolved to structure the CEO’s remuneration
components as follows:
Remuneration Mix Overview
The intent of the CEO and Senior Executives remuneration
arrangements is shared, that is to remunerate fairly and to attract
and retain appropriately skilled and experienced staff and also
provide incentive to individuals to drive shareholder wealth in their
various roles. However, there are differences in the structures
and relativities.
In setting the CEO and Senior Executive remuneration quantum
and mix, the Board takes into account a number of factors
including:
• The scope of the individual’s role
• Their skills and experience
• Role-critical factors
• Company performance
• External market practice.
CEO Remuneration structure
As previously mentioned, the Board instituted changes to
remuneration components of the CEO’s 2017 remuneration package
which is structured differently to the profile of the previous CEO.
However, in terms of overall potential quantum, there is little change.
The Board reconsidered which remuneration elements most aligned
with the role of the CEO at Alumina Limited and the skills and
experience of the individual who was appointed. The aspects
considered most important centred on strategic influence, long
term value creation, joint-venture and industry relationships,
identification of portfolio opportunities and leadership skills. An
annual award based on a scorecard assessment was thought to
be less meaningful at CEO level but a greater proportion of equity
exposure within overall remuneration was thought to be more
meaningful and reflective of the CEO performance. As well the
Board wished to maintain positioning in the lowest quartile and
ensure upswings in the cycle don’t generate excessive remuneration
rewards. The decision to remove the STI also aligns with Alumina
Limited’s remuneration strategy, in particular to have lower levels
of maximum short term incentives when compared with peers.
The Board continues to set specific objectives for the CEO including
for example strategic initiatives, asset portfolio enhancements, and
other leadership matters. Typically some of these objectives relate
to the year ahead, whereas others may take longer to achieve with
specific milestones sought in the year ahead. Progress is reviewed
formally quarterly and at the end of the year. This process provides
the Board with a basis to assess and discuss CEO performance
in the short term. Also, and importantly, it provides a basis to
ensure that the Board and CEO are aligned on priorities that will
underpin long term shareholder value creation. While the CEO
does not have any STI remuneration linked to the achievement of
annual performance objectives, it ensures the Board has a formal
transparent mechanism to measure, and hold the CEO accountable,
for performance.
A fixed cash remuneration component of $1,275,000
plus an:
% of potential total
remuneration
FAR 60%
CEO
Conditional Rights 19%
Restriction period
LTI Performance Rights 21%
Year 1
Year 2
Year 3
h
s
a
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y
t
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E
• Equity component that is variable in value contingent on the
share price performance of Alumina Limited and delivered
via conditional rights valued at $400,000 at the time of the
grant. This component of the CEO’s pay has a three year
trading restriction imposed and is therefore at risk to share
price fluctuations, in line with the experience of shareholders.
• Equity component contingent on the Company’s TSR
performance against comparator group companies and is
delivered in performance rights valued at $450,000 at the
time of the grant, with a 3 year performance period. This
reinforces the remuneration policy that the CEO acts in the
longer term interests of the Company and its shareholders
The restructuring of the CEO’s remuneration to include conditional
rights, coupled with the LTI opportunity results in a total of 40 per
cent of the CEO’s total opportunity remuneration being variable
to share price fluctuations.
The Board is satisfied that the CEO’s target remuneration is
appropriate to attract, retain and motivate a high calibre, and
with appropriate skill-set CEO. The revised CEO remuneration
package was validated through external benchmarking.
A market comparison was conducted against the CEO remuneration
of the ASX51-100, the Company’s preferred comparator group
that comprises companies with a market capitalisation of
approximately 70% to 150% of Alumina Limited. Relative to
this comparator group, the CEO’s total reward opportunity was
a modest 4th percentile. Compared to the ASX51-75 comparator
group the CEO’s total reward ranked as the lowest.
The CEO’s FAR quantum at $1,275,000 positions him at the 34th
percentile of the ASX51-100 comparator group and at the 19th
percentile of the ASX51-75 comparator group which the Board
is satisfied reflects an appropriate quantum for the CEO of a
non-operating entity such as Alumina Limited.
42 ¬
Alumina Limited Annual Report 2017
¬43
Senior Executive (other than the CEO) remuneration structure
The remuneration structures for other senior executives remains
unchanged, consistent with their existing employment contracts.
The remuneration structure for the senior executives (other than
the CEO) includes:
• Fixed remuneration delivered in cash
• STI component based on annual performance scorecard, of
which half is reinvested through share purchase
• An LTI component delivered in performance rights with a 3
year performance period.
Senior Executive1 2017 remuneration structure
% of potential total
remuneration
FAR 48%
STI 33% (Cash)
STI
(via shares)
Retention Period
LTI Performance Rights 19%
Year 1
Year 2
Year 3
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The STI component for the senior executives, (excluding the CEO)
is considered appropriate providing the CEO with a management
tool to set annual priorities in the context of the Company’s
longer term strategic plans, reinforced through the attachment
of an incentive.
Further details of the STIs paid to the company’s senior team,
over time, are shown in the graph below which plots these against
Alumina Limited's dividends and share price. Table 7 provides a
comparison between 2016 and 2017 STI payments.
1 Mr Wood’s remuneration mix differs from the other senior executives.
His maximum potential award is FAR 55%, STI 28% and LTI 17%. Mr
Wood’s STI is received in cash only.
2. COMPANY PERFORMANCE & EXECUTIVE
REMUNERATION OUTCOMES
In terms of financial performance, 2017 has been a very positive
year for Alumina Limited and the AWAC business. Alumina Limited
and AWAC benefited from improved industry fundamentals that
saw the spot price for alumina reach $484 per tonne and an
average realised price of $335 for the year compared to $242
in 2016. This uptick in prices contributed to a profit for Alumina
Limited of $340m for 2017.
The diagrams that follow highlight Alumina Limited’s performance
against market indicators.
As outlined in Alumina Limited’s 2016 Annual Report, a number of
transformational changes were made to the AWAC agreements
following lengthy negotiations by management. In 2017, tangible
benefits from those negotiations are apparent. AWAC’s funding
structure is now more efficient utilising debt for growth projects
rather than solely equity (within certain limits) and there was
improved certainty of cash flows by way of distributions to
Alumina Limited from AWAC. These positive changes are a
direct result of management action and have contributed to the
Company’s ability to declare increased dividends to shareholders.
Also, Alumina Limited sought to build on the transformational
outcomes flowing from the 2016 changes to the joint venture
agreements and the largely complete repositioning of the AWAC
asset portfolio. AWAC’s tier one assets generated their best
returns for several years due to their low cost position and
efficiency gains that resulted in production records.
Within Alumina Limited, a series of objectives were formulated
for 2017. A priority was to improve AWAC cash distributions in
2017. Flowing from the transformational change to the AWAC
joint venture, arrangements to maximise cash distributions to
partners and minimise equity calls were implemented. The change
to the AWAC joint venture also included some funding of growth
projects by debt. Maximising the amount of this financing was
achieved in 2017 which is beneficial to Alumina Limited.
It was also important to maintain key financial metrics consistent
with an investment grade credit rating. Following consultation
between management and S&P, the Company’s rating increased and
Alumina Limited is now one notch from reaching investment grade.
Following the substantial completion of the restructuring of
the AWAC asset portfolio, it was important to examine the
strategy of the business in the context of industry trends and
development. Alumina Limited’s management provided Alcoa
with, and contributed to, options to capture synergies in various
alumina and bauxite assets. The options are being explored.
The diagrams that follow highlight Alumina Limited’s 2017
performance against market indicators.
42 ¬
Alumina Limited Annual Report 2017
¬ 43
Alumina Limited 2017 TSR compared to ASX indices1
5 year dividend and percentage STI award history
150
140
130
120
110
100
E
G
N
A
H
C
E
G
A
T
N
E
C
R
E
P
90
80
Jan Feb Mar Apr May
Jun
Jul Aug Sep Oct Nov Dec
Alumina Ltd. TSR (incl. franking credits)
ASX100 Accumulation Index
ASX200 Materials Accumulation Index
E
R
A
H
S
/
S
T
N
E
C
S
U
14
12
10
8
6
4
2
0
2013
2014
2015
2016
2017
Dividend
% Target STI
Percentage awarded compared to potential
Alumina Limited 2017 share price performance
compared to ASX indices2
5 year share price and percentage LTI award history
140
130
120
110
100
90
80
E
G
N
A
H
C
E
G
A
T
N
E
C
R
E
P
Jan Feb Mar Apr May
Jun
Jul Aug Sep Oct Nov Dec
Alumina Ltd.
All Ordinaries Index
ASX200 Materials Index
ASX300 Metals and Mining Index
ASX100 Index
3
2.5
2
1.5
1
E
R
A
H
S
/
$
U
A
0.5
0
2013
2014
2015
2016
2017
Share Price
% LTI
180
150
120
90
60
30
0
E
G
A
T
N
E
C
R
E
P
E
G
A
T
N
E
C
R
E
P
120
100
80
60
40
20
0
1 Accumulation indices were used to take into account dividends and both growth and dividend income.
2 Non accumulation indices do not take dividends into account and measure price growth only.
REMUNERATION INDICATORS
REMUNERATION INDICATORS
Per cent increase in fixed remuneration1
Per cent short-term incentive2
Per cent long-term incentive2
20173
2.50%
33%
32%
2016
Nil
64%
23%
2015
2014
2013
3.50%
3.00%
3.80%
38%
23%
40%
10%
22%
8%
1 Percentage is calculated by reference to FAR as at 31 December in the stated financial year relative to FAR as at 31 December in the immediately preceding
financial year.
2 Represents the percent of total 'at risk' incentive component compared to the total FAR applicable to Senior Executives and the CEO.
3 In 2017, the calculation excludes FAR of Mr Ferraro for whom no STI is applicable and the termination payment for Mr Wasow.
44 ¬
2.1 REMUNERATION DECISIONS AND OUTCOMES FOR 2017
FIXED REMUNERATION
2017 OUTCOMES
SHORT TERM INCENTIVE
2017 OUTCOMES
The fixed remuneration for the Senior Executives (excluding the CEO) increased in 2017 by 2.5%.
This was the lower end of the forecast increase for the resources sector.
The CEO's fixed remuneration was reviewed on appointment and details are set out in section 1.2.3.
50 percent of the STI is assessed against a Corporate Scorecard of objectives and 50 per cent against
a Personal Scorecard of objectives.
Executives achieved on average 70 per cent of maximum STI. The total percentage paid against the target
STI varied between 89–91% of the target level.
For a detailed performance against the Corporate and Personal Scorecard see pages 46 and 47.
LONG TERM INCENTIVE
2017 OUTCOME
Rights granted In 2015 Performance Rights were tested in 2017
(testing period December 2014 to December 2017).
As a result of Alumina Limited's percentile performance against the ASX Comparator group, 52.38 per cent
of the potential entitlement vested. In relation to the International Comparator Group, Alumina Limited's
performance resulted in 96.58 per cent of the potential entitlement vesting. Table 8 indicates the number
of shares that vested under the LTI.
Alumina Limited Annual Report 2017
¬ 45
2.1.1 PERFORMANCE UNDER THE STI PLAN
Tables 3 and 4 below provide a summary assessment of performance against STI performance measures for 2017.
TABLE 3 – CORPORATE SCORECARD – 50% OF POTENTIAL STI AWARD
PERFORMANCE MEASURES
PERFORMANCE RESULT AND ASSESSMENT
Financial objective – Maximising cash flow under the joint
venture agreements
(20% weighting)
Financial objective – Maintain key financial metrics consistent
with investment grade credit rating:
(i) Funds from operations/debt >5%
(ii) Debt / EBITDA<2 times
(10% weighting)
Strategic objective – Strategic review to progress alternative
corporate strategies
(15% weighting)
At target
Distributions of US$343.1 million received during 2017.
At target
Credit rating increased to 2 notches above Alcoa.
Funds from operations/total debt 214%.
Net debt/EBITDA is [0.5 times],
Below target
Continuing to develop alternative corporate strategies
Strategic objective – Prepare corporate development plan and
strategy
(20% Weighting)
At target
Plans developed and implemented
Strategic objective – Work with Alcoa on AWAC asset and
business synergies and strategies
(20% weighting)
Below target
Recommendations developed and communicated to Alcoa
and synergies being reviewed
Strategic objective – Progress a strategy on strategic decisions
relating to Brazilian assets with Alcoa
(15% weighting)
Below target
Positive response and action taken. However, still in progress.
Strategic objective – Develop a bauxite pricing and investment
strategy
(10% weighting)
Below target
Bauxite pricing strategies well developed and initiatives
introduced
46 ¬
TABLE 4 – PERSONAL OBJECTIVES – 50% OF POTENTIAL STI AWARD (THE APPLICATION OF PERSONAL OBJECTIVES VARY
FOR EACH EXECUTIVE)
PERFORMANCE MEASURES
PERFORMANCE RESULT ASSESSMENT
Resolve the treatment of certain Alcoa Brazilian alumina tonnage
Below target
(15% weighting)
Hold Alumina Limited costs flat to 2016
(10% weighting)
Ongoing
At target
Achieved, excluding extraordinary expenses directly related
in activities to finalise the joint venture restructure
Implement process and information gathering in relation to
treatment of pre-existing liabilities at the Point Comfort refinery
At target
Progressing but not finalised.
(15% weighting)
Protect Alumina Limited’s rights in Suriname closure and
that pre-existing liabilities are correctly allocated.
(15% weighting)
Below target
Company position determined, outcome
yet to be resolved
Agree with Alcoa and execute AWAC debt financing.
(15% weighting)
Review with Alcoa indirect risk management priorities.
(10% weighting)
Verify intercompany charges for AWAC and related party
transactions with Alcoa and isolate separation costs.
At target
Achieved
At target
Achieved
At target
Relevant cost allocations appropriate
Develop financing strategies
(5% weighting)
At target
Achieved
TABLE 5 – 2017 STI OUTCOMES
The following table indicates the actual value of STI paid to the CEO and Senior Executives and the percentage of total potential STI
paid and forfeited by each executive.
EXECUTIVE KMP
Michael Ferraro (CEO)
Peter Wasow ( Previous CEO)1
Chris Thiris (CFO)
Stephen Foster (General Counsel/Company Secretary)
Andrew Wood (Group Executive Strategy and Development)
Total Executive Remuneration
YEAR
STI PAID
PERCENTAGE
PAID
PERCENTAGE
FORFEITED
2017
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
–
–
185,653
725,000
355,000
485,000
265,000
500,000
119,000
200,000
924,653
1,910,000
75%
175%
72%
100%
71%
138%
64%
110%
71%
132%
–
25%
–
28%
–
29%
–
36%
–
29%
–
1 Mr Wasow retired and ceased employment with Alumina Limited on 31 July 2017. His STI payment was pro-rated for his time of service.
Alumina Limited Annual Report 2017
¬ 47
NET (LOSS)/PROFIT AFTER TAX EXCLUDING SIGNIFICANT
ITEMS
• was the matter within management’s control (for example,
was it a legacy matter).
The Board had considered the following factors in deciding
whether it is appropriate to use adjusted earnings within the STI
scheme;
• the rationale and circumstances causing the adjustment, or
simply put, was it the right thing to do?
• the impact on shareholders.
• was the matter caused by error or poor judgement.
• the Audit and Risk Committee’s review of these matters.
2.1.2 PERFORMANCE UNDER THE LTI PLAN
The testing of the LTI Performance Rights granted in 2015
resulted in partial vesting of those due to the Company’s
performance outcome exceeding the minimum vesting criteria
for both comparator groups. Performance Rights not allocated
lapse. Retesting does not apply.
TSR PERFORMANCE RESULTS FOR THE YEARS 2013 TO 2017
Percentile ranking of TSR against ASX Comparator Group
2017
511
Percentile ranking of TSR against International Comparator Group3
732
Percentage of total remuneration relating to vested LTI4
20%
2016
2015
76
85
100
84
37%
35
48
67
74
2014
46
2013
18
38
30
15%
2%
8%
1 TSR percentile ranking of approximately 51 is applicable to Performance Rights granted in 2015 under the ESP against the ASX Comparator Group,
performance period 12 December 2014 to 11 December 2017, calculated on the average closing share price over the 20 trading days up to and including the
start of the performance period, and on the average closing share price over the 20 trading days up to and including the end of the performance period.
2 TSR percentile ranking of approximately 73 is applicable to Performance Rights granted in 2015 under of the ESP against the International Comparator
Group, performance period 12 December 2014 to 11 December 2017, calculated on the average closing share price over the 20 trading days up to and
including the start of the performance period, and on the average closing share price over the 20 trading days up to and including the end of the
performance period.
3 For the testing of the tranche in December 2017, the comparison was made against the performance of eight companies in the alumina or aluminium
industry. The Board considers the reasonableness of the International Comparator Group each year and due to the limited number of relevant companies
against which to test on a like basis Alumina Limited’s performance. For the grant in 2017, it was decided to include United Company Rusal that increased
the comparator group to nine companies, a number the Board considers is appropriate.
4 Represents the average applicable to senior executives.
2.1.3 ALUMINA LIMITED’S REMUNERATION
GOVERNANCE FRAMEWORK
EXTERNAL CONSULTANTS
• Provide independent advice on remuneration trends and
THE BOARD OF DIRECTORS
practices.
Reviews and approves the Charter of the Compensation
Committee. The Board approves the remuneration philosophy,
policies and practices.
