Latest / On The Record with Andrea Hotter / Alcoa CEO: Bill Oplinger

Transcript

Alcoa CEO: Bill Oplinger · On The Record with Andrea Hotter

• 0:00
  SPEAKER_00: You've been to London many times now.
• 0:01
  SPEAKER_00: Many times.
• 0:01
  SPEAKER_00: Yeah, okay.
• 0:02
  SPEAKER_00: So it's not like you're going on a getting a haircut.
• 0:04
  SPEAKER_01: I'm really excited about that.
• 0:05
  SPEAKER_01: So you know, this these things in life, you know, you get to a certain point in life where haircut's pretty uh makes you happy.
• 0:11
  SPEAKER_00: Well, I'm glad that your hair's gonna be making you happy tomorrow.
• 0:13
  SPEAKER_00: Will be a good day.
• 0:14
  SPEAKER_01: It doesn't make me happy today, so it's gonna make me happy tomorrow.
• 0:27
  SPEAKER_00: Bill Oplinger, you are on the record, a new podcast by CPAL, hosted by me, Andrew Hotter.
• 0:34
  SPEAKER_00: So, Bill, I'm really looking forward to this conversation because you are essentially a different kind of CEO.
• 0:41
  SPEAKER_00: You are an Alcoa Lifer who's worked across finance operations and the company's upstream businesses for more than 25 years.
• 0:48
  SPEAKER_00: So you know the assets and the numbers really well.
• 0:50
  SPEAKER_00: And anyone who follows you on LinkedIn can see your passion for the company's history and also for its people.
• 0:57
  SPEAKER_00: So I think that makes you a little bit of a different CEO.
• 0:59
  SPEAKER_00: Yeah.
• 1:00
  SPEAKER_00: Okay.
• 1:00
  SPEAKER_00: I think so.
• 1:01
  SPEAKER_01: Yeah, yeah.
• 1:01
  SPEAKER_01: I mean, I it'll be 27 years in March, and that's only the second company I've ever worked for.
• 1:07
  SPEAKER_01: And uh I find it to be a fantastic company, and I've had a wonderful career and would not do anything over again.
• 1:14
  SPEAKER_01: That's been just a wonderful place to be for 27 years.
• 1:17
  SPEAKER_01: And I like to say, who knew aluminum could be this exciting over the course of 27 years?
• 1:22
  SPEAKER_01: I mean, it's an exciting industry, things change on a daily basis, and uh just have had an absolute blast doing it.
• 1:29
  SPEAKER_00: Well, that's good news.
• 1:30
  SPEAKER_00: You've definitely been very busy.
• 1:31
  SPEAKER_00: I remember clearly the first time we met.
• 1:33
  SPEAKER_00: You were the CFO of our corporation, and the company had just been created, but I think we're gonna have to acknowledge that elephant in the room that it is 10 years since the divorce.
• 1:44
  SPEAKER_01: It's 10 years.
• 1:44
  SPEAKER_01: We don't call it a divorce.
• 1:45
  SPEAKER_01: I'm cool.
• 1:46
  SPEAKER_01: We don't call it a divorce.
• 1:47
  SPEAKER_01: It's it was a separation.
• 1:49
  SPEAKER_01: You know, it felt like for a time there we were living together and separated, but ultimately it was a separation of the upstream from at the time, which was just the mid and the downstream.
• 1:58
  SPEAKER_00: And so when you look back at that, was that the right decision?
• 2:00
  SPEAKER_00: The split, the separation?
• 2:02
  SPEAKER_01: It was actually Alcoa Inc.
• 2:04
  SPEAKER_01: was the parent company, and Alcoa Inc.
• 2:06
  SPEAKER_01: split off Alcoa Corp, and the old Alcoa Inc renamed itself to Arconic, and it was a hundred percent the right decision.
• 2:16
  SPEAKER_01: You can say that both qualitatively and quantitatively.
• 2:20
  SPEAKER_01: When you look back at what the market cap of Alcoa Inc.
• 2:23
  SPEAKER_01: was, the combined market cap of the three remaining entities, because Arconic subsequently split again into Arconic and Halmet, those three entities are probably close to$120 billion of market cap today.
• 2:38
  SPEAKER_01: And when we decided to make the split, and we started to do the work in early 2015, we announced it at the end of September of 2015.
