Rating Action: Moody's affirms Alcoa of Australia Limited's Baa2 rating; outlook stableGlobal Credit Research - 25 Aug 2022Sydney, August 25, 2022 -- Moody's Investors Service has affirmed Alcoa of Australia Limited's ("AoA") Baa2 issuer rating. The rating outlook remains stable."IMPORTANT NOTICE: MOODY'S RATINGS AND PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS. SUCH USE WOULD BE RECKLESS AND INAPPROPRIATE. SEE FULL DISCLAIMERS BELOW."RATINGS RATIONALEAlcoa of Australia Limited's Baa2 rating reflects its well-established, integrated, and efficient operations in alumina production, as well as a solid bauxite reserve base and long-term energy supply agreements. AoA benefits from a competitive cost position with its overall alumina operations estimated to be in the lowest quartile of the cost curve. As such, while operating costs are rising, AoA's low cost position relative to other producers provides it with a superior ability to generate earnings and weather downside risks to alumina and aluminum prices.The rating is further supported by the company's strong financial and liquidity profile. Moody's expects AoA will maintain a low level of debt backed by a conservative financial policy. AoA's low debt level will allow the company to maintain strong credit metrics even at lower alumina prices.The rating is constrained by the company's operating and commodity concentration, and exposure to volatility in alumina and aluminum markets. The rating also considers AoA's ownership by Alcoa Corporation (Alcoa Nederland Holding B.V., Baa3 stable), which Moody's considers to be a weaker credit than AoA, and that AoA's excess cashflow will continue to be distributed to its shareholders.AoA's financial performance for calendar 2021 was good, supported by higher average alumina prices. Moody's expects calendar 2022 performance will remain solid, supported by a strong first half given elevated alumina prices averaging USD396 per tonne during that period. Although alumina prices have moderated in recent months and is recently trading around USD330 per tonne, Moody's believes AoA will maintain strong credit metrics supported by its competitive cost position and low debt levels over the next 12-18 months.The stable outlook reflects Moody's expectation that AoA will maintain a conservative financial profile with minimal debt, which would allow the company to maintain credit metrics within the parameters set for the Baa2 rating.ENVIRONMENTAL, SOCIAL, GOVERNANCE (ESG) CONSIDERATIONSSimilar to industry peers, AoA faces very highly negative exposure to environmental risks, mainly related to natural capital and waste and pollution risks. AoA's operations require high energy intensity and tend to cause a significant impact on water, air and land resources. That said, Moody's notes AoA's Western Australia alumina operations are competitive from an energy cost and emissions perspective underpinned by its vertical integration and long term gas supply agreements. AoA's Portland aluminum smelter's emissions and proportion of electricity sourced from renewable energy have also improved in recent years and there are ongoing efforts to improve this further.In regards to social risks, AoA is exposed to risks that are typical for the mining industry such as health and safety.From a governance perspective, AoA has shown a track record of conservative financial policy with the company's debt levels remaining low. Governance considerations also include AoA's concentrated ownership.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGAoA has a strong financial profile for its rating category, however, upward rating pressure is unlikely given the essentially single commodity focus of its operations and the impact of volatile commodities demand and pricing on earnings. Any further upward pressure would likely require an improvement in AoA's standalone business profile, including increased scale and/or diversity, as well as there being no deterioration in the credit profile of Alcoa Corporation.Specifically, in addition to an improved business profile Moody's would expect AoA to maintain its strong financial profile as indicated by debt/EBITDA remaining comfortably below 1.5x.AoA's ratings could be downgraded if its operating and earnings profile deteriorates beyond Moody's current base case expectations. The rating could also be downgraded if AoA materially increases debt to fund shareholder distributions.Specifically, its ratings could be downgraded if debt/EBITDA approaches 2.0x and/or EBITDA margin falls below 15%, on a sustained basis. A significant deterioration in liquidity could also lead to a downgrade.A deterioration in the credit profile of Alcoa Corporation could also lead to a downgrade of AoA's ratings, given the financial and operating linkages between the two entities.The principal methodology used in this rating was Mining published in October 2021 and available at https://ratings.moodys.com/api/rmc-documents/76085. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.PROFILEAlcoa of Australia Limited ("AoA") is an alumina/aluminum producing company in Australia and is 60% owned by Alcoa Corporation (unrated) and 40% owned by Alumina Limited (unrated).REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ratings.moodys.com/documents/PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on https://ratings.moodys.com.Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating. David Xu Analyst Corporate Finance Group Moody's Investors Service Pty. Ltd. 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Follow Buffett’s lead. And collect big dividends too.

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