COMPENSATION COMMITTEE
Delegated authority to:
• Take advice from management and where relevant,
independent advisers.
• Devise a remuneration framework, strategy, policies and
practices.
• Oversee the implementation of the remuneration strategy
and policy.
• Establish appropriate performance objectives and measures.
• Monitor performance against objectives and recommend
incentive awards.
• Approve remuneration outcomes.
• Provide benchmarking data and analysis.
• Support the Compensation Committee in relation to changes
to remuneration policy, employment contracts, structures
and practices etc.
• Provide governance and legal advice on remuneration related
matters.
MANAGEMENT
• Provides the Compensation Committee with information to
assist in its remuneration decisions including remuneration
recommendations.
The Compensation Committee is solely formed of Non-Executive
Directors and is chaired by Ms Emma Stein.
The duties and responsibilities delegated to the Compensation
Committee by the Board are set out in the Compensation
Committee’s Charter, which is available on the Company’s
website at www.aluminalimited.com/compensation-committee.
48 ¬
Alumina Limited Annual Report 2017
¬49
Remuneration Consultants
CHANGE OF CONTROL
The Compensation Committee has the authority to seek advice
from independent remuneration consultants on matters relating
to remuneration including developing and implementing
executive remuneration strategies, associated statutory
obligations and the quantum of remuneration.
Alumina Limited has established protocols for the engagement
of remuneration consultants and the processes to be followed
regarding recommendations.
In seeking remuneration advice from consultants, the
Compensation Committee ensures that the advice is free from
undue influence by:
• selecting the consultant
• briefing the consultant
• receiving the report directly from the consultant rather than
via Company executives
• the consultant declaring that a remuneration recommendation
is free from undue influence by the Key Management Personnel
to whom it relates.
In 2017, no remuneration recommendation, as defined in the
Corporations Act, was received.
2.1.4
OTHER REMUNERATION MATTERS
CLAWBACK POLICY
Alumina Limited has a Clawback Policy that provides scope for
the Board to recoup incentive remuneration paid to the CEO and
senior executives where:
• material misrepresentation or material restatement of Alumina
Limited’s financial statements occurred as a result of fraud or
misconduct by the CEO or any senior executives; and
• the CEO or senior executives received incentive remuneration
in excess of that which should have been received if the
Alumina Limited financial statements had been correctly
reported.
The Board also may seek to recover gains from the sale or
disposition of vested shares and determine to cancel unvested
equity awards.
In the event of a change in control, the Board may bring forward
the testing date for the LTI performance conditions, or waive
those conditions, and/or (in the case of Performance Rights
granted from 2016) shorten the exercise period for Performance
Rights that have already vested or that vest subsequently. The
Board may also, in its discretion, determine that cash settlement
amounts will be paid in respect of any vested Performance
Rights.
CESSATION OF EMPLOYMENT
On cessation of employment, prior to Performance Rights vesting,
except to the extent that the Board otherwise determines in its
absolute discretion within 20 business days after employment
ceasing, a pro rata number of unvested Performance Rights
will lapse. The number of unvested Performance Rights that
lapse will be proportional to the amount of the testing period
that has not yet elapsed at the time of employment ceasing. In
these circumstances, the Board also has discretion under the
LTI plan rules to determine, within two months of employment
ceasing, that any of the remaining unvested Performance Rights
are forfeited.
In relation to any remaining unvested Performance Rights that
do not lapse and are not forfeited, they will continue on foot
under the LTI plan rules and be tested for vesting in the normal
way unless the exercise period is shortened or the Board in its
discretion determines that any or all performance conditions in
respect of all or some of the Performance Rights will be tested
at a date determined by the Board or waived, and/or cash
settlement amounts will be paid in respect of Performance Rights
that vest and are exercised.
Mr Peter Wasow retired and ceased employment with Alumina
Limited on 31 July 2017. As per the terms of his contract, Mr
Wasow was paid;
• FAR proportionally calculated in lieu of notice (notice period 31
July 2017 to 1 June 2018)
• STI pro rata payment for 1 January to 31 July 2017 based on
delivery of specific pre-retirement outcomes and his role in
handover to his successor
• LTI unvested Performance Rights were lapsed proportional to
the amount of the testing period that had not yet elapsed at the
time of ceasing employment.
As a result, Mr Wasow has two further tranches due for testing
in December 2018 and December 2019. In total Mr Wasow
had 851,600 Performance Rights prior to his retirement. After
applying pro rata allocation, Mr Wasow lapsed 387,134 rights
with 464,466 retained subject to performance testing.
48 ¬
Alumina Limited Annual Report 2017
¬ 49
SHARE TRADING AND HEDGING PROHIBITIONS
Performance Rights granted under Alumina Limited’s LTI plan must remain at risk until fully vested. This is consistent with Alumina
Limited’s Share Trading Policy that prohibits Directors and employees from engaging in:
• short-term trading of any Alumina Limited securities
• buying or selling Alumina Limited securities if they possess unpublished, price-sensitive information; or
• trading in derivative products over the Company’s securities, or entering into transactions in products that limit the economic
risk of their security holdings in the Company.
2.2 SENIOR EXECUTIVE REMUNERATION
This section outlines the STI and LTI components of executive remuneration.
2017
KEY FEATURES OF THE STI PLAN
KEY FEATURES OF THE LTI PLAN
Description
The Board sets financial and non-financial performance
objectives at the start of each year, and company and
executive performance is then assessed against each
objective at the end of each year to determine whether
executives receive payment under the STI plan.
The LTI is delivered in the form of Performance Rights
that are tested over a three year performance period.
Each Performance Right that vests delivers to the holder
an ordinary share in Alumina Limited upon vesting (for
Performance Rights granted prior to 2016) or upon
vesting and exercise (for Performance Rights granted
from 2016).
Performance
Period
Performance
levels
Financial Year
Three years
Level of Performance
Percentage of FAR
Below expectations
0% received
At Target
Maximum
Mr Thiris 56%
Mr Foster 56%
Mr Wood 35%
Mr Thiris 70%
Mr Foster 70%
Mr Wood 50%
• The CEO Performance Right entitlement
is approximately 35 per cent of FAR.
• For Mr Thiris and Mr Foster the maximum
is 40 per cent of FAR and 30 per cent
for Mr Wood.1
Performance
hurdles
• Based on a scorecard comprising of corporate (50 per
cent weighting) and personal (50 per cent weighting)
objectives focused on key financial outcomes for the
year ahead together with critical initiatives, issues and
projects (which could be at the asset, joint venture
or industry level).
• Alumina Limited’s performance is tested using relative
TSR compared against two comparator groups.
• Relative TSR was chosen as a performance measure
as an appropriate means of measuring Company
performance as it incorporates both capital growth
and dividends. The two comparator groups against
which Alumina Limited’s performance is tested are:
• (Test 1 – ASX Comparator Group) S&P ASX 100 Index
companies which are alternative investments for the
Company's shareholders, excluding the Company,
the top 20 companies by market capitalisation and
property trusts.
• (Test 2 – International Comparator Group) reflecting
the Company's direct competitors in the market
comprising eight selected companies in the alumina
and/or aluminium industries that are listed in Australia
or overseas, excluding the Company.
5 0¬
Alumina Limited Annual Report 2017
¬51
2017
Performance
assessment
KEY FEATURES OF THE STI PLAN
KEY FEATURES OF THE LTI PLAN
The Compensation Committee reviews individual
performance against the scorecard at year end. It
takes into account actual performance outcomes and
internal and external factors that may have contributed
to the results based on a comprehensive report
provided by the CEO.
Performance hurdles are
independently
measured by Mercer Consulting (Australia) at
the conclusion of the relevant performance period.
Alumina Limited’s TSR is ranked against the TSR
of companies in each of the comparator groups.
In determining its recommendations to the board
on the level of STI payments, the Compensation
Committee decides and, through discussion, tests:
Percentile ranking
(in the relevant
comparator group)
• weightings.
• whether each individual element was achieved and
surpassed
Percentage of
annual vesting of
Performance Rights
in the relevant half
of the LTI award
Below 50th percentile
0% vesting
Entitlements
• if an element was not achieved, whether and for
what reason a positive rating is given, otherwise
likely to be zero.
Equal to 50th
percentile
50% vesting
Given the nature of the building blocks to the Alumina
Limited STI scheme, a simple distinction between
threshold, at target and stretch performance is not
always apparent, especially at the beginning of the
year. But in making its assessments as described
above, the Compensation Committee is focused on a
scheme which is sufficiently demanding and rewards
hard-won achievements by executives.
Between 50th &
75th percentile (ASX
Comparator Group)1
An additional 2%
of awards for each
percentile increase
Equal to or greater than
75th percentile
100% vesting
Following testing, any
Performance Rights
that have not vested
will lapse.
• The participant is only entitled to proportionally
receive dividends and other distributions, bonus
issues or other benefits if the performance conditions
applicable to Performance Rights are satisfied (or
waived) and the Performance Rights vest and are
exercised.
• Shares relating to Performance Rights, are not
automatically allocated upon vesting. Instead,
participants are entitled to exercise each relevant
Performance Right at any time during the applicable
exercise period (Exercise Period) after vesting. The
Exercise Period will generally end seven years after
vesting of the relevant Performance Rights. However,
the Exercise Period may be shortened in certain
circumstances such as cessation of employment or a
change of control event. Performance Rights that do
not vest as at the end of the vesting period will lapse.
2
1 The annual dollar value of the LTI grant is divided by the average Company share price over the 20 trading days leading up to the time that the Board
determined to make offers of Performance Rights to Senior Executives under the LTI plan for the relevant year, in order to determine the number
of Performance Rights to be offered.
If the Company's TSR performance is equal to that of any entity (or security) between the 50th percentile and the 75th percentile of the International
Comparator Group ranked by TSR performance, the number of Performance Rights in the relevant half of the LTI award that vest will be equal to the vesting
percentage assigned by the Board to that entity (or security). If the Company's TSR performance is between that of any two such entities (or securities)
in the International Comparator Group, the number of Performance Rights in the relevant half of the LTI award that vest will be determined on a pro rata
basis relative to the vesting percentages assigned by the Board to those entities (or securities).
50¬
Alumina Limited Annual Report 2017
¬ 51
2.3 EXECUTIVE KMP REMUNERATION AND EQUITY GRANTED IN 2017
The following tables contain the components that form the total statutory remuneration paid in 2017 to the Company’s
CEO and Senior Executives. Remuneration outcomes presented in Table 6 are prepared in accordance with relevant
accounting standards.
TABLE 6 - CHIEF EXECUTIVE OFFICER’S AND SENIOR EXECUTIVES REMUNERATION FOR THE YEAR ENDED
31 DECEMBER 2017
EXECUTIVE
KMP
Michael Ferraro
(CEO)
Peter Wasow
(Retired CEO)
Chris Thiris
(CFO)
Stephen Foster
(General Counsel/
Company Secretary)
Andrew Wood
(Group Executive
Strategy and
Development)
SHORT-TERM BENEFITS
YEAR
2017
FAR1
731,502
STI2
–
NON-
MONETARY3
OTHER4
TOTAL
18,543
–
750,045
POST EMPLOYMENT
BENEFITS
SHARE BASED PAYMENTS
SUPERANNUATION AND
TERMINATION5
CONDITIONAL
RIGHTS6
PERFORMANCE
RIGHTS7
12,248
136,111
59,265
TOTAL
195,376
TOTAL
REMUNERATION
957,669
2017
899,473
185,653
–
4,065
1,089,191
1,034,356
292,675
175,436
468,111
2,591,658
2016
1,170,838
725,000
29,676
21,997
1,947,511
19,462
207,000
310,856
517,856
2,484,829
2017
678,712
355,000
26,371
7,798
1,067,881
181,694
181,694
1,279,563
2016
656,458
485,000
23,278
5,484
1,170,220
207,649
207,649
1,412,811
2017
499,600
265,000
24,213
–
788,813
135,995
135,995
954,708
2016
483,500
500,000
18,917
15,966
1,018,383
155,368
155,368
1,206,751
2017
353,768
119,000
11,204
–
483,972
2016
345,038
200,000
9,087
11,780
565,905
71,842
71,842
71,052
71,052
575,646
656,419
29,988
34,942
29,900
33,000
19,832
19,462
–
–
–
–
–
–
Total
2017
3,163,055
924,653
80,331
11,863
4,179,902
1,126,324
428,786
624,232
1,053,018
6,359,244
Executive
remuneration
2016
2,655,834
1,910,000
80,958
55,227
4,702,019
106,866
207,000
744,925
951,925
5,760,810
1 Short-Term FAR is the total cash cost of salary, exclusive of superannuation.
2 Short-term incentive payments reflect the cash value paid for the years ended 31 December 2017 and 31 December 2016.
3 Non-monetary benefits represent accrued long service leave and value of the car park and a travel entitlement for Mr Ferraro.
4 Other short-term benefits include personal financial advice allowance and travel allowance.
5 Superannuation contributions reflect the SGC payment and termination (payment in lieu) payment for the previous CEO.
6 In 2017, Mr Ferraro was granted a conditional rights share based payment that is amortised over 12 month (conditional) period. In 2017, Mr Ferraro received
122,164 conditional rights calculated by dividing the aggregate grant value of $233,333 (pro-rated for his $400,000 full entitlement) by an independently
determined Volume Weighted Average Price (VWAP) of $1.91 per right. The grant date was 9 June 2017 with release date of 8 June 2020. The rights vest
immediately after the 12 month (conditional) period and only then is Mr Ferraro entitled to any benefits or entitlements attaching to the shares. While
Mr Ferraro is employed by the Company, and unless the Board otherwise determines, he may not dispose of or otherwise deal or purport to deal with any
shares transferred to him upon vesting of the award, until (and including) the release date. In 2017, FAR for Mr Wasow included a conditional rights share
based payment that is amortised over a 12 month (conditional) period. In 2017, Mr Wasow received 116,580 conditional rights calculated by dividing the
aggregate grant value of $212,175 by an independently determined VWAP of $1.82 per right. The grant date was 9 January 2017 with a vesting date of 9
July 2017. The 2017 rights vest immediately after the 6 month (conditional) period and only then is Mr Wasow entitled to any benefits or entitlements
attaching to the shares. In 2016, Mr Wasow was the recipient of 177,988 share rights at a VWAP of $1.163. The grant date was on 7 January 2016 with
share rights vesting on 7 July 2017. In 2016, Mr Foster elected to increase his superannuation contribution (reflected in the superannuation column) which
caused a reduction in his recorded 2016 FAR by the same amount.
7
In accordance with AASB 2, the value attributed to Performance Rights represents the amortisation for the reporting period of the value at grant date of all
previously granted Performance Rights that have neither vested nor lapsed. The value at grant date is amortised over a three year period.
5 2¬
Alumina Limited Annual Report 2017
¬53
2.3 EXECUTIVE KMP REMUNERATION AND EQUITY GRANTED IN 2017
The following tables contain the components that form the total statutory remuneration paid in 2017 to the Company’s
CEO and Senior Executives. Remuneration outcomes presented in Table 6 are prepared in accordance with relevant
TABLE 6 - CHIEF EXECUTIVE OFFICER’S AND SENIOR EXECUTIVES REMUNERATION FOR THE YEAR ENDED
SHORT-TERM BENEFITS
NON-
FAR1
STI2
MONETARY3
OTHER4
TOTAL
YEAR
2017
731,502
–
18,543
–
750,045
12,248
136,111
59,265
POST EMPLOYMENT
BENEFITS
SHARE BASED PAYMENTS
SUPERANNUATION AND
TERMINATION5
CONDITIONAL
RIGHTS6
PERFORMANCE
RIGHTS7
TOTAL
195,376
TOTAL
REMUNERATION
957,669
2017
899,473
185,653
–
4,065
1,089,191
1,034,356
292,675
175,436
468,111
2,591,658
2016
1,170,838
725,000
29,676
21,997
1,947,511
19,462
207,000
310,856
517,856
2,484,829
2017
678,712
355,000
26,371
7,798
1,067,881
2016
656,458
485,000
23,278
5,484
1,170,220
2017
499,600
265,000
24,213
788,813
2016
483,500
500,000
18,917
15,966
1,018,383
2017
353,768
119,000
11,204
483,972
2016
345,038
200,000
9,087
11,780
565,905
–
–
29,988
34,942
29,900
33,000
19,832
19,462
–
–
–
–
–
–
181,694
181,694
1,279,563
207,649
207,649
1,412,811
135,995
135,995
954,708
155,368
155,368
1,206,751
71,842
71,842
71,052
71,052
575,646
656,419
Total
2017
3,163,055
924,653
80,331
11,863
4,179,902
1,126,324
428,786
624,232
1,053,018
6,359,244
2016
2,655,834
1,910,000
80,958
55,227
4,702,019
106,866
207,000
744,925
951,925
5,760,810
accounting standards.
31 DECEMBER 2017
EXECUTIVE
KMP
Michael Ferraro
(CEO)
Peter Wasow
(Retired CEO)
Chris Thiris
(CFO)
Stephen Foster
(General Counsel/
Company Secretary)
Andrew Wood
(Group Executive
Strategy and
Development)
Executive
remuneration
1 Short-Term FAR is the total cash cost of salary, exclusive of superannuation.
2 Short-term incentive payments reflect the cash value paid for the years ended 31 December 2017 and 31 December 2016.
3 Non-monetary benefits represent accrued long service leave and value of the car park and a travel entitlement for Mr Ferraro.