• 2:48
  SPEAKER_01: The thinking was that really two things drove the split.
• 2:51
  SPEAKER_01: The first was that investors didn't want to invest in a completely integrated upstream, midstream, and downstream company.
• 3:00
  SPEAKER_01: The investors that looked at the downstream wanted to talk about how many A380 Airbuses would be built and what's the production of cars.
• 3:09
  SPEAKER_01: Whereas the investors in the upstream wanted to talk about tons and cost and capital.
• 3:15
  SPEAKER_01: And there was really a Venn diagram that had a very slim intersection of those investors that would be willing to buy the combined entity.
• 3:22
  SPEAKER_01: So the thinking was that if we split it out, the valuations would rise naturally.
• 3:28
  SPEAKER_01: And that has occurred.
• 3:29
  SPEAKER_01: And the downstream part of the business, there was a thinking that the downstream part of the business, unlocked from the upstream part of the business, could drive significant value.
• 3:37
  SPEAKER_01: That has occurred.
• 3:38
  SPEAKER_01: All right.
• 3:39
  SPEAKER_01: You know, both Arconic and Helmut are run by fantastic management teams.
• 3:43
  SPEAKER_01: So it's not all due to the split.
• 3:45
  SPEAKER_01: They've subsequently been run extremely well.
• 3:47
  SPEAKER_01: And then the upstream, which is where I'm at, was really the second reason for the split.
• 3:52
  SPEAKER_01: And that was so that each individual part of the business could focus exclusively on what they do well.
• 3:58
  SPEAKER_01: And that's what we've done at Alcoa Corp over the last decade.
• 4:02
  SPEAKER_00: If you look back over that last decade and you think that Alcoa of the 2016 that was going through that breakup, and you look at the Alcoa now, what do you think you've become?
• 4:12
  SPEAKER_01: First of all, I look back and there was a lot of aspects that Alcoa Corp, when we originated, that were really difficult.
• 4:20
  SPEAKER_01: We had huge underfunded pension liabilities.
• 4:23
  SPEAKER_01: So the combination of our funded debt and our underfunded debt was about$4 billion in total debt or debt-like liabilities.
• 4:33
  SPEAKER_01: So when that happened, we immediately started to work on the pension problem.
• 4:38
  SPEAKER_01: In addition to that, we had a very cumbersome joint venture structure in the upstream part of the business.
• 4:44
  SPEAKER_01: We had a joint venture partner called Illumina Limited.
• 4:47
  SPEAKER_01: And so we have subsequently acquired Illumina Limited and unwound that cumbersome joint venture structure.
• 4:54
  SPEAKER_01: On top of that, we had a portfolio of operations that we really needed to do a lot of restructuring work.
• 5:00
  SPEAKER_01: And we've done that at this point.
• 5:02
  SPEAKER_01: So the balance sheet is fixed.
• 5:05
  SPEAKER_01: The portfolio is largely fixed.
• 5:07
  SPEAKER_01: It led us to a position where in November of last year, we started to signal to our investors that we were in a position to be able to grow.
• 5:16
  SPEAKER_01: And one of the growth vectors that we knew about over the last couple of years would be to acquire the aluminum assets of South 32.
• 5:26
  SPEAKER_01: And that's what we call Alley Group today.
• 5:28
  SPEAKER_01: So it is the Bauxite Alumina and Aluminum Assets of South 32.
• 5:33
  SPEAKER_01: And so we announced that acquisition in the early part of the third quarter, and we're anticipating closing that in the first half of next year.
• 5:42
  SPEAKER_00: Yeah.
• 5:42
  SPEAKER_00: And congratulations on that deal because as you said, you became this smaller, this simpler, this financially stronger company.
• 5:48
  SPEAKER_00: This is probably the biggest expansionary move in your modern history.
• 5:52
  SPEAKER_01: It is absolutely by by far.
• 5:54
  SPEAKER_01: And this will grow the company by roughly 50% in production capacity.
• 5:58
  SPEAKER_00: And it was the balance sheet that made you personally think, okay, now we can grow again, or was there something else?
• 6:02
  SPEAKER_01: Really, a couple of things.
• 6:03
  SPEAKER_01: One was the balance sheet was in a position to be able to grow.