4 Other short-term benefits include personal financial advice allowance and travel allowance.
5 Superannuation contributions reflect the SGC payment and termination (payment in lieu) payment for the previous CEO.
6 In 2017, Mr Ferraro was granted a conditional rights share based payment that is amortised over 12 month (conditional) period. In 2017, Mr Ferraro received
122,164 conditional rights calculated by dividing the aggregate grant value of $233,333 (pro-rated for his $400,000 full entitlement) by an independently
determined Volume Weighted Average Price (VWAP) of $1.91 per right. The grant date was 9 June 2017 with release date of 8 June 2020. The rights vest
immediately after the 12 month (conditional) period and only then is Mr Ferraro entitled to any benefits or entitlements attaching to the shares. While
Mr Ferraro is employed by the Company, and unless the Board otherwise determines, he may not dispose of or otherwise deal or purport to deal with any
shares transferred to him upon vesting of the award, until (and including) the release date. In 2017, FAR for Mr Wasow included a conditional rights share
based payment that is amortised over a 12 month (conditional) period. In 2017, Mr Wasow received 116,580 conditional rights calculated by dividing the
aggregate grant value of $212,175 by an independently determined VWAP of $1.82 per right. The grant date was 9 January 2017 with a vesting date of 9
July 2017. The 2017 rights vest immediately after the 6 month (conditional) period and only then is Mr Wasow entitled to any benefits or entitlements
attaching to the shares. In 2016, Mr Wasow was the recipient of 177,988 share rights at a VWAP of $1.163. The grant date was on 7 January 2016 with
share rights vesting on 7 July 2017. In 2016, Mr Foster elected to increase his superannuation contribution (reflected in the superannuation column) which
caused a reduction in his recorded 2016 FAR by the same amount.
In accordance with AASB 2, the value attributed to Performance Rights represents the amortisation for the reporting period of the value at grant date of all
previously granted Performance Rights that have neither vested nor lapsed. The value at grant date is amortised over a three year period.
7
52 ¬
Alumina Limited Annual Report 2017
¬ 53
CHIEF EXECUTIVE OFFICER’S AND SENIOR EXECUTIVES ‘TAKE HOME’ REMUNERATION FOR THE YEAR ENDED
31 DECEMBER 2017
The following table is non-statutory table and is not prepared in accordance to AASB 2. The purpose of the table to provide a snapshot
of the actual 'take home' remuneration received in 2017. It takes the total remuneration as per Table 6 above and adjusts for the
impact of amortised share based remuneration and adds in the value of actual vested Performance Rights which vested during 2017.
TABLE 7
EXECUTIVE KMP
YEAR
TOTAL
REMUNERATION
LESS NON-CASH ITEMS
ADD VALUE OF
THE VESTED
PERFORMANCE
RIGHTS
TOTAL
TAKE HOME
REMUNERATION
SHORT-TERM
NON-MONETARY
BENEFITS
SHARE BASED
REMUNERATION
Michael Ferraro
(CEO)
Peter Wasow
(Previous CEO)
Chris Thiris (CFO)
Stephen Foster
(General Counsel/
Company
Secretary)
Andrew Wood
(Group Executive
Strategy and
Development)
Total Executive
remuneration
2017
957,669
(18,543)
(195,376)
743,750
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2,591,658
2,484,829
1,279,563
1,412,811
954,708
1,206,751
575,646
656,419
0
(29,676)
(26,371)
(23,278)
(24,213)
(18,917)
(11,204)
(9,087)
(468,111)
(517,856)
(181,694)
(207,649)
(135,995)
(155,368)
(71,842)
(71,052)
385,019
715,080
2,508,566
2,652,377
292,400
1,363,898
701,329
219,705
523,828
115,598
184,760
1,883,213
1,014,205
1,556,294
608,198
761,040
6,359,244
(80,331)
(1,053,018)
1,012,722
6,238,617
5,760,810
(80,958)
(951,925)
2,124,997
6,852,924
5 4¬
Alumina Limited Annual Report 2017
¬ 55
The terms and conditions of each grant of Performance Rights affecting remuneration in the previous, current or future
reporting periods are as follows:
TABLE 8 – PERFORMANCE RIGHTS GRANTED AS REMUNERATION FOR THE YEARS ENDED 31 DECEMBER 2017
AND 31 DECEMBER 2016
CEO
Michael Ferraro
Previous CEO
Peter Wasow
Senior Executives
Chris Thiris
Stephen Foster
Andrew Wood
YEAR1
2017
2017
2016
2017
2016
2017
2016
2017
2016
NUMBER OF
PERFORMANCE
RIGHTS AS AT
1 JANUARY2
NUMBER GRANTED
DURING THE YEAR
AS REMUNERATION3
VALUE OF
PERFORMANCE
RIGHTS AT GRANT
DATE4
NUMBER
VESTED
DURING
YEAR5
VALUE
VESTED
DURING
YEAR6
NUMBER
LAPSED
DURING
YEAR7
VALUE
LAPSED
DURING
YEAR
VALUE AS
NUMBER OF
MINIMUM VALUE
MAXIMUM
PROPORTION OF
PERFORMANCE
OF GRANTS YET
VALUE OF GRANTS
REMUNERATION %8
TO VEST
YET TO VEST10
RIGHTS AS AT
31 DECEMBER9
-
141,900
$262,515
-
-
27.41%
141,900
$262,500
599,900
647,900
400,700
581,076
300,000
434,737
158,400
174,566
251,700
356,000
168,100
237,800
125,600
177,600
66,500
94,000
$259,251
(159,759)
$281,240
(404,000)
$173,143
$187,862
$129,368
(121,328)
(418,176)
(91,164)
$140,304
(312,337)
$68,495
$74,260
(47,966)
(110,166)
$385,019
(441,873)
($425,033)
$292,400
(41,572)
($46,976)
32.71%
405,900
$219,705
(31,236)
($35,297)
32.87%
303,200
$115,598
(16,434)
($18,570)
8.46%
40.10%
249,968
599,900
62.94%
400,700
55.03%
300,000
28.75%
39.46%
160,500
158,400
$715,080
$701,329
$523,828
$184,760
-
-
-
-
-
-
-
-
-
-
-
-
-
-
$210,537
$556,847
$361,005
$371,939
$269,672
$278,616
$142,755
$147,032
1 For Performance Rights granted on 20 January 2017, Performance Rights vest on satisfaction of the performance criteria on 6 December 2019. The eligible participant
then enters an exercise period that concludes at 5:00pm (Melbourne time) on the date that is seven years after vesting. Vested ESP entitlements that are not exercised
by the end of the Exercise Period will lapse (and consequently no Shares will be allocated, and no Cash Settlement Amounts will be paid, in respect of those vested ESP
entitlements). However, if any of an eligible participants vested ESP entitlements would otherwise lapse at the end of the Exercise Period because of this rule, and they
have not previously notified Alumina Limited that they do not wish those vested ESP entitlements to be exercised, then they will be deemed to be exercised by the
eligible participant. For Performance Rights granted on 19 February 2016, if at the end date for testing on 7 December 2018, less than 100 percent of the ESP entitlements
vest on the basis of the performance tests, those that do not vest will lapse.
Includes the number of Performance Rights granted that were subject to testing in 2017.
2
3 Performance Rights granted on 20 January 2017 (2016: 19 February 2016) for the three year performance test period concluding 6 December 2019 (2016: 7 December
2018). The value of 2017 Performance Right at grant date was $1.03 (2016: $0.79).Value per Performance Right is independently calculated by Mercer Consulting
(Australia) using the assumptions underlying the Black-Scholes methodology to produce a Monte Carlo simulation model which allows the incorporation of the hurdles
that must be met before the Performance Rights vest.
TABLE 8.1 CONDITIONAL RIGHTS GRANTED TO THE CEO FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016
YEAR
NUMBER OF
CONDITIONAL RIGHTS
AS AT 1 JANUARY
NUMBER GRANTED
DURING THE YEAR AS
REMUNERATION1
VALUE OF
CONDITIONAL RIGHTS
AT GRANT DATE2
NUMBER VESTED
DURING YEAR3
VALUE VESTED
DURING YEAR4
NUMBER LAPSED
DURING YEAR5
VALUE LAPSED
DURING YEAR6
VALUE AS
NUMBER OF
PROPORTION OF
CONDITIONAL RIGHTS
REMUNERATION %7
AS AT 31 DECEMBER8
MAXIMUM VALUE
OF GRANTS YET
TO VEST9
CEO
Michael Ferraro
2017
-
122,164
$233,333
-
Previous CEO
Peter Wasow
2017
2016
177,988
114,930
116,580
177,988
$212,175
$207,000
(294,568)
(114,930)
1 Mr Ferraro receives annually, Conditional Rights, an equity based component of his remuneration. In 2017 the number of Conditional Rights was equal to the value of
$400,000 which was pro-rated and equated to $233,333. The number of Conditional Rights was determined by an independently calculated Volume Weighted
Average Price (VWAP) which for 2017 was $1.91 (122,164 shares). The previous CEO, Mr Wasow, received annually, Conditional Rights as an equity component of his
FAR. In 2017 the number of Conditional Rights was equal to the set value of $212,175 divided by an independently determined VWAP which, for 2017 was $1.82
(116,580 shares).
2 Mr Wasow's FAR increased in 2017 therefore the total value of the initial grant of Conditional Rights was $212,175.
3 The number of Conditional Rights vested is the number granted in the prior year following the completion of the service conditions.
4 Value vested is equal to the number of Conditional Rights that have satisfied the service condition multiplied by the share price at the time of vesting. In 2017 it was
294,568 Conditional Rights by the share price of $2.03 on 7 July 2017 (2016: 114,930 Conditional Rights by the share price of $1.32 on 16 September 2016).
5 6¬
Alumina Limited Annual Report 2017
-
$597,973
$151,708
-
-
-
24.36%
122,164
31.26%
14.44%
-
177,988
-
-
-
¬57
-
-
-
-
-
-
-
-
The terms and conditions of each grant of Performance Rights affecting remuneration in the previous, current or future
reporting periods are as follows:
AND 31 DECEMBER 2016
TABLE 8 – PERFORMANCE RIGHTS GRANTED AS REMUNERATION FOR THE YEARS ENDED 31 DECEMBER 2017
CEO
Michael Ferraro
Previous CEO
Peter Wasow
Senior Executives
Chris Thiris
Stephen Foster
Andrew Wood
YEAR1
2017
2017
2016
2017
2016
2017
2016
2017
2016
NUMBER OF
PERFORMANCE
NUMBER GRANTED
DURING THE YEAR
VALUE OF
PERFORMANCE
RIGHTS AS AT
AS REMUNERATION3
RIGHTS AT GRANT
1 JANUARY2
DATE4
NUMBER
VESTED
DURING
YEAR5
VALUE
VESTED
DURING
YEAR6
NUMBER
LAPSED
DURING
YEAR7
VALUE
LAPSED
DURING
YEAR
VALUE AS
PROPORTION OF
REMUNERATION %8
NUMBER OF
PERFORMANCE
RIGHTS AS AT
31 DECEMBER9
MINIMUM VALUE
OF GRANTS YET
TO VEST
MAXIMUM
VALUE OF GRANTS
YET TO VEST10
-
141,900
$262,515
-
-
-
-
27.41%
141,900
599,900
647,900
400,700
581,076
300,000
434,737
158,400
174,566
251,700
356,000
168,100
237,800
125,600
177,600
66,500
94,000
$259,251
(159,759)
$281,240
(404,000)
$173,143
$187,862
$129,368
(121,328)
(418,176)
(91,164)
$140,304
(312,337)
$68,495
$74,260
(47,966)
(110,166)
$385,019
(441,873)
($425,033)
$715,080
-
-
8.46%
40.10%
249,968
599,900
$292,400
(41,572)
($46,976)
32.71%
405,900
$701,329
-
-
62.94%
400,700
$219,705
(31,236)
($35,297)
32.87%
303,200
$523,828
-
-
55.03%
300,000
$115,598
(16,434)
($18,570)
$184,760
-
-
28.75%
39.46%
160,500
158,400
-
-
-
-
-
-
-
-
-
$262,500
$210,537
$556,847
$361,005
$371,939
$269,672
$278,616
$142,755
$147,032
4 The value of Performance Rights granted in the year reflects the value of a Performance Right, multiplied by the number of Performance Rights granted during 2017.
Performance Rights were valued independently by Mercer Consulting (Australia) using the assumptions underlying the Black-Scholes methodology to produce a Monte
Carlo simulation model that accommodates features associated with Alumina Limited’s ESP such as exercise, lapse and performance hurdles. The rights are those
granted in 2017.
5 The number of Performance Rights that vested in 2017 due to testing of Tranche 15. Performance testing of Tranche 15 resulted in 52.4 per cent of the Performance Rights
vesting against the ASX Comparator Group and 96.6 per cent against the International Comparator Group.
6 The value of Performance Rights vested is determined by the number of vested Rights multiplied by the market price at the vesting date.
7 The number of the Performance Rights that did not meet the criteria for vesting and are not subject to further testing and therefore lapsed. The unvested portion of
Tranche 15 Performance Rights lapsed in 2017. No Performance Rights lapsed in 2016. It also includes 387,134 Performance Rights for Mr Wasow that lapsed on a
proportionate basis from his retirement date to the end of the relevant performance period.
8 Value of vested Performance Rights represented as a percentage of total remuneration.
9 Number of Performance Rights granted subject to future testing.
10 Maximum value of Performance Rights subject to future testing. Maximum value is determined by multiplying the number of untested Performance Rights by the fair
value that is independently calculated by Mercer Consulting (Australia) using the assumptions underlying the Black-Scholes methodology to produce a Monte Carlo
simulation model which allows the incorporation of the hurdles that must be met before the Performance Right vest.
TABLE 8.1 CONDITIONAL RIGHTS GRANTED TO THE CEO FOR THE YEARS ENDED 31 DECEMBER 2017 AND 31 DECEMBER 2016
YEAR
NUMBER OF
NUMBER GRANTED
VALUE OF
CONDITIONAL RIGHTS
DURING THE YEAR AS
CONDITIONAL RIGHTS
AS AT 1 JANUARY
REMUNERATION1
AT GRANT DATE2
NUMBER VESTED
DURING YEAR3
VALUE VESTED
DURING YEAR4
NUMBER LAPSED
DURING YEAR5
VALUE LAPSED
DURING YEAR6
VALUE AS
PROPORTION OF
REMUNERATION %7
NUMBER OF
CONDITIONAL RIGHTS
AS AT 31 DECEMBER8
MAXIMUM VALUE
OF GRANTS YET
TO VEST9
CEO
Previous CEO
Peter Wasow
Michael Ferraro
2017
-
122,164
$233,333
-
2017
2016
177,988
114,930
116,580
177,988
$212,175
$207,000
(294,568)
(114,930)
-
$597,973
$151,708
-
-
-
-
-
-
24.36%
122,164
31.26%
14.44%
-
177,988
-
-
-
5 No Conditional Rights lapsed.
6 No Conditional Rights lapsed.
7 Percentage proportion of remuneration is determined by value of vested Conditional Rights as a percentage of total remuneration.
8 Number of Conditional Rights yet to meet the service condition and have not lapsed.
9 The maximum value of the Conditional Rights is based on the number of rights that vest and are released at the expiration of the restricted period multiplied by
the share price on the date of release.
56 ¬
Alumina Limited Annual Report 2017
¬ 57
SENIOR EXECUTIVE SHAREHOLDING
TABLE 9 – SENIOR EXECUTIVE SHAREHOLDINGS FOR THE YEARS ENDED 31 DECEMBER 2017 AND
31 DECEMBER 2016
BALANCE OF
SHARES AS AT 1
JANUARY1
SHARES ACQUIRED
DURING THE YEAR
UNDER EMPLOYEE
SHARE PLAN2
OTHER
SHARES ACQUIRED
DURING THE YEAR
SHARES SOLD
DURING THE YEAR
BALANCE
OF SHARES
HELD AT
31 DECEMBER
Michael Ferraro3
Peter Wasow
Chris Thiris
Stephen Foster
Andrew Wood
2017
2017
2016
2017
2016
2017
2016
2017
2016
68,000
455,838
214,908
814,000
263,224
739,717
511,842
150,000
111,010
–
–
–
68,000
294,568
(910,165)
–
(278,000)
455,838
(73,428)
900,000
114,930
38,100
132,600
–
28,867
(94,000)
125,538
(210,000)
–
–
–
(71,176)
814,000
765,748
739,717
197,966
150,000
159,759
404,000
121,328
418,176
91,164
312,337
47,966
110,166
1 Balance of shares held at 1 January and 31 December of the respective years include directly held, and nominally held shares, and shares held by personally related
entities.
Includes vested 2015 Performance Rights that were tested in December 2017.
2
3 Mr Ferraro was appointed Chief Executive Officer on the 1 June 2017. Prior to this he was a Non-Executive Director. His shareholdings in 2016 are disclosed in Table 11.
5 8¬
2.3.1 EXECUTIVES’ SERVICE AGREEMENTS
Remuneration and other terms of employment for executives are formalised in service agreements.
Major provisions of the agreements relating to remuneration are set out below.
Termination benefits are within the limits set by the Corporations Act 2001 (Cth) such that they
do not require shareholder approval.
TERM OF AGREEMENT
AND NOTICE PERIOD
Mike Ferraro
No fixed term
12 month written notice from either
party.
Mr Ferraro’s employment may be
terminated immediately for any
conduct that would justify summary
dismissal.
TERMINATION PAYMENTS1
• Alumina Limited may, at its discretion, make a payment in lieu of some or all of the
notice period.
• Any payment to be made to Mr Ferraro in lieu of notice shall be calculated based
on his Fixed Annual Reward. He would also receive any statutory entitlements.
• Number of shares equal to the granted conditional rights that would have vested
during notice period.
• In addition to the above, Mr Ferraro may terminate his employment by giving notice
to Alumina Limited (effectively immediately or up to six months later) in the event
of a Significant Change. In that case Mr Ferraro will be entitled to receive a payment
equal to 12 months’ Fixed Annual Reward less the amount received during any period
of notice served. He will also be entitled to payment in lieu of accrued annual
and long service leave entitlements.
Chris Thiris and Stephen Foster
No fixed term
• An additional payment which is the greater of:
Six month notice from the Company,
three month notice from Mr Thiris
and Mr Foster
– A payment equivalent to six months Base Remuneration; or
– A payment comprising:
– Notice payment (the greater of 12 weeks or notice provided
within employment contract).
Andrew Wood
No fixed term
Four month notice from the
Company, two month notice from Mr
Wood
– severance payment of 2.5 weeks per complete year of service, pro-rated for
completed months of service; and
– nine weeks ex gratia payment.
• An additional payment which is the greater of:
– A payment equivalent to six months Base Remuneration; or
– A payment comprising:
– Notice payment (the greater of 12 weeks or notice provided
within employment contract).
– severance payment of 2.5 weeks per complete year of service, pro-rated
– for completed months of service; and
– six weeks ex gratia payment
1 Payable upon termination with notice and without the cause (eg for reasons other than unsatisfactory performance) and suitable alternative employment
is not offered or if they do not accept other employment or in the event of a significant change (which is defined to be if Alumina Limited ceases to be listed
on the ASX or if there is a significant change to the executives status and/or responsibilities that is detrimental to the executive). Calculated according to
the “Base Remuneration”, which is defined as FAR for Mr Ferraro; and FAR + STI at target for Mr Thiris, Mr Foster and Mr Wood. The above termination
entitlements are subject to any restrictions imposed by the Corporations Act.
If Mr Ferraro’s employment ceases within 3 years from the grant date of any conditional rights that have been granted to him in accordance with the annual
grant of conditional rights, and the Board determines that his status is not that of a good leaver, the Board may decide that shares received in respect of
relevant conditional rights and all outstanding conditional rights are subject to immediate forfeiture. The treatment of any unvested Performance Rights
upon termination of employment will be determined in accordance with the LTI Plan and the relevant terms of grant. Upon the occurrence of a change in
control event all unvested Performance Rights shall immediately vest. Similarly any restricted Annual Grant of Share Rights will be freed from holding locks.
2
Alumina Limited Annual Report 2017
¬ 59
3. NON-EXECUTIVE DIRECTORS REMUNERATION
The maximum remuneration for Non-Executive Directors is
determined by resolution of shareholders. At the 2016 AGM,
shareholders approved a maximum aggregate remuneration of
$1,500,000 per annum for Non-Executive Directors. A total of
$1,117,670 was paid in Non-Executive Director fees in 2017.
As foreshadowed in the 2016 Remuneration Report, an
independent review of Non-Executive Director fees, relevant
to the market, was undertaken. Also, the workload of Board
Committees had increased over a period of years, especially for
the Chairman and Chair of the Committees. The review identified
that the Chairman’s and Committee Chair’s remuneration had
lagged compared to the market. The outcome of the review was
considered in light of Non-Executive Director’s base fees remaining
unchanged from the fee level set in 2011 and no recent changes to
the Chairman and Committee Chair fees. The Board determined
that in the context of business conditions that there would be
no increase to the base fee for the 2017 year (except for a nine
per cent increase to the Chairman’s base fee). However, the fee
for Chair of the Audit and Risk Management and Compensation
committees were increased from $15,000 to $30,000 per annum
to reflect changes in market practice, align with the workload of
those roles and ensure Alumina Limited remained competitive
to the market to attract and retain high calibre Non-Executive
Directors.
In addition to the base fee, Non-Executive Directors receive fees
for participation on the Board Committees and Superannuation
Guarantee Contributions.
Committee Member
Compensation Committee Chair
Audit & Risk Committee Chair
Nomination Committee Chair
$10,000 (aggregate)
$30,000
$30,000
$10,000
Non-Executive Directors participation on Board Committees is set out on page 17.
Non-Executive Directors do not receive any other retirement benefits or performance based incentives, rights or options.
3.1 REMUNERATION OUTCOMES
Non-Executive Directors’ remuneration details are set out below in Table 10.
TABLE 10
John Pizzey
Emma Stein
Chen Zeng
Peter Day
Mike Ferraro2
Deborah O'Toole3
Total
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2017
2016
SHORT-TERM BENEFITS
POST EMPLOYMENT
TOTAL REMUNERATION
FEES – CASH
NON-MONETARY
BENEFITS
SUPERANNUATION
GUARANTEE1
390,168
357,008
189,953
174,193
159,262
159,262
184,147
174,193
70,507
169,216
13,333
1,007,370
1,033,872
–
–
–
–
–
–
–
–
–
–
–
–
–
19,832
19,462
18,055
16,557
15,138
15,138
17,503
16,557
6,702
16,084
1,267
78,497
83,798
410,000
376,470
208,008
190,750
174,400
174,400
201,650
190,750
77,209
185,300
14,600
1,085,867
1,117,670
1 Non-Executive Directors receive, in addition to their fees, a SGC. The applicable rate for 2017 and 2016 was 9.5 per cent. Non-Executive Directors do not receive
any other retirement benefits.
2 Mr Ferraro resigned as a Non-Executive Director on the 31 May 2017 and was appointed to the position of Chief Executive Officer and Managing Director on 1
June 2017. His remuneration following his appointment is shown in Table 6.
3 Ms O'Toole was appointed a Non-Executive Director on 1 December 2017.
6 0 ¬
Alumina Limited Annual Report 2017
¬61
3.2 NON–EXECUTIVE DIRECTOR SHARE HOLDINGS
Each Non-Executive Director is required to hold shares in the Company having a value at least equal to 50 per cent of their annual
fees at the expiry of five years from appointment as a director. The requirement is satisfied when shares are acquired or by the expiry
of the five year term.
TABLE 11 NON–EXECUTIVE DIRECTOR SHAREHOLDINGS FOR THE YEARS ENDED 31 DECEMBER 2017 AND
31 DECEMBER 2016
BALANCE OF SHARES AS AT 1
JANUARY1
OTHER SHARES ACQUIRED
DURING
THE YEAR
BALANCE OF SHARES HELD AT
31 DECEMBER
John Pizzey
Emma Stein
Chen Zeng2
Peter Day
Mike Ferraro3
Deborah O'Toole5
2017
2016
2017
2016
2017
2016
2017
2016
2016
2017
82,111
82,111
75,808
75,808
4,804
4,804
75,720
75,720
25,000
–
8,500
–
8,986
–
–
–
–
–
43,0004
–
90,611
82,111
84,794
75,808
4,804
4,804
75,720
75,720
68,000
–
1 Balance of shares held at 1 January and 31 December of the respective years include directly held shares, nominally held shares, and shares held by
personally related entities.
2 Mr Zeng is a nominee of CITIC and CITIC holds 548,959,208 ordinary fully paid shares in Alumina Limited.
3 Mr Ferraro resigned as a Non-Executive Director on the 31 May 2017 and was appointed to the position of Chief Executive Officer and Managing Director
on 1 June 2017. His shareholdings for 2017 are shown in Table 9.
4 Mr Ferraro purchased 43,000 shares indirectly via the trustee company of the Ferraro Super Fund, of which Mr Ferraro is a beneficiary.
5 Ms O'Toole was appointed a Non-Executive Director on 1 December 2017.
This report is made in accordance with a resolution of the Directors.
GJ Pizzey Chairman
—
22 March 2018
6 0¬
Alumina Limited Annual Report 2017
¬ 61
Financial Report
The financial report covers the consolidated entity consisting of Alumina Limited
(the Company or parent entity) and its subsidiaries (together the Group).
The financial report is presented in US dollars.
Alumina Limited is a Company limited by shares, incorporated
and domiciled in Australia. Its registered office and principal
place of business is: Alumina Limited, Level 12, IBM Centre, 60
City Road, Southbank Victoria 3006.
A description of the nature of the consolidated entity’s operations
and its principal activities is included in the operating and financial
review on pages 20–35 of the annual report. The operating and
financial review is not part of this financial report.
The financial report was authorised for issue by the Directors
on 22 March 2018.
Through the use of the internet, we have ensured that our corporate
reporting is timely and complete. All press releases, financial
reports and other information are available at our Investor Centre
on our website: www.aluminalimited.com.
CONTENTS
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statement of Profit or Loss
and Other Comprehensive Income
Consolidated Balance Sheet
Consolidated Statement of Changes in Equity
Consolidated Statement of Cash Flows
NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS FOR THE YEAR ENDED
31 DECEMBER 2017
About This Report
Group structure and AWAC performance
1. Segment Information
2. Investments In Associates
3. Investments In Controlled Entities
Financial and Capital Risk
4. Financial Assets And Liabilities
5. Financial Risk Management
6. Capital Management
63
64
65
66
67
68
68
69
72
73
75
79
Key Numbers
7. Expenses
8. Income Tax Expense
9. Equity
10. Cash Flow Information
Other Information
11. Related Party Transactions
12. Share-Based Payments
13. Remuneration Of Auditors
14. Commitments And Contingencies
15. Events Occurring After The Reporting Period
16. Parent Entity Financial Information
17. Deed Of Cross Guarantee
18. New Accounting Standards And Interpretations
Not Yet Adopted
SIGNED REPORTS
Directors’ Declaration
Independent Auditor’s Review Report
to the Members of Alumina Limited
80
81
83
84
86
86
87
88
88
88
89
91
91
92
6 2¬
Alumina Limited Annual Report 2017
¬63
Alumina Limited Year Ended 31 December 2017
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
Revenue from continuing operations
Share of net profit of associates accounted for using the equity method
General and administrative expenses
Change in fair value of derivatives/foreign exchange losses
Finance costs
Profit/(loss) before income tax
Income tax expense
NOTES
US$ MILLION
2017
0.6
360.4
(13.6)
0.7
(8.3)
2016
0.6
18.1
(25.7)
(14.1)
(9.1)
2(c)
7(a)
7(b)
339.8
(30.2)
8
–
–
Profit/(loss) for the year attributable to the owners of Alumina Limited
339.8
(30.2)
Other comprehensive income/(loss)
Items that may be reclassified to profit or loss
Share of reserve movements accounted for using the equity method
Foreign exchange translation difference
Items that will not be reclassified to profit or loss
Re-measurements of retirement benefit obligations accounted
for using the equity method
Other comprehensive income for the year, net of tax
Total comprehensive income for the year attributable
to the owners of Alumina Limited
9(b)
2.9
88.0
7.8
98.7
4.4
178.5
7.5
190.4
438.5
160.2
Earnings per share for profit/(loss) from continuing operations attributable to the
ordinary equity holders of the Company:
Basic earnings per share
Diluted earnings per share
9(a)
9(a)
11.8¢
11.8¢
(1.0¢)
(1.0¢)
The above consolidated statement of profit or loss and other comprehensive income should be read in conjunction with the accompanying notes.
6 2¬
Alumina Limited Annual Report 2017
¬ 63
CONSOLIDATED BALANCE SHEET
CURRENT ASSETS
Cash and cash equivalents
Receivables
Other assets
Total current assets
NON-CURRENT ASSETS
Investment in associates
Property, plant and equipment
Total non-current assets
TOTAL ASSETS
CURRENT LIABILITIES
Payables
Provisions
Other liabilities
Total current liabilities
NON-CURRENT LIABILITIES
Borrowings
Derivative financial instruments
Provisions
Total non-current liabilities
TOTAL LIABILITIES
NET ASSETS
EQUITY
Contributed equity
Treasury shares
Reserves
Retained earnings
TOTAL EQUITY
The above consolidated balance sheet should be read in conjunction with the accompanying notes.
NOTES
US$ MILLION
2017
2016
4(a)
40.0
–
1.8
41.8
8.6
0.1
3.0
11.7
2(c)
2,301.0
2,106.0
0.1
2,301.1
2,342.9
0.1
2,106.1
2,117.8
1.3
0.3
0.1
1.7
98.4
8.3
0.5
107.2
108.9
1.3
0.3
0.1
1.7
92.4
16.2
0.6
109.2
110.9
4(b)
4(c)
2,234.0
2,006.9
9(a)
9(a)
2,682.9
2,682.9
(0.9)
–
(1,034.7)
(1,125.3)
586.7
449.3
2,234.0
2,006.9
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Alumina Limited Annual Report 2017
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Alumina Limited Year Ended 31 December 2017
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Balance as at 1 January 2016
Loss for the year
Other comprehensive income/(loss) for the year
Transactions with owners in their capacity as owners:
Dividends paid
NOTES
US$ MILLION
CONTRIBUTED
EQUITY1
RESERVES
RETAINED
EARNINGS
TOTAL
2,681.5
(1,305.9)
607.3
1,982.9
–
–
–
1.4
–
–
(30.2)
(30.2)
182.9
7.5
190.4
–
–
(2.3)
(135.3)
(135.3)
–
–
1.4
(2.3)
2,682.9
(1,125.3)
449.3
2,006.9
–
339.8
90.9
7.8
339.8
98.7
–
–
–
–
–
(210.2)
(210.2)
–
–
(0.9)
(0.3)
Movement in treasury shares
9(a)
Movement in share based payments reserve
Balance as at 31 December 2016
2,682.9
(1,125.3)
449.3
2,006.9
Balance as at 1 January 2017
Profit for the year
Other comprehensive income for the year
Transactions with owners in their capacity as owners:
Dividends paid
Movement in treasury shares
9(a)
(0.9)
Movement in share based payments reserve
–
(0.3)
Balance as at 31 December 2017
2,682.0
(1,034.7)
586.7
2,234.0
1 Treasury shares have been deducted from contributed equity.
The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.
6 4¬
Alumina Limited Annual Report 2017
¬ 65
CONSOLIDATED STATEMENT OF CASH FLOWS
Cash flows from operating activities
Payments to suppliers and employees (inclusive of goods and services tax)
GST refund received
Dividends received from associates
Distributions received from associates
Finance costs paid
Interest paid under cross currency interest rate swap
Interest received under cross currency interest rate swap
Other
NOTES
US$ MILLION
2017
2016
(12.1)
0.5
278.1
1.2
(9.8)
(5.4)
6.6
0.4
(26.3)
0.9
150.2
0.7
(7.2)
(3.5)
5.0
0.2
Net cash inflow from operating activities
10(a)
259.5
120.0
Cash flows from investing activities
Payments for investments in associates
Proceeds from return of invested capital
Net cash (outflow)/inflow from investing activities
2(c)
Cash flows from financing activities
Proceeds from borrowings
Repayment of borrowings
Payments for shares acquired by the Alumina Employee Share Plan
Dividends paid
Net cash outflow from financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at the beginning of the financial year
Effects of exchange rate changes on cash and cash equivalents
Cash and cash equivalents at the end of the financial year
4(a)
The above consolidated statement of cash flows should be read in conjunction with the accompanying notes.
(80.0)
63.8
(16.2)
105.0
(105.0)
(2.0)
(210.2)
(212.2)
31.1
8.6
0.3
40.0
(48.0)
81.9
33.9
30.0
(50.0)
(1.6)
(135.3)
(156.9)
(3.0)
9.3
2.3
8.6
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Alumina Limited Annual Report 2017
¬67
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2017
ABOUT THIS REPORT
Alumina Limited is a for profit company limited by shares
incorporated and domiciled in Australia whose shares are publicly
traded on the Australian Securities Exchange. The consolidated
financial report of the Group for the year ended 31 December
2017 was authorised for issue in accordance with a resolution of
the Directors on 22 March 2018.
The consolidated financial report is a general purpose financial
report which:
• incorporates assets, liabilities and results of operations of
all Alumina Limited’s subsidiaries and equity accounts its
associates. For the list of the Company’s associates and
subsidiaries refer Notes 2(a) and 3 respectively.
• has been prepared in accordance with the requirements of
the Corporations Act 2001, Australian Accounting Standards
(AAS) and Interpretations issued by the Australian Accounting
Standards Board (AASB). Alumina Limited is a for profit entity
for the purpose of preparing the financial statements.
• complies with International Financial Reporting Standards (IFRS)
as issued by the International Accounting Standards Board.
• has been prepared under historical cost convention, as modified
by the revaluation of certain financial assets and liabilities
(including derivative instruments) at fair value through profit
or loss.
• the Company is of a kind referred to in the Australian Securities
and Investments Commission Corporations Instrument
2016/191, relating to the “rounding off” of amounts in the
financial report. Amounts in the financial report have been
rounded off in accordance with that Legislative Instrument to
the nearest hundred thousand dollars, and presented in US
dollars, except where otherwise required.
• adopts all new and amended Accounting Standards and
Interpretations issued by the AASB that are effective for the
annual reporting beginning 1 January 2017.
• does not early adopt Accounting Standards and Interpretations
that have been issued or amended but are not yet effective.