• 6:07
  SPEAKER_01: Secondly, as we look at creating value for our shareholders, one of the ways we do that is investing in opportunities that have synergies that our investors can't unlock on their own.
• 6:19
  SPEAKER_01: If an investor wanted to buy Sal 32, first of all, they'd be getting both the base metals business and an aluminum business.
• 6:25
  SPEAKER_01: And they can't unlock the synergies that we can unlock by owning those assets.
• 6:30
  SPEAKER_01: So what do I mean?
• 6:31
  SPEAKER_01: We're talking about$900 million of NPV synergies over the next decade.
• 6:36
  SPEAKER_01: The first tranche of that is procurement synergies.
• 6:39
  SPEAKER_01: The second tranche is essentially taking our knowledge and running those assets more efficiently and being able to grow those assets.
• 6:48
  SPEAKER_01: So our refineries and smelters typically grow at 1% a year.
• 6:52
  SPEAKER_01: We're going to look to apply that to their assets also.
• 6:55
  SPEAKER_01: And then thirdly, on the mining side, their assets are essentially co-located with ours.
• 7:00
  SPEAKER_01: And so we'll be able to optimize the mine plan between our two mines and refineries and their one mine and a refinery in Western Australia.
• 7:09
  SPEAKER_01: So I envision a situation that over the next decade we'll be able to operate those three mines together and gain tremendous synergies that investors can't do on their own.
• 7:20
  SPEAKER_00: All right.
• 7:21
  SPEAKER_00: Let's get under the hood of this deal a little bit more because there's a lot in there.
• 7:24
  SPEAKER_00: So what was the first date to continue using that divorce, separation, new partner analogy?
• 7:29
  SPEAKER_01: I'm not into the divorce and separation analogy, but that's that's okay.
• 7:33
  SPEAKER_01: We'll go with it.
• 7:33
  SPEAKER_00: We'll go with it.
• 7:34
  SPEAKER_00: What was the first date?
• 7:35
  SPEAKER_00: Who made the first move?
• 7:36
  SPEAKER_00: How did that come about?
• 7:37
  SPEAKER_01: September of 2024.
• 7:39
  SPEAKER_01: So I became CEO in September of 2023.
• 7:43
  SPEAKER_01: We fairly quickly, well, very quickly, looked to roll up the Illumina Limited acquisition.
• 7:50
  SPEAKER_01: We started that in October of 2023 and closed it.
• 7:54
  SPEAKER_01: We announced it in the first quarter of 2024 and closed it fairly quickly after that.
• 8:00
  SPEAKER_01: In addition to that, at the exact same time, we were negotiating with our joint venture partner Modden to swap out our 25% stake in the integrated aluminum value chain of Modden for a parent company stake in Modden.
• 8:14
  SPEAKER_01: So we were able to do that.
• 8:16
  SPEAKER_01: And at the time it was valued at about a billion dollars.
• 8:19
  SPEAKER_01: Today it's valued at more like a billion four, billion five, depending on what the Modden stock price is.
• 8:24
  SPEAKER_01: So at that point, we started to look around to see what the major growth opportunities were.
• 8:30
  SPEAKER_01: There are a number of them.
• 8:32
  SPEAKER_01: And we approached South 32 about their aluminum assets.
• 8:36
  SPEAKER_01: And so it took us what two years, close to two years, to get a deal done and announced.
• 8:42
  SPEAKER_00: So what was it about South 32 and those aluminum, as you say, or aluminium, as I would say, assets that attracted you?
• 8:48
  SPEAKER_00: And what did they bring that Alcohol didn't have?
• 8:50
  SPEAKER_01: So let me just back up and talk about when I became CEO, we spent the first three months thinking about where we wanted to take the company, what we want it to be.
• 9:03
  SPEAKER_01: And we looked at everything.
• 9:04
  SPEAKER_01: We looked at about 10 different options and we started to rule out certain options fairly quickly.
• 9:11
  SPEAKER_01: And I've made it very clear to our investors, we're not looking to be in lithium.
• 9:15
  SPEAKER_01: We're not going to go into copper.
• 9:17
  SPEAKER_01: You know, everybody's after copper in the world.
• 9:18
  SPEAKER_01: We don't bring anything to the copper game.
• 9:20
  SPEAKER_01: We don't know how to mine copper.
• 9:21
  SPEAKER_01: Somebody else can do that.