• presents reclassified comparative information where required
for consistency with the current year’s presentation.
THE NOTES TO THE FINANCIAL STATEMENTS
The notes include information, which is required to understand the
financial statements and is material and relevant to the operations,
financial position and performance of the Group. Information is
considered material and relevant if, for example:
• the amount in question is significant because of its size or nature.
• it is important for the understanding of the results of the Group.
• it relates to an aspect of the Group’s operations that is important
to its future performance.
The notes are organised into the following sections:
• Group structure and AWAC performance: explains the group
structure and information about AWAC’s financial position
and performance and its impact on the Group.
• Financial and capital risk: provides information about the Group’s
financial assets and liabilities and discusses the Group’s
exposure to various financial risks and explains how these
affect the Group’s financial position and performance and what
the Group does to manage these risks. It also describes capital
management objectives and practices of the Group.
• Key numbers: provides a breakdown of individual line items
in the financial statements that the Directors consider most
relevant and summarises the accounting policies, judgements
and estimates relevant to understanding these line items.
• Other Information: provides information on items, which require
disclosure to comply with Australian Accounting Standards
and other regulatory pronouncements. However, they are not
considered critical in understanding the financial performance
of the Group and are not immediately related to the individual
line items in the financial statements.
ACCOUNTING POLICIES
Significant and other accounting policies that summarise the
measurement basis used and are relevant to the understanding
of the financial statements are provided throughout the notes to
the financial statements.
6 6¬
Alumina Limited Annual Report 2017
¬ 67
Notes to the consolidated financial statements
for the year ended 31 December 2017
ABOUT THIS REPORT (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The consolidated financial statements are presented in US dollars,
which is Alumina Limited’s presentation and functional currency.
Foreign currency transactions are translated into the functional
currency using the exchange rates prevailing at the dates of these
transactions. Foreign exchange gains and losses resulting from
the settlement of such transactions and from the translation
at year-end exchange rates of monetary assets and liabilities
denominated in foreign currencies are recognised in the profit or
loss, except when they are deferred in other equity as qualifying
cash flow hedges and qualifying net investment hedges or are
attributable to part of the net investment in a foreign operation.
The results and financial position of the Group entities and
associates that have a functional currency different from the
presentation currency are translated into the presentation
currency as follows:
• assets and liabilities for each balance sheet presented are
translated at the closing rate at the date of that balance sheet.
• income and expenses are translated at average exchange
rates (unless this is not a reasonable approximation of the
cumulative effect of the rates prevailing on the transaction
dates, in which case income and expenses are translated at
the dates of the transactions).
• all resulting exchange differences are recognised in other
comprehensive income.
• on consolidation, exchange differences arising from the
translation of any net investment in foreign entities, and of
borrowings and other financial instruments designated as hedges
of such investments, are recognised in other comprehensive
income. When a foreign operation is sold, its proportionate
share of such exchange differences are reclassified to the profit
or loss, as part of the gain or loss on sale.
GROUP STRUCTURE AND AWAC PERFORMANCE
1. SEGMENT INFORMATION
Alumina Limited’s sole business undertaking is in the global bauxite, alumina and aluminium industry, which it conducts primarily
through bauxite mining and alumina refining. All of those business activities are conducted through its 40% investments in AWAC.
Alumina Limited’s equity interest in AWAC form one reportable segment. A full description of Alumina Limited’s business model is
included in the Operating and Financial Review on pages 20–35 of the annual report.
The equity interest in AWAC is represented by investments in a number of entities in different geographical locations.
YEAR ENDED 31 DECEMBER 2017
US$ MILLION
Investments in Associates
Assets
Liabilities
Consolidated net assets
AUSTRALIA
1,187.8
32.2
(108.9)
1,111.1
BRAZIL
747.9
9.3
–
OTHER
365.3
0.4
–
TOTAL
2,301.0
41.9
(108.9)
757.2
365.7
2,234.0
YEAR ENDED 31 DECEMBER 2016
US$ MILLION
Investments in Associates
Assets
Liabilities
Consolidated net assets
AUSTRALIA
1,043.1
6.4
(110.9)
938.6
BRAZIL
761.2
5.1
–
OTHER
TOTAL
301.7
0.3
–
2,106.0
11.8
(110.9)
766.3
302.0
2,006.9
6 8 ¬
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Alumina Limited Annual Report 2017
¬69
¬69
2. INVESTMENTS IN ASSOCIATES
(A) ALCOA WORLD ALUMINA AND CHEMICALS
Alumina Limited has an interest in the following entities forming AWAC:
NAME
PRINCIPAL ACTIVITIES
COUNTRY OF
INCORPORATION
PERCENTAGE
OWNERSHIP
2017
2016
Alcoa of Australia Limited
Bauxite, alumina & aluminium production
Australia
Alcoa World Alumina LLC
Bauxite and alumina trading & production
USA
Alumina Espanola S.A.
Alumina production
Alcoa World Alumina Brasil Ltda. Bauxite and alumina production
AWA Saudi Ltda.
Bauxite and alumina production
Enterprise Partnership
Finance lender
Spain
Brazil
Hong Kong
Australia
40
40
40
40
40
40
40
40
40
40
40
40
The audited combined financial statements of the entities forming
AWAC are prepared in accordance with Accounting Principles
Generally Accepted in the United States of America (US GAAP).
Alcoa of Australia Limited and Enterprise Partnership (AWAC
entities) further issue audited financial statements prepared in
accordance with the requirements of the Corporations Act 2001,
Australian Accounting Standards and interpretations issued by
Australian Accounting Standards Board.
For the remaining AWAC entities, adjustments are made to convert
the accounting policies under US GAAP to Australian Accounting
Standards. The principal adjustments are to the valuation of
inventories from last-in-first-out basis to a basis equivalent to
weighted average cost, to create an additional asset retirement
obligation for dismantling, removal and restoration of certain
refineries, differences in the recognition of actuarial gains and
losses on certain defined pension plans and the reversal of certain
fixed asset uplifts included in Alcoa World Alumina Brasil Ltda.
In arriving at the value of these GAAP adjustments, Management
is required to use accounting estimates and exercise judgement in
applying the Group’s accounting policies. The note below provides
an overview of the areas that involved a higher degree of judgement
or complexity.
(B) CRITICAL ACCOUNTING ESTIMATES
AND JUDGEMENTS
Estimates and judgements are continually evaluated and are based
on historical experience and other factors, including expectations
of future events that may have a financial impact on the Group and
that are believed to be reasonable under the circumstances. The
resulting accounting estimates will by definition, seldom equal the
related actual results. The estimates and judgements that have a
significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year are
disclosed below.
Retirement benefit obligations
The Group recognised a net liability for retirement benefit obligations
under the defined benefit superannuation arrangements through
its investment in AWAC. All plans are valued in accordance with
AASB 119 Employee Benefits.
These valuations require actuarial assumptions to be made. All
re-measurements are recognised in other comprehensive income.
Asset retirement obligations
The amount of asset retirement obligations recognised under
US GAAP by AWAC is adjusted to be in compliance with AAS.
This requires judgemental assumptions regarding the timing of
reclamation activities, plant and site closure and discount rates
to determine the present value of these cash flows.
Carrying value of investments in associates
The Group assesses at each reporting period whether there is
objective evidence that the investment in associates is impaired by:
• Performing an impairment indicators' assessment to consider
whether indicators of impairment exist;
• If indicators of impairment exist, calculating the value in use of
the investment in AWAC using a discounted cash flow model
(“DCF model”); and
• Comparing the resulting value to the book value.
The key assumptions used in the DCF model to estimate future
cash flows are those relating to future alumina and aluminium
prices, energy prices and exchange rates. Key assumptions are
determined with reference to industry participants and brokers’
forecasts, commodity and currency forward curves and industry
consultant views.
These cash flows are then discounted to net present value using
the weighted average cost of capital (WACC) of 9.5%.
Furthermore, the following sensitivity analyses (stress testing) are
performed over the value in use calculation:
• Commodities, including aluminium, alumina, caustic, coal, oil and
gas price fluctuations (plus or minus 10%). AWAC’s future cash
flows are most sensitive to alumina price fluctuations.
• Currency rate fluctuation (plus or minus 10%).
• Increased WACC.
6 8¬
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Alumina Limited Annual Report 2017
¬ 69
¬ 69
Notes to the consolidated financial statements for the year ended 31 December 20172. INVESTMENTS IN ASSOCIATES (CONTINUED)
As a final check, the book value of the investment in associates
is compared to Alumina Limited’s market capitalisation and to
major analysts’ valuations.
An impairment loss is recognised for the amount by which the
asset’s carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset’s fair value less
costs to sell and value in use.
No indicators of impairment were identified and no impairment
loss was recognised in the years ended 31 December 2017 and
31 December 2016.
(C) SUMMARISED FINANCIAL INFORMATION
FOR AWAC
The information disclosed in the tables below reflects the amounts
presented in the AWAC financial statements amended to reflect
adjustments made by Alumina Limited when using the equity
method, including adjustments for differences in accounting policies.
SUMMARISED BALANCE SHEET
US$ MILLION
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Group Share as a percentage
Group Share in dollars
Goodwill
Net value of mineral rights and bauxite assets
Deferred tax liability (DTL) on mineral rights and bauxite assets
Allocation of Alba settlement
Carrying value
Reconciliation of carrying amount:
Opening carrying value 1 January
Net additional funding/(return) in AWAC entities
Profit for the year
Other comprehensive income for the year
Dividends and distributions paid
Closing net assets
2017
1,798.8
6,171.9
(1,514.9)
(1,393.3)
5,062.5
40%
2,025.0
175.8
104.9
(34.3)
29.6
2016
1,180.4
5,726.7
(1,127.1)
(1,282.7)
4,497.3
40%
1,799.0
175.8
107.0
(34.9)
59.1
2,301.0
2,106.0
2,106.0
2,098.0
16.2
360.4
97.7
(279.3)
2,301.0
(33.9)
18.1
174.7
(150.9)
2,106.0
70 ¬
Alumina Limited Annual Report 2017
¬71
Notes to the consolidated financial statements for the year ended 31 December 20172. INVESTMENTS IN ASSOCIATES (CONTINUED)
SUMMARISED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
US$ MILLION
Revenues
Profit from continuing operations
Profit for the year
Other comprehensive income for the year
Total comprehensive income for the year
Group Share of profit for the year as a percentage
Group Share of profit for the year in dollars
Mineral rights and bauxite amortisation
Movement in deferred tax liability on mineral rights and bauxite assets
Share of profit from associate accounted for using equity method
Dividends and distributions received from AWAC
2017
5,274.0
904.8
904.8
244.3
1,149.1
40%
361.9
(2.1)
0.6
360.4
279.3
2016
4,057.1
48.9
48.9
436.8
485.7
40%
19.6
(2.1)
0.6
18.1
150.9
(D) COMMITMENTS AND CONTINGENT LIABILITIES
IN RESPECT OF AWAC
St Croix proceedings
Lockheed Martin Corporation (“Lockheed”) filed a complaint (the
“Lockheed Action”) against Virgin Islands Aluminium Company
(“Vialco”) and its parent Glencore Xstrata Plc (“Glencore”) in the
United States District Court, Southern District of New York following
Lockheed’s settlement of environmental lawsuits previously brought
by the Government of the US Virgin Islands against Lockheed and
Vialco in connection with the past ownership and operation of the
alumina refinery.
Glencore demanded that St Croix Alumina LLC (“SCA”) and Alcoa
World Alumina LLC (“AWA”), AWAC entities, indemnify Glencore
from any losses incurred as a result of the Lockheed Action under
the 19 July 1995 Acquisition Agreement (the “1995 Agreement”)
between Vialco and AWA pursuant to which SCA purchased the
refinery from Vialco. AWA denied that it owed Glencore any such
obligation of indemnity and filed a declaratory judgement action
in Delaware seeking clarification of its rights and obligations under
the 1995 Agreement.
By order dated 8 February 2016, the court granted AWA’s motion
and denied Glencore’s motion, resulting in AWA not being liable to
indemnify Glencore for the Lockheed action. On 17 February 2016,
Glencore filed notice of its application for interlocutory appeal of
the 8 February ruling. AWA and SCA filed an opposition to that
application on 29 February 2016. On 10 March 2016, the court
denied Glencore’s motion for interlocutory appeal and on the same
day entered judgment on claims other than Glencore’s claims
for costs and fees it incurred in defending and settling the earlier
Superfund action brought against Glencore by the Government of
the Virgin Islands.
On 29 March 2016, Glencore filed a withdrawal of its notice of
interlocutory appeal and on 6 April 2016, Glencore filed an appeal
of the court’s 10 March 2016 judgement to the Delaware Supreme
Court which set the appeal for argument for 2 November 2016.
On 4 November 2016, the Delaware Supreme Court affirmed the
judgement of the Delaware Superior Court. Remaining in the case
were Glencore’s claims for costs and fees it incurred related to the
previously described Superfund action.
On 7 March 2017, AWA and Glencore agreed in principle to settle
these claims and on 17 March 2017 requested and were granted an
adjournment of the court’s scheduled 21 March 2017 conference.
On 5 April 2017, AWA and Glencore entered into a settlement
agreement to resolve these remaining claims. Accordingly, on
24 April 2017, the court dismissed the case at the request of the
parties. The amount of the settlement was not material. This matter
is now closed.
Other claims
There are potential obligations that may result in a future obligation
due to the various lawsuits and claims and proceedings which
have been, or may be, instituted or asserted against entities within
AWAC, including those pertaining to environmental, product liability,
safety and health and tax matters. While the amounts claimed may
be substantial, the ultimate liability cannot now be determined
because of the considerable uncertainties that existed at balance
date. Also, not every plaintiff has specified the amount of damages
sought in their complaint. Therefore, it is possible that results of
operations or liquidity in a particular period could be materially
affected by certain contingencies. Pursuant to the terms of the
AWAC Formation Agreement, Arconic Inc, Alcoa Corporation and
Alumina Limited have agreed to remain liable for Extraordinary
Liabilities (as defined in the agreement) as well as for certain other
pre-formation liabilities, such as environmental conditions, to the
extent of their pre-formation ownership of the AWAC’s entity or
asset with which the liability is associated.
7 0¬
Alumina Limited Annual Report 2017
¬ 71
Notes to the consolidated financial statements for the year ended 31 December 20173. INVESTMENTS IN CONTROLLED ENTITIES
The consolidated financial statements incorporate the assets and liabilities of all subsidiaries of Alumina Limited as at 31 December
2017 and the results of their operations for the year then ended.
The Group has formed a trust to administer the Group’s employee share scheme. This trust is consolidated, as the substance of
the relationship is that the trust is controlled by the Group. Shares held by the Alumina Employee Share Plan Trust are disclosed as
treasury shares and deducted from contributed equity.
The Group’s subsidiaries at 31 December 2017 are set out below.
NAME
NOTES
PLACE OF INCORPORATION
PERCENTAGE OWNERSHIP
Alumina Employee Share Plan Pty Ltd
Alumina Finance Pty Ltd.
Alumina Holdings (USA) Inc.
Alumina International Holdings Pty. Ltd.
Alumina Brazil Holdings Pty Ltd
Alumina Limited Do Brasil SA
Alumina (U.S.A.) Inc.
Butia Participaçoes SA
Westminer Acquisition (U.K.) Limited
A
A
B
C
A
D
B
D
D
VIC, Australia
VIC, Australia
Delaware, USA
VIC, Australia
VIC, Australia
Brazil
Delaware, USA
Brazil
UK
2017
100
100
100
100
100
100
100
100
100
2016
100
100
100
100
100
100
100
100
100
A. A small proprietary company, which is not required to prepare a financial report.
B. A company that has not prepared audited accounts because its a non-operating company or its is not required in its country of
incorporation. Appropriate books and records are maintained for the company.
C. The company has been granted a relief from the necessity to prepare accounts pursuant to Australian Securities and Investment
Commission (ASIC) Class Order 2016/785. For further information refer Note 17.
D. A company that prepares separate audited accounts in the country of incorporation.
72 ¬
Alumina Limited Annual Report 2017
¬73
Notes to the consolidated financial statements for the year ended 31 December 2017FINANCIAL AND CAPITAL RISK
4. FINANCIAL ASSETS AND LIABILITIES
This note provides information about the Group’s financial instruments, including:
• an overview of all financial instruments held by the Group.
• specific information about each type of financial instrument.
• accounting policies.
• information about determining the fair value of the instruments.
2017
Cash and cash equivalents – Note 4(a)
Receivables
Total financial assets
Payables
Borrowings – Note 4(b)
Derivative financial instruments – Note 4(c)
Total financial liabilities
Net financial liabilities
2016
Cash and cash equivalents – Note 4(a)
Receivables
Total financial assets
Payables
Borrowings – Note 4(b)
Derivative financial instruments – Note 4(c)
Total financial liabilities
Net financial liabilities
US$ MILLION
AT FAIR VALUE THROUGH
PROFIT OR LOS
AT AMORTISED
COSTS
–
–
–
–
–
8.3
8.3
8.3
40.0
–
40.0
1.3
98.4
–
99.7
59.7
US$ MILLION
AT FAIR VALUE THROUGH
PROFIT OR LOS
AT AMORTISED
COSTS
–
–
–
–
–
16.2
16.2
16.2
8.6
0.1
8.7
1.3
92.4
–
93.7
85.0
TOTAL
40.0
–
40.0
1.3
98.4
8.3
108.0
68.0
TOTAL
8.6
0.1
8.7
1.3
92.4
16.2
109.9
101.2
The Group’s exposure to various risks associated with the financial instruments is disclosed in Note 5. The maximum exposure to
credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above. The carrying
amounts of financial assets and liabilities, other than derivative financial instruments, approximate their fair values. Derivative financial
instruments are measured at fair value through profit or loss.
7 2¬
Alumina Limited Annual Report 2017
¬ 73
Notes to the consolidated financial statements for the year ended 31 December 20174. FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
(A) CASH AND CASH EQUIVALENTS
Cash and cash equivalents comprise cash on hand, deposits held at call with financial institutions, other short-term highly liquid
investments with original maturities of three months or less that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value, and bank overdrafts.
Cash on hand and at bank
Money market deposits
Total cash and cash equivalents as per the Statement of Cash Flows
(B) BORROWINGS
US$ MILLION
2017
13.1
26.9
40.0
2016
5.3
3.3
8.6
Borrowings are initially recognised at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised
cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over
the period of the borrowings using the effective interest method.
Fees paid on establishment of loan facilities are recognised as transaction costs to the extent that it is probable that some or all of
a facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is
probable that some or all of a facility will be drawn down, the fee is capitalised as a prepayment for the liquidity services and amortised
over the period of the facility to which it relates.
Borrowings are classified as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at
least 12 months after the balance sheet date.
Bank loans
Fixed rate note
Total borrowings
Bank loans
US$ MILLION
2017
–
98.4
98.4
2016
–
92.4
92.4
During the second half of 2017 Alumina Limited rolled over and reduced a tranche of the bank facility that was due to mature in
December 2017.
Following this renegotiation, Alumina Limited now has a US$250 million syndicated bank facility with two tranches maturing in July
2020 (US$150 million) and October 2022 (US$100 million). As at 31 December 2017 there were no amounts drawn against the
syndicated facility so the undrawn available facility amount as at 31 December 2017 was $250 million.
Fixed rate note
On 12 November 2014, Alumina Limited issued an A$125 million face value 5.5% fixed rate note at a discount of A$0.7 million. A change
in the credit rating of Alumina Limited triggered a 1.75% step up in coupon from 5.5% to 7.25%, which was effective 20 November
2016. A subsequent change in the credit rating triggered a 0.50% step down in the coupon from 7.25% to 6.75%, effective 19 May 2017.
The note matures on 19 November 2019. The fixed rate note has been converted to US dollar equivalents at year-end exchange rates.
74 ¬
Alumina Limited Annual Report 2017
¬75
Notes to the consolidated financial statements for the year ended 31 December 20174. FINANCIAL ASSETS AND LIABILITIES (CONTINUED)
(C) DERIVATIVES
Derivatives are only used for economic hedging purposes and not as trading or speculative instruments. Derivatives are classified
as held for trading and accounted for at fair value through profit or loss as they are not designated as hedges. They are presented as
current assets or liabilities if they are expected to be settled within 12 months after the end of the reporting period.
To provide an indication about the reliability of the input used in determining the fair value, the Group has classified its financial
instruments into three levels prescribed under the accounting standards. An explanation of each level follows underneath the table.
US$ MILLION
2017
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
Cross-currency interest rate swap (CCIRS AUD/USD)
Total financial liabilities at fair value through profit or loss
2016
Cross-currency interest rate swap (CCIRS AUD/USD)
Total financial liabilities at fair value through profit or loss
–
–
–
–
8.3
8.3
16.2
16.2
–
–
–
–
8.3
8.3
16.2
16.2
Level 1:
Financial instruments traded in active markets (such as publicly traded derivatives, trading and available for sale securities)
for which the fair value is based on quoted market prices at the end of the reporting period.
Level 2:
Financial instruments that are not traded in an active market (for example, over the counter derivatives) for which the
fair value is determined using valuation techniques which maximise the use of observable market data and rely as little as
possible on entity specific estimates.
Level 3: If one or more of the significant inputs is not observable market data, the instrument is included in level 3.
5. FINANCIAL RISK MANAGEMENT
This note explains the Group’s exposure to financial risks and how these risks could affect the Group’s future financial performance.
RISK
EXPOSURE ARISING FROM
MEASUREMENT
MANAGEMENT
Cash flow forecasting &
sensitivity analysis
Cross-currency interest
rate swaps
Market risk: foreign currency
Market risk: interest rate
Financial assets and
liabilities denominated in
currency other than US$
Long-term borrowings at
fixed rates
Sensitivity analysis
Credit risk
Liquidity risk
Cash and cash equivalents,
and derivative financial
instruments
Credit ratings
Borrowings and other
liabilities
Cash flow forecasting
Cross-currency interest
rate swaps
Credit limits, letters
of credit, approved
counterparties list
Availability of committed
borrowing facilities
Financial risk management is carried out by the Treasury Committee which is responsible for developing and monitoring risk
management policies. Risk management policies are established to identify and analyse the risks faced by the Group to set appropriate
risk limits and controls, and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly
to reflect changes in market conditions and the Group’s activities.
7 4¬
Alumina Limited Annual Report 2017
¬ 75
Notes to the consolidated financial statements for the year ended 31 December 20175. FINANCIAL RISK MANAGEMENT (CONTINUED)
(A) MARKET RISK
Foreign exchange risk
Foreign exchange risk for the Group arises when future commercial transactions and recognised assets and liabilities are denominated
in a currency that is not the Group’s functional currency.
The fixed rate note is issued in Australian dollars. To mitigate the exposure to the AUD/USD exchange rate and Australian interest
rates the Group entered into CCIRS for the full amount of the face value of the fixed rate note to swap the exposure back to US dollars.
Except as described above, the Group generally does not hedge its foreign currency exposures except through the near-term purchase
of currency to meet operating requirements.
The Group’s exposure to foreign currency risk at the end of the reporting period, as expressed in US$, was as follows:
2017
Cash and cash equivalents
Receivables
Total non-derivative financial assets
Payables
Borrowings
Total non-derivative financial liabilities
Net non-derivative financial (liabilities)/assets
Derivative financial instruments (notional principal)
Net financial assets/(liabilities)
2016
Cash and cash equivalents
Receivables
Total non-derivative financial assets
Payables
Borrowings
Total non-derivative financial liabilities
Net non-derivative financial (liabilities)/assets
Derivative financial instruments (notional principal)
Net financial assets/(liabilities)
USD
29.5
–
29.5
–
–
–
29.5
(108.4)
(78.9)
USD
3.8
–
3.8
–
–
–
3.8
(108.4)
(104.6)
US$ MILLION
AUD
OTHER
1.7
–
1.7
1.3
98.4
99.7
(98.0)
108.4
10.4
8.8
–
8.8
–
–
–
8.8
–
8.8
TOTAL
40.0
–
40.0
1.3
98.4
99.7
(59.7)
–
(59.7)
US$ MILLION
AUD
OTHER
TOTAL
0.1
0.1
0.2
1.3
92.4
93.7
(93.5)
108.4
14.9
4.7
–
4.7
–
–
–
4.7
–
4.7
8.6
0.1
8.7
1.3
92.4
93.7
(85.0)
–
(85.0)
76 ¬
Alumina Limited Annual Report 2017
¬77
Notes to the consolidated financial statements for the year ended 31 December 20175. FINANCIAL RISK MANAGEMENT (CONTINUED)
Cash flow and fair value interest rate risk
The Group’s main interest rate risk arises from its borrowings.
Borrowings by the Group at variable rates expose it to cash flow interest rate risk. Borrowings at fixed rates would expose the Group
to fair value interest rate risk. When managing interest rate risk the Group seeks to reduce the overall cost of funds. Group policy is
to generally borrow at floating rates subject to availability of attractive fixed rate deals.
In 2017 and 2016, CCIRS for the whole face value of the fixed rate note were used to manage the exposure to Australian interest rates
over the life of the note.
A change in credit rating for Alumina Limited triggered a 1.75% step up in coupon from 5.5% to 7.25%, which was effective 20
November 2016. To cover the increased interest rate exposure one of the original CCIRS was amended and an additional CCIRS was
entered into. A subsequent change in credit rating triggered a 0.50% step down in the coupon from 7.25% to 6.75%, effective 19
May 2017. Existing CCIRS were amended to manage the changed interest rate exposure.
The consolidated entity’s exposure to interest rate risk and the effective weighted interest rate after the effect of derivative instruments
is set out below:
2017
Cash and cash equivalents
Receivables
Total non-derivative financial assets
Payables
Borrowings
Total non-derivative financial liabilities
Net non-derivative financial (liabilities)/assets
Weighted average interest rate before derivatives
Weighted average interest rate after derivatives
2016
Cash and cash equivalents
Receivables
Total non-derivative financial assets
Payables
Borrowings
Total non-derivative financial liabilities
Net non-derivative financial (liabilities)/assets
Weighted average interest rate before derivatives
Weighted average interest rate after derivatives
US$ MILLION
FLOATING
INTEREST
FIXED
INTEREST
NON-INTEREST
BEARING
TOTAL
40.0
–
40.0
1.3
98.4
99.7
–
–
–
1.3
–
1.3
(1.3)
(59.7)
40.0
–
40.0
–
–
–
40.0
2.8%
2.8%
–
–
–
–
98.4
98.4
(98.4)
6.9%
4.9%
US$ MILLION
FLOATING
INTEREST
FIXED
INTEREST
NON-INTEREST
BEARING
TOTAL
8.6
–
8.6
–
–
–
8.6
1.6%
1.6%
–
–
–
–
92.4
92.4
(92.4)
5.8%
3.4%
–
0.1
0.1
1.3
–
1.3
(1.2)
8.6
0.1
8.7
1.3
92.4
93.7
(85.0)
7 6¬
Alumina Limited Annual Report 2017
¬ 77
Had interest rates on floating rate debt during 2017 been one percentage point higher/lower than the average, with all other variables
held constant, pre-tax profit for the year would have been US$0.7 million lower/higher (2016: US$0.6 million lower/higher).
Notes to the consolidated financial statements for the year ended 31 December 20175. FINANCIAL RISK MANAGEMENT (CONTINUED)
(B) CREDIT RISK
Credit risk arises from cash and cash equivalents, derivative financial instruments and deposits with banks and financial institutions,
as well as credit exposures to customers, including outstanding receivables and committed transactions. For banks and financial
institutions, only independently rated parties with a minimum rating of ‘A-‘ are accepted, and exposure limits are assigned based on
actual independent rating under Board approved guidelines.
Credit risk further arises in relation to cross guarantees given to wholly owned subsidiaries (see Note 17 for details). Such guarantees
are only provided in exceptional circumstances and are subject to Board approval.
The carrying amount of financial assets recorded in the financial statements, net of any allowances for losses, represent the Group’s
maximum exposure to credit risk.
(C) LIQUIDITY RISK
Prudent liquidity risk management requires maintaining sufficient cash and credit facilities to ensure the Group’s commitments and
plans can be met. This is managed by maintaining committed undrawn credit facilities to cover reasonably expected forward cash
requirements. Management monitors rolling forecasts of the Group’s liquidity, including undrawn borrowing facilities and cash and
cash equivalents on the basis of expected cash flows.
The Group had the following undrawn borrowing facilities at the end of the reporting period: The Group had the following undrawn
borrowing facilities at the end of the reporting period:
Expiring within one year
Expiring beyond one year
Total undrawn borrowing facilities
The table below details the Group’s remaining contractual maturity for its financial liabilities.
US$ MILLION
2017
–
250.0
250.0
2016
150.0
150.0
300.0
2017
Trade payables
Borrowings
Total non-derivative financial liabilities
Derivative financial liabilities
2016
Trade payables
Borrowings
Total non-derivative financial liabilities
Derivative financial liabilities
US$ MILLION
LESS THAN 6
MONTHS
6–12
MONTHS
1–2
YEARS
2–5
YEARS
TOTAL
1.3
–
1.3
–
1.3
–
1.3
–
–
–
–
-
–
–
–
–
–
98.4
98.4
8.3
–
–
–
–
–
–
–
–
–
92.4
92.4
16.2
1.3
98.4
99.7
8.3
1.3
92.4
93.7
16.2
78 ¬
Alumina Limited Annual Report 2017
¬79
Notes to the consolidated financial statements for the year ended 31 December 20176. CAPITAL MANAGEMENT
(A) RISK MANAGEMENT
The Group’s objective when managing capital is to safeguard the ability to continue as a going concern, so that it can continue to
provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital.
The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future
development of the business. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends
paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.
The Group calculates the gearing ratio as net debt divided by total capital. Net debt is calculated as total borrowings less cash and
cash equivalents. Total capital is calculated as ‘equity’ as shown in the balance sheet plus debt.
The gearing ratios at 31 December 2017 and 31 December 2016 were as follows:
Total borrowings
Less: cash and cash equivalents
Net debt
Total borrowings
Total equity
Total capital
Gearing ratio
(B) DIVIDENDS
Interim dividend of US4.2 cents fully franked at 30% per fully paid share declared 24 August
2017 and paid on 14 September 2017 (2016: US2.9 cents fully franked at 30% per fully paid
share declared 24 August 2016 and paid on 15 September 2016)
Final dividend of US3.1 cents fully franked at 30% per fully paid share declared 23 February
2017 and paid on 22 March 2017 (2016: US1.8 cents fully franked at 30% per fully paid share
declared 25 February 2016 and paid on 23 March 2016)
Total dividends
US$ MILLION
2017
98.4
(40.0)
58.4
98.4
2,234.0
2,332.4
2.5%
2016
92.4
(8.6)
83.8
92.4
2,006.9
2,099.3
4.0%
US$ MILLION
2017
2016
120.9
83.5
89.3
51.8
210.2
135.3
Since the year-end the Directors have recommended the payment of a final dividend of US9.3 cents per share (2016: US3.1 cents per
share), fully franked based on the tax paid at 30%. The record date to determine entitlements to the dividend was 28 February 2018.
The aggregate amount of the dividend paid on 15 March 2018 out of retained earnings at 31 December 2017, but not recognised as a
liability at the year-end, was $267.8 million.
7 8¬
Alumina Limited Annual Report 2017
¬ 79
Notes to the consolidated financial statements for the year ended 31 December 20176. CAPITAL MANAGEMENT (CONTINUED)
(C) FRANKED DIVIDENDS
Franking credits available for subsequent financial years, based on a tax rate of 30% (2016: 30%)
388.5
A$ MILLION
2017
2016
347.5
The above amounts are calculated from the balance of the franking credits as at the end of the reporting period, adjusted for franking
credits and debits that will arise from the settlement of liabilities and receivables for income tax and dividends after the end of the year.
The fully franked dividends received from AWAC in the financial year were
US$ MILLION
2017
278.1
2016
150.2
KEY NUMBERS
7. EXPENSES
(A) EMPLOYEE BENEFITS EXPENSE
Liabilities for salaries and annual leave are recognised in current provisions (i.e. short-term employee benefits), and are measured as
the amount unpaid at reporting date at expected pay rates in respect of employees’ services up to that date, including related on-costs.
The liability for long service leave is recognised in the provision for employee benefits and measured as the present value of expected
future payments to be made in respect of services provided by employees up to the reporting date. Consideration is given to expected
future wage and salary levels, experience of employee departures and periods of service. Expected future payments are discounted
using market yields at the end of the reporting period of high-quality corporate bonds with terms to maturity and currency that match,
as closely as possible, the estimated future cash flows.
All employees of Alumina Limited are entitled to benefits on retirement, disability or death from the Group’s superannuation plan.
Alumina Limited’s employees are members of the Alumina Limited Super Plan managed by MLC MasterKey Super, except for
employees who elected to contribute to an alternate fund. The plan is an accumulation category plan which offers a minimum
Company contribution of 9.5 per cent of basic salary to each member’s account. Members also have the option to make voluntary
contributions to their account. Employer contributions to these funds are recognised as an expense.
Profit/(loss) before income tax included the following specific expenses:
Defined contribution superannuation expense
Other employee benefits expense
Total employee benefits expense
US$ MILLION
2017
2016
0.2
6.5
6.7
0.2
5.8
6.0
8 0 ¬
Alumina Limited Annual Report 2017
¬81
Notes to the consolidated financial statements for the year ended 31 December 20177. EXPENSES (CONTINUED)
(B) FINANCE COSTS
Finance costs comprise interest payable on borrowings using the effective interest rate method, commitment fees and amortisation
of capitalised facility fees.
Finance costs:
Interest expense
Commitment and upfront fees
Amortisation of capitalised upfront fees
Total finance costs
8. INCOME TAX EXPENSE
(A) INCOME TAX EXPENSE AND DEFERRED TAXES
US$ MILLION
2017
2016
4.7
2.1
1.5
8.3
6.5
2.0
0.6
9.1
The income tax expense/benefit for the period is the tax payable/receivable on the current period’s taxable income based on the
applicable income tax rate for each jurisdiction adjusted by charges in deferred tax assets and liabilities attributable to temporary
differences and to unused tax losses.
The current income tax charge is calculated on the basis of the tax laws enacted or substantively enacted at the reporting period in
the countries where the Company’s subsidiaries and associates operate and generate taxable income.
Current tax
Deferred tax
Aggregate income tax expense
US$ MILLION
2017
2016
–
–
–
–
–
–
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets
and liabilities and their carrying amounts in the consolidated financial statements. Deferred income tax is determined using tax rates
(and laws) that have been enacted or substantially enacted by the reporting date and are expected to apply when the related deferred
income tax asset is realised or the deferred income tax liability is settled.
Deferred tax assets are recognised for deductible temporary differences and unused tax losses only if it is probable that future taxable
amounts will be available to utilise those temporary differences and losses.
Deferred tax liabilities and assets are not recognised for temporary differences between the carrying amount and tax bases of
investments in controlled entities where the parent entity is able to control the timing of the reversal of the temporary differences
and it is probable that the differences will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets and liabilities and
when the deferred tax balances relate to the same taxation authority. Current tax assets and liabilities are offset where the entity has a
legally enforceable right to offset and intends either to settle on a net basis, or to realise the asset and settle the liability simultaneously.
Alumina Limited and its wholly-owned Australian controlled entities have implemented the tax consolidation legislation. As a
consequence, these entities are taxed as a single entity and the deferred tax assets and liabilities of these entities are set off in the
consolidated financial statements.
8 0¬
Alumina Limited Annual Report 2017
¬ 81
Notes to the consolidated financial statements for the year ended 31 December 20178. INCOME TAX EXPENSE (CONTINUED)
The Group’s deferred tax assets and liabilities are attributable to the following:
Deferred tax liabilities
Unrealised foreign exchange gains
Total deferred tax liabilities
Deferred tax assets
Employee benefits
Derivative financial instruments
Other
Total deferred tax assets other than tax losses
Net deferred tax (liabilities)/assets before tax losses
Deductible temporary differences and tax losses not recognised
Net deferred tax (liabilities)/assets
US$ MILLION
2017
2016
2.8
2.8
0.2
2.5
0.1
2.8
–
–
–
4.6
4.6
0.3
0.4
0.2
0.9
(3.7)
3.7
–
Deferred tax assets are recognised only to the extent of deferred tax liabilities existing at reporting date. Remaining deferred tax
assets are not recognised as it is not probable that future taxable amounts will be available to utilise those temporary differences
and losses.
(B) NUMERICAL RECONCILIATION OF INCOME TAX EXPENSE TO PRIMA FACIE TAX PAYABLE
Profit/(loss) before income tax
Prima facie tax (expense)/benefit for the period at the rate of 30%
The following items caused the total charge for income tax to vary from the above:
US$ MILLION
2017
2016
339.8
(101.9)
(30.2)
9.1
Share of equity accounted profit not assessable for tax
(360.4)
(18.1)
Foreign income subject to accruals tax
Share of Partnership income assessable for tax
Timing differences not recognised
Tax losses not recognised
Previously unrecognised tax losses now recouped to reduce current tax expense
Non-deductible expenses
Net movement
Consequent decrease/(increase) in charge for income tax
Aggregate income tax expense
4.7
0.8
–
11.2
–
3.9
(339.8)
101.9
–
2.8
3.0
–
26.3
(0.2)
16.4
30.2
(9.1)
–
8 2¬
Alumina Limited Annual Report 2017
¬83
Notes to the consolidated financial statements for the year ended 31 December 20178. INCOME TAX EXPENSE (CONTINUED)
(C) TAX EXPENSE RELATING TO ITEMS OF COMPREHENSIVE INCOME
Current and deferred tax balances attributable to amounts recognised directly in other comprehensive income and equity are also
recognised directly in other comprehensive income and equity.
Cash flow hedges
Actuarial gains on retirement benefit obligations
Total tax expense relating to items of other comprehensive income
(D) TAX LOSSES
Tax losses – revenue
Tax losses – capital
Total unused tax losses
Potential tax benefit – revenue
Potential tax benefit – capital
Total potential tax benefit
9. EQUITY
(A) CONTRIBUTED EQUITY
US$ MILLION
2017
10.6
3.5
14.1
2016
2.4
2.3
4.7
US$ MILLION
2017
1,053.3
951.5
2016
973.9
951.5
2,004.8
1,925.4
345.6
285.4
631.0
319.1
285.4
604.5
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a
deduction, net of tax, from the proceeds.
MOVEMENT IN SHARE CAPITAL
NUMBER OF SHARES
US$ MILLION
Balance brought forward
Movement for the period
Total issued capital
Treasury shares
2017
2016
2017
2016
2,879,843,498
2,879,843,498
2,682.9
2,682.9
–
–
–
–
2,879,843,498 2,879,843,498
2,682.9
2,682.9
Treasury shares are Alumina Limited shares held by the Alumina Employee Share Plan Trust for the purpose of issuing shares
under the Alumina Employee Share Plan.
MOVEMENT IN TREASURY SHARES
NUMBER OF SHARES
US$ MILLION
Balance brought forward
Shares acquired by Alumina Employee Share Plan Pty
Ltd (average price: A$1.84 per share (2016: A$1.37 per
share))
2017
1,856
2016
61,717
2017
2016
1,905
1,413,606
1,484,568
1,508,604
2,040,374
1,558,319
Employee performance rights vested
(785,979)
(1,568,465)
(1,135,406)
(2,970,020)
Total treasury shares
700,445
1,856
906,873
1,905
8 2¬
Alumina Limited Annual Report 2017
¬ 83
Notes to the consolidated financial statements for the year ended 31 December 20179. EQUITY (CONTINUED)
The weighted average number of ordinary shares used as the denominator in the calculation of basic earnings per share is
calculated as the weighted average number of ordinary shares outstanding during the financial year, adjusted for treasury
shares issued.
NUMBER OF SHARES
2017
2016
Weighted average number of ordinary shares used as the denominator in the
calculation of basic and diluted earnings per share
2,878,924,467
2,879,474,499
(B) OTHER RESERVES
Other Reserves include assets revaluation reserve, capital reserve, option premium on convertible bonds reserve, share-based
payments reserve, cash-flow hedge reserve and foreign currency translation reserve.
Foreign currency translation reserve
The foreign currency translation reserve represents exchange differences arising on the translation of non-US dollar functional
currency operations within the Group into US dollars.
Balance at the beginning of the financial year
Currency translation differences arising during the year
Balance at the end of the financial year
10. CASH FLOW INFORMATION
(A) RECONCILIATION OF PROFIT/(LOSS) AFTER INCOME TAX
TO NET CASH (OUTFLOW)/INFLOW FROM OPERATING ACTIVITIES
Profit/(loss) from continuing operations after income tax
Share of net profit of associates accounted for using equity method
Dividends and distributions received from associates
Share based payments
Other non-cash items (depreciation, net exchange differences, other)
Sub-total
Change in assets and liabilities
Decrease/(increase) in receivables
Decrease/(increase) in other assets
(Decrease)/increase in payables
(Decrease)/increase in current tax liability
Net cash inflow from operating activities
US$ MILLION
2017
2016
(1,192.2)
88.0
(1,104.2)
(1,370.7)
178.5
(1,192.2)
US$ MILLION
2017
339.8
(360.4)
279.3
0.9
(1.4)
258.2
0.1
1.2
–
–
259.5
2016
(30.2)
(18.1)
150.9
0.9
16.7
120.2
(0.1)
0.3
(0.4)
–
120.0
8 4¬
Alumina Limited Annual Report 2017
¬85
Notes to the consolidated financial statements for the year ended 31 December 201710. CASH FLOW INFORMATION (CONTINUED)
(B) NON-CASH FINANCING AND INVESTING ACTIVITIES
There were no non-cash financing or investing activities in the years ended 31 December 2017 and 31 December 2016.
(C) NET DEBT RECONCILIATION
This section sets out an analysis of net debt and the movements in net debt for each of the periods presented.
Cash and cash equivalents
Borrowings – repayable after one year
Net debt
Cash and liquid investments
Gross debt – fixed interest rates
Net debt
Net debt as at 1 January 2016
Net cash flows
Foreign exchange adjustments
Other non-cash movements
Net debt as at 31 December 2016
Cash flows
Foreign exchange adjustments
Other non-cash movement
Net debt as at 31 December 2017
US$ MILLION
2017
40.0
(98.4)
(58.4)
40.0
(98.4)
(58.4)
US$ MILLION
CASH/BANK
OVERDRAFT
BORROWINGS
DUE WITHIN
1 YEAR
BORROWINGS
DUE AFTER
1 YEAR
2016
8.6
(92.4)
(83.8)
8.6
(92.4)
(83.8)
TOTAL
9.3
(3.0)
2.3
–
8.6
31.1
0.3
–
40.0
(20.0)
20.0
–
–
–
–
–
–
–
(90.5)
(101.2)
–
0.8
(2.7)
(92.4)
–
(7.4)
1.4
17.0
3.1
(2.7)
(83.8)
31.1
(7.1)
1.4
(98.4)
(58.4)
8 4¬
Alumina Limited Annual Report 2017
¬ 85
Notes to the consolidated financial statements for the year ended 31 December 2017OTHER INFORMATION
11. RELATED PARTY TRANSACTIONS
The parent entity within the Group is Alumina Limited. Balances
and transactions between the parent entity and its subsidiaries
have been eliminated on consolidation and are not disclosed in
this note.
(A) OWNERSHIP INTERESTS IN RELATED PARTIES
Interests held in the following classes of related parties are set
out in the following notes:
• associates – Note 2.
• controlled entities – Note 3.
(B) COMPENSATION OF KEY
MANAGEMENT PERSONNEL
Detailed remuneration disclosures for the key management
personnel, defined as Group Directors, CEO and Senior Executives,
are provided in the remuneration report on pages 38 to 61 of this
annual report.
The remuneration report has been presented in Australian
dollars, whilst the financial report has been presented in
US dollars. The average exchange rate for 2017 of 0.7667
(2016: 0.7439) has been used for conversion.
DIRECTORS AND SENIOR EXECUTIVES
Short-term employee benefits
Post-employment and termination benefits
Share based payments
Total
US$
2017
2016
3,977,082
4,242,211
923,735
807,349
141,834
708,137
5,708,166
5,092,182
(C) OTHER TRANSACTIONS AND BALANCES WITH RELATED PARTIES
There have been no other related party transactions made during the year or balances outstanding as at 31 December 2017,
between the Group, its related parties, the Directors or key management personnel (2016: Nil).
12. SHARE-BASED PAYMENTS
The Group provides benefits to employees (including CEO and Senior Executives) through share based incentives. Employees are
incentivised for their performance in part through participation in the grant of conditional entitlement to fully paid ordinary shares
(a Performance Right) via the Alumina Limited Employee Share Plan (ESP).
For further details on key features of the ESP refer to the remuneration report on pages 59 to 61 of this annual report.
Set out below are summaries of performance rights granted under the ESP.
2017
Grant Date
Vesting Date
5/1/2015
19/2/2016
20/1/2017
1/6/2017
Total
11/12/2017
7/12/2016
11/12/2019
31/5/2020
Balance at
start of the
year
Number
689,866
1,004,737
Granted
during the
year
Number
–
–
–
–
708,400
141,900
Vested
during the
year
Number
(491,411)
–
–
–
Lapsed
during the
year
Number
(198,455)
(165,073)
(201,913)
Balance at
end of the
year
Number
–
839,664
506,487
–
141,900
1,694,603
850,300
(491,411)
(565,441)
1,448,051
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Notes to the consolidated financial statements for the year ended 31 December 20172016
Grant Date
Vesting Date
8/2/2013
10/2/2014
5/1/2015
19/2/2016
Total
7/12/2015
6/12/2018
11/12/2017
7/12/2018
Balance at
start of the
year
Number
Granted
during the
year
Number
687,768
1,110,770
694,250
–
–
–
–
1,016,250
Vested
during the
year
Number
(687,768)
(1,109,102)
–
–
Lapsed
during the
year
Number
–
(1,668)
(4,384)
Balance at
end of the
year
Number
–
–
689,866
(11,513)
1,004,737
2,492,788
1,016,250
(1,796,870)
(17,565)
1,694,603
The weighted average remaining contractual life of performance rights outstanding at the end of the period was 2.4 years
(2016: 2.6 years).
In addition to the ESP, the CEO’s fixed remuneration includes an annual share right component. This share based component of the
CEO’s fixed remuneration is conditional on a minimum of 12 months service and deferred for three years from the date of the grant.
For further details refer to the remuneration report on page 42 of this annual report.
Total expenses arising from share-based payment transactions recognised during the period as part of employee benefits expense
were as follows:
Performance rights granted under the Alumina Employee Share Plan
CEO annual conditional share rights grant
Retired CEO annual conditional share rights grant
Total
US$ 000’s
2017
556
104
217
877
2016
645
–
154
799
13. REMUNERATION OF AUDITORS
During the period the following fees were paid or payable for services provided by the auditor of the parent entity, and its related
practices and non-related audit firms:
PricewaterhouseCoopers Australia:
Audit and review of the financial reports
Other assurance services
Related practices of PricewaterhouseCoopers Australia:
Overseas taxation services
Total
US$ 000’s
2017
395
3
8
406
2016
383
32
8
423
It is the Group’s policy to employ PricewaterhouseCoopers on assignments additional to their statutory audit duties where
PricewaterhouseCoopers’ expertise and experience with the Group are important provided such arrangements do not compromise
audit independence. These assignments are principally tax advice or where PricewaterhouseCoopers is awarded assignments
on a competitive basis.
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Notes to the consolidated financial statements for the year ended 31 December 201714. COMMITMENTS AND CONTINGENCIES
Capital commitments
There are no contractual capital commitments at reporting date but there could be future equity calls by AWAC entities in relation
to working capital support. However, this is subject to market conditions.
Contingent Liabilities
There are no contingent liabilities of the Group as at 31 December 2017 and 31 December 2016, other than as disclosed in Note
2(d) and Note 16.
15. EVENTS OCCURRING AFTER THE REPORTING PERIOD
Except as disclosed in the Director’s report or elsewhere in the Financial Statements, there have been no significant events
occurring since 31 December 2017.
Please refer to Note 6(b) for the final dividend recommended by the Directors.
16. PARENT ENTITY FINANCIAL INFORMATION
The financial information for the parent entity has been prepared
on the same basis as the consolidated financial statements, except
as set out below.
Intercompany Loans
Loans granted by the parent entity to its subsidiaries are classified
as non-current assets.
Investments in subsidiaries, associates and joint venture entities.
Tax consolidation legislation
Investments in subsidiaries, associates and joint venture entities
are accounted for at cost in the financial statements of Alumina
Limited. Dividends received from associates are recognised in the
parent entity’s profit or loss, rather than being deducted from the
carrying amount of these investments.
Where the parent entity has provided financial guarantees in
relation to loans and payables of subsidiaries for no compensation,
the fair values of these guarantees are accounted for as
contributions and recognised as part of the cost of the investment.
Alumina Limited and its wholly-owned Australian controlled
entities have implemented tax consolidation legislation.
The head entity, Alumina Limited, and the controlled entities
in the tax consolidated Group account for their own current
and deferred tax amounts. These tax amounts are measured
as if each entity in the tax consolidated Group continues
to be a standalone taxpayer in its own right. In addition to
its own current and deferred tax amounts, Alumina Limited
also recognises the current tax liabilities (or assets) and
the deferred tax assets arising from unused tax losses and
unused tax credits assumed from controlled entities in the
tax consolidated Group.
(A) SUMMARISED FINANCIAL INFORMATION
The individual financial statements for the parent entity show the following aggregate amounts:
BALANCE SHEET
Current assets
Total assets
Current liabilities
Total liabilities
SHAREHOLDERS’ EQUITY
Issued capital
Reserves
Retained earnings
TOTAL SHAREHOLDERS’ EQUITY
Profit for the year
Total comprehensive income for the year
US$ MILLION
2017
32.2
3,861.5
1.7
114.5
2,682.9
236.9
827.2
3,747.0
258.7
258.7
2016
7.8
3,815.1
1.7
116.3
2,682.9
237.2
778.7
3,698.8
101.8
101.8
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Notes to the consolidated financial statements for the year ended 31 December 2017(B) GUARANTEES ENTERED INTO
BY THE PARENT ENTITY
The parent entity has provided guarantees to certain third parties
in relation to the performance of contracts by various AWAC
companies.
In order to facilitate the full conversion of the San Ciprian alumina
refinery from fuel oil to natural gas, in October 2013, Alumina
Espanola SA (Espanola) signed a take or pay gas pipeline utilisation
agreement. In November 2013, Alumina Limited agreed to
proportionally (i.e. 40%) guarantee the payment of Espanola’s
contracted gas pipeline utilisation over the four years of the
commitment period. Such commitment came into force six months
after the gas pipeline was put into operation. The gas pipeline
was completed in January 2015 and the refinery has switched to
natural gas consumption for 100% of its needs.
There is also a guarantee to Banco di Bilbao in respect of Espanola’s
bank facility.
In late 2011, Alcoa, on behalf of AWAC, issued guarantees
to the lenders of the Ma’aden bauxite mining/refining joint
venture in Saudi Arabia. Alcoa Corporation guarantees for the
Ma’aden Bauxite and Alumina Company cover total debt service
requirements through 2019 and 2024.
In the event Alcoa would be required to make payments under
the guarantees, 40% of such amount would be contributed by
Alumina Limited.
In addition, the parent entity has entered into a Deed of Cross
Guarantee with the effect that it guarantees the debts of its wholly-
owned subsidiaries. Further details of the Deed of Cross Guarantee
are disclosed in Note 17.
No liability was recognised by the parent entity of the group in
relation to the abovementioned guarantees, as the fair values of
the guarantees are immaterial.
(D) CONTINGENT LIABILITIES
OF THE PARENT ENTITY
The parent entity did not have any contingent liabilities as at 31
December 2017 or 31 December 2016. For information about
guarantees given by the parent entity refer above.
(E) CONTRACTUAL COMMITMENTS FOR
THE ACQUISITION OF PROPERTY,
PLANT AND EQUIPMENT
There are no contractual commitments by the parent
entity for the acquisition of property, plant and equipment
as at 31 December 2017.
17. DEED OF CROSS GUARANTEE
Alumina Limited and Alumina International Holdings Pty. Ltd. are parties to a cross guarantee under which each of these
companies guarantees the debts of the other. By entering into the deed, wholly-owned entities have been relieved from
the requirement to prepare a financial report and directors’ report under Class Order 2016/785 (as amended) issued by the
Australian Securities and Investments Commission.
The above companies represent a “closed group” as defined in the Class Order, and there are no other parties to the deed of cross
guarantee that are controlled by Alumina Limited, they also represent the “extended closed group”.
(A) CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME AND SUMMARY
MOVEMENTS IN CONSOLIDATED RETAINED EARNINGS
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
US$ MILLION
Dividends and distributions
Other income
General and administrative expenses
Change in fair value of derivatives/foreign exchange losses
Finance costs
Profit from ordinary activities before income tax
Income tax expense
Net profit for the year
Other comprehensive income net of tax
Total comprehensive income for the year
MOVEMENT IN CONSOLIDATED RETAINED EARNINGS
Retained profits at the beginning of the financial year
Net profit for the year
Dividend provided for or paid
Retained profits at the end of the financial year
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Alumina Limited Annual Report 2017
2017
279.3
0.3
(13.3)
0.6
(8.4)
258.5
–
258.5
–
258.5
2017
646.2
258.5
(210.2)
694.5
2016
150.9
0.2
(25.3)
(14.8)
(9.2)
101.8
–
101.8
–
101.8
2016
679.7
101.8
(135.3)
646.2
¬ 89
Notes to the consolidated financial statements for the year ended 31 December 201717. DEED OF CROSS GUARANTEE (CONTINUED)
(E) CONSOLIDATED BALANCE SHEET
Current assets
Cash and cash equivalents
Receivables
Other assets
Total current assets
Non-current assets
Investment in associates
Other financial assets
Property, plant and equipment
Total non-current assets
Total assets
Current liabilities
Payables
Provisions
Total current liabilities
Non-current liabilities
Borrowings
Derivative financial instruments
Provisions
Total non-current liabilities
Total liabilities
Net assets
Equity
Contributed equity
Reserves
Retained profits
Total equity
US$ MILLION
2017
2016
31.2
124.8
1.0
157.0
1,669.6
1,902.2
0.1
3,571.9
3,728.9
1.4
0.3
1.7
104.0
8.3
0.5
112.8
114.5
3.9
72.9
2.4
79.2
1,669.6
1,933.6
0.1
3,603.3
3,682.5
1.3
0.4
1.7
97.8
16.2
0.5
114.5
116.2
3,614.4
3,566.3
2,682.9
2,682.9
237.0
694.5
237.2
646.2
3,614.4
3,566.3
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Notes to the consolidated financial statements for the year ended 31 December 201718. NEW ACCOUNTING STANDARDS AND
INTERPRETATIONS NOT YET ADOPTED
The Group does not expect a material impact from
implementation of AASB 15.
Certain new accounting standards and interpretations have been
published that are not mandatory for the 31 December 2017
reporting period and have not been early adopted by the Group.
The Group’s assessment of the impact of these new standards
and interpretations is set out below:
AASB 15 REVENUE FROM CONTRACTS WITH
CUSTOMERS (EFFECTIVE 1 JANUARY 2018)
The AASB has issued a new standard for the recognition of revenue.
AASB 15 Revenue from Contracts with Customers replaces AASB
118 which covers contracts for goods and services and AASB 111
which covers construction contracts. The new standard is based on
the principle that revenue is recognised when control of a good or
a service transfers to a customer. Therefore, the notion of control
replaces the existing notion of risks and rewards. The standard
permits a modified retrospective approach for the adoption. Under
this approach entities will recognise transitional adjustments to
retained earnings on the date of initial application (e.g. 1 January
2017), i.e. without restating the comparative period. They will only
need to apply the new rules to contracts that are not completed
as of the date of initial application. The standard is not applicable
until 1 January 2018 but is available for early adoption.
DIRECTORS’ DECLARATION
In the Directors’ opinion:
AASB 16 LEASES (EFFECTIVE 1 JANUARY 2019)
The new standard will replace AASB 117 Leases. Once effective,
the new requirements will apply to new and pre-existing lease
arrangements. The key changes have been outlined below:
• Lessees will recognise a lease liability reflecting future lease
payments and a ‘right-of-use asset’ for virtually all lease
contracts (optional exemption available for certain short-term
leases and leases of low-value assets).
• Lessees will have to present interest expense on the lease
liability and depreciation on the right-of-use assets in their
income statement.
• Lease payments that reflect interest on the lease liability can
be presented as an operating cash flow. Cash payments for
the principal portion of the lease liability should be classified
within financing activities. Payments for short-term leases
and for leases of low-value assets could be presented within
operating activities.
The Group is in the process of assessing the impact of AASB 16.
a) the financial statements and notes set out on pages 60
to 91 are in accordance with the Corporations Act 2001,
including:
The financial statements also comply with International Financial
Reporting Standards as issued by the International Accounting
Standards Board.
(i) complying with Accounting Standards, the Corporations
Regulations 2001 and other mandatory professional reporting
requirements; and
The Directors have been given the declarations by the Chief
Executive Officer and Chief Financial Officer required by section
295A of the Corporation Act 2001.
(ii) giving a true and fair view of the consolidated entity’s
financial position as at 31 December 2017 and of its
performance for the financial year ended on that date; and
b) there are reasonable grounds to believe that the Company
will be able to pay its debts as and when they become due
and payable; and
c) at the date of this declaration, there are reasonable grounds
to believe that the members of the Extended Closed Group
identified in Note 3 will be able to meet any obligations or
liabilities to which they are, or may become, subject by virtue
of the deed of cross guarantee described in Note 17.
This declaration is made in accordance with a resolution
of the Directors.
GJ PIZZEY
Chairman
22 March 2018
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Alumina Limited Annual Report 2017
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Notes to the consolidated financial statements for the year ended 31 December 2017
INDEPENDENT AUDITOR’S REPORT
To the members of Alumina Limited
REPORT ON THE AUDIT OF THE FINANCIAL REPORT
OUR OPINION
In our opinion:
The accompanying financial report of Alumina Limited (the Company) and its controlled entities
(together, the Group) is in accordance with the Corporations Act 2001, including:
a) giving a true and fair view of the Group’s financial position as at 31 December 2017 and of its
financial performance for the year then ended
b) complying with Australian Accounting Standards and the Corporations Regulations 2001.
WHAT WE HAVE AUDITED
The Group financial report comprises:
• the consolidated balance sheet as at 31 December 2017
• the consolidated statement of profit or loss and other comprehensive income for the year then ended
• the consolidated statement of changes in equity for the year then ended
• the consolidated statement of cash flows for the year then ended
• the notes to the consolidated financial statements, which include a summary of significant accounting policies
• the Directors’ declaration.
BASIS FOR OPINION
We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further
described in the Auditor’s responsibilities for the audit of the financial report section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.
INDEPENDENCE
We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the
ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants
(the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities
in accordance with the Code.
PricewaterhouseCoopers, ABN 52 780 433 757
2 Riverside Quay, SOUTHBANK VIC 3006, GPO Box 1331, MELBOURNE VIC 3001
T: 61 3 8603 1000, F: 61 3 8603 1999, www.pwc.com.au
Liability limited by a scheme approved under Professional Standards Legislation.
9 2¬
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Alumina Limited Annual Report 2017
¬93
¬93
OUR AUDIT APPROACH
An audit is designed to provide reasonable assurance about whether the financial report is free from material misstatement.
Misstatements may arise due to fraud or error. They are considered material if individually or in aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of the financial report.
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial report as
a whole, taking into account the geographic and management structure of the Group, its accounting processes and controls and the
industry in which it operates.
Alumina Limited’s (Alumina) sole business undertaking is investing globally in bauxite mining, alumina refining with some minor
alumina-based chemical businesses and aluminium smelting operations. All of these business activities are conducted through
Alumina’s 40% investment in several entities which collectively form Alcoa World Alumina and Chemicals (AWAC). Alcoa Corporation
owns the remaining 60% of AWAC and is the manager of these business activities. Alumina participates in AWAC through the
Strategic Council, which consists of three members appointed by Alcoa Corporation and two members appointed by Alumina. As
Alumina does not control or operate the AWAC assets, its role involves strategic investment management on behalf of its shareholders.
Accordingly, this investment has been determined to be an associate and is accounted for by the equity method.
Materiality
Key audit
matters
Audit Scope
MATERIALITY
AUDIT SCOPE
KEY AUDIT MATTERS
• Amongst other relevant topics, we
communicated the following key
audit matters to the Audit and Risk
Management Committee:
• Equity accounting for Alumina’s
investment in AWAC
• Impairment indicator assessment
for Alumina’s equity accounted
investment in AWAC
• These are further described
in the Key audit matters section
of our report.
• For the purpose of our audit we used
an overall materiality of $22 million,
which represents approximately 1%
of the Group’s total assets.
• We applied this threshold, together
with qualitative considerations, to
determine the scope of our audit and
the nature, timing and extent of our
audit procedures and to evaluate
the effect of misstatements on the
financial report as a whole.
• We chose total assets as a benchmark
primarily because of the nature of
Alumina’s operations, noting that it is
a generally accepted benchmark for
investment management companies.
• We selected 1% based on our
professional judgement, noting that it is
within a range of commonly accepted
thresholds.
• Component auditors assisted in
performing audit work over the AWAC
financial statements on behalf of the
Group engagement team. Specific
instructions were issued to the
component audit teams, including risk
analysis and materiality.
• We audited the equity accounting for
Alumina’s 40% investment in AWAC.
This process included auditing certain
adjustments made by Alumina to
convert the AWAC results (which were
prepared under US GAAP), to comply
with Australian Accounting Standards
(AAS).
• We audited the remainder of Alumina’s
financial report.
• Our audit also focused on where the
Group made subjective judgements;
for example, significant accounting
estimates involving assumptions and
inherently uncertain future events.
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¬ 93
KEY AUDIT MATTERS
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report
for the current period. The key audit matters were addressed in the context of our audit of the financial report as a whole, and in
forming our opinion thereon, and we do not provide a separate opinion on these matters. Further, any commentary on the outcomes
of a particular audit procedure is made in that context.
KEY AUDIT MATTER
HOW OUR AUDIT ADDRESSED
THE KEY AUDIT MATTER
Equity accounting for Alumina’s investment in AWAC
(Refer to note 2 in the financial report)
Alumina’s equity accounted investment in AWAC is carried at
$2.3 billion and its share of the net profit of AWAC accounted
for using the equity method is $360 million.
AWAC accounts are prepared under US Generally Accepted
Accounting Principles (US GAAP). There are significant
differences between US GAAP and AAS. For AWAC
entities other than Alcoa of Australia Limited and Enterprise
Partnership, which already prepare accounts under AAS,
adjustments are required to convert amounts accounted for
under US GAAP to comply with AAS.
We determined the equity accounting to be a key audit matter
because of the magnitude of the Investment in associates
balance and the complexity of the adjustments required by
the Group to convert amounts accounted for under US GAAP
to AAS.
Judgement is involved in determining the differences in
the accounting for areas such as the valuation of inventory,
asset retirement obligation provisions and defined benefit
superannuation plans. In arriving at the value of these US
GAAP to AAS adjustments, the Group is required to use
accounting estimates and significant judgement.
Impairment indicator assessment for Alumina’s equity
accounted investment in AWAC
(Refer to note 2c in the financial report)
Alumina’s equity accounted investment in AWAC ($2.3 billion)
is the most material balance sheet item in the consolidated
financial report.
We therefore focused on the assessment which was performed
by Alumina to determine whether there was any objective
evidence that the equity accounted investment in AWAC could
be impaired as at 31 December 2017.
The long term alumina price is the key assumption to which the
valuation of AWAC is most sensitive.
Alumina’s conclusion was that there was no indicator for
impairment for the year ended 31 December 2017.
To assess the equity accounting of Alumina’s 40% investment
in AWAC, we performed the following procedures amongst
others:
• Agreed the equity accounting schedule prepared by the
Group to the financial statements of AWAC (as audited by
component auditors under our instruction).
• Assessed the appropriateness and completeness of
material US GAAP to AAS adjustments.
• Considered whether other transactions that had occurred
during the year required a different treatment under AAS
compared with US GAAP.
• Reconciled the opening equity accounted investment
balance to the final position reflected in the financial report.
To do this we:
• Recalculated the share of net profit and changes in reserves
of AWAC by examining the audited AWAC financial
statements and recalculating Alumina’s 40% share.
• Compared dividends, distributions and capital returns
received from AWAC and additional investments made
through cash calls to the relevant declaration documents
and bank statements.
• We also evaluated the impairment indicator assessment
performed by the Group in relation to the investment
balance (refer to the following Key audit matter).
• To evaluate the Group’s impairment indicator assessment
of the AWAC investment we performed the following
procedures amongst others:
• Developed an understanding of the process by which the
Group conducted the impairment indicator assessment.
• Compared the Group’s long term alumina price
assumption to economic analyst and industry forecasts.
We found that the long term alumina price assumption
used by the Group was consistent with market data and
industry research.
• Compared the Group’s market capitalisation to its net
assets as at 31 December 2017, noting that market
capitalisation exceeded net assets by approximately
$3.2 billion.
• Evaluated the Group’s assessment of whether there were
any other external or internal sources of information that
could indicate that the investment may be impaired.
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OTHER INFORMATION
The Directors are responsible for the other information. The other information comprises the information included
in the Group’s annual report for the year ended 31 December 2017, including:
• At a Glance
• Chairman and Chief Executive Officer’s Report
• Sustainability
• Board of Directors
• Director’s Report
• Operating and Financial Review
• Letter by Chair of the Compensation Committee
• Shareholder Information
• Financial History
but does not include the financial report and our auditor’s report thereon.
Our opinion on the financial report does not cover the other information and accordingly we do not express any form of
assurance conclusion thereon.
In connection with our audit of the financial report, our responsibility is to read the other information identified above and,
in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge
obtained in the audit, or otherwise appears to be materially misstated.
If, based on the work we have performed, we conclude that there is a material misstatement of this other information,
we are required to report that fact. We have nothing to report in this regard.
RESPONSIBILITIES OF THE DIRECTORS FOR THE FINANCIAL REPORT
The Directors of the Company are responsible for the preparation of the financial report that gives a true and fair view in
accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the Directors
determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material
misstatement, whether due to fraud or error.
In preparing the financial report, the Directors are responsible for assessing the ability of the Group to continue as a going concern,
disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless the Directors
either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.
AUDITOR’S RESPONSIBILITIES FOR THE AUDIT OF THE FINANCIAL REPORT
Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a
high level of assurance, but is not a guarantee that an audit conducted in accordance with the Australian Auditing Standards will
always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if,
individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis
of the financial report.
A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards
Board website at: http://www.auasb.gov.au/auditors_responsibilities/ar1.pdf. This description forms part of our audit report.
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Alumina Limited Annual Report 2017
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REPORT ON THE REMUNERATION REPORT
OUR OPINION ON THE REMUNERATION REPORT
We have audited the remuneration report included in pages 38 to 61 of the Directors’ report for the year ended 31 December 2017.
In our opinion, the remuneration report of Alumina Limited for the year ended 31 December 2017 complies with section 300A of the
Corporations Act 2001.
RESPONSIBILITIES
The Directors of the Company are responsible for the preparation and presentation of the remuneration report in accordance with
section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our
audit conducted in accordance with Australian Auditing Standards.
PricewaterhouseCoopers
JOHN O’DONOGHUE
Partner
Melbourne
22 MARCH 2018
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DETAILS OF SHAREHOLDINGS AND SHAREHOLDERS LISTED SECURITIES – 28 FEBRUARY 2018
Alumina Limited has 2,879,843,498 issued fully paid ordinary shares.
SIZE OF SHAREHOLDING AS AT 28 FEBRUARY 2018
Range
1-1,000
1,001-5,000
5,001-10,000
10,001-100,000
100,001 Over
Total
Total Holders
Units
% of Issued Capital
18,000
18,783
5,884
6,070
333
49,697
8,496,227
46,357,743
43,662,082
151,139,024
2,630,188,422
2,879,843,498
0.30
1.61
1.52
5.25
91.32
100.00
Of these, 5,124 shareholders held less than a marketable parcel of $500 worth of shares (225) a total of 642,691 shares. In accordance
with ASX Business Rules, the last sale price on the Company’s shares on the ASX on 28 February 2018 was used to determine the
number of shares in a marketable parcel.
Rank Total Holders
HSBC CUSTODY NOMINEES (AUST)
J P MORGAN NOMINEES AUSTRALIA LIMITED
CITICORP NOMINEES PTY LTD
CITIC RESOURCES AUSTRALIA PTY LTD
BESTBUY OVERSEAS CO LTD
NATIONAL NOMINEES
BNP PARIBAS NOMINEES PTY LTD
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