• 9:23
  SPEAKER_01: We then said, well, we could go downstream again.
• 9:25
  SPEAKER_01: Well, you know, we broke up the company for a reason.
• 9:28
  SPEAKER_01: That doesn't make any sense.
• 9:29
  SPEAKER_01: And where we settled upon is there is growth in the upstream value chain.
• 9:35
  SPEAKER_01: And so we've told our investors we're going to be a pure play upstream aluminum company, and that's what we're going to do.
• 9:40
  SPEAKER_01: Not looking to do anything significantly differently.
• 9:43
  SPEAKER_01: So then you start to look at the space around the world.
• 9:46
  SPEAKER_01: And where are there opportunities again for us to bring synergies that investors can't get on their own?
• 9:53
  SPEAKER_01: Right.
• 9:53
  SPEAKER_01: And so South 32 was a natural fit.
• 9:56
  SPEAKER_01: You know, it starts to check the boxes.
• 9:58
  SPEAKER_01: Do they do what we do?
• 9:59
  SPEAKER_01: Is it bauxite mining, refining, and smelting?
• 10:01
  SPEAKER_01: Yes, it is.
• 10:02
  SPEAKER_01: Can we bring significant synergies?
• 10:04
  SPEAKER_01: Yes, we can.
• 10:05
  SPEAKER_01: And there was a few opportunities out there, and we really zoned in on that one.
• 10:09
  SPEAKER_01: And, you know, given the co-location of the assets, and if you go around the world just real quickly, the Western Australia is nearly co-located with our assets.
• 10:18
  SPEAKER_01: Brazil is a roll-up of assets that we already manage and own.
• 10:21
  SPEAKER_01: They just had an ownership position in those.
• 10:24
  SPEAKER_01: And then on top of that, we now are entering into South Africa, which is hillside.
• 10:29
  SPEAKER_01: It's smelting, it's a great smelter, it's what we know.
• 10:32
  SPEAKER_01: It's just a new geography for us.
• 10:34
  SPEAKER_01: And we've entered new geographies in the past and we've made them work.
• 10:38
  SPEAKER_01: And so we're excited about being in South Africa.
• 10:40
  SPEAKER_00: So when you were doing that due diligence, was there one thing in there that surprised you suddenly you said, Oh wow, actually I didn't know that.
• 10:46
  SPEAKER_00: And I really do want this business.
• 10:48
  SPEAKER_00: This is the clincher for me.
• 10:49
  SPEAKER_01: So, like our industry, the value in not only their assets, but in the industry shifts over time.
• 10:57
  SPEAKER_01: So when we launched this two years ago, we really saw the value in the upstream part of the business, bauxite mining and alumina refining.
• 11:07
  SPEAKER_01: Interestingly enough, over the last 18 months, that value has heavily shifted into the smelting.
• 11:14
  SPEAKER_01: So as we really got to know the assets and the industry evolved a little bit, we realized that there's a tremendous amount of value in Hillside.
• 11:23
  SPEAKER_01: So originally this was about looking at Worsley and Bodington and Alumar.
• 11:29
  SPEAKER_01: And now when we look at Hillside, there's a huge amount of value.
• 11:32
  SPEAKER_01: And I was just in South Africa three weeks ago, met with the president, President Ramaposa.
• 11:38
  SPEAKER_01: We think that there's a really good long-term trajectory for Hillside, and we just can't wait to get in there.
• 11:46
  SPEAKER_00: That's good news.
• 11:46
  SPEAKER_00: I went to that smelter back in the late 90s.
• 11:49
  SPEAKER_01: It's a big smelter.
• 11:50
  SPEAKER_01: It's a beautiful smelter and uh very well run.
• 11:53
  SPEAKER_00: It was billetin at the time when I was there.
• 11:55
  SPEAKER_00: So it's, I mean, I'm dating myself here as well.
• 11:57
  SPEAKER_00: They were having a lot of problems at that time with electricity, which they're not having now because ESCOM has ESCOM's now long electricity.
• 12:04
  SPEAKER_01: So ESCOM's in a better shape than they were.
• 12:06
  SPEAKER_01: Now, one of my visions for those assets is if you look around Alcoa today, so if you looked at our leadership team, you would see a Canadian, actually a couple of Canadians, you'd see an Australian, you'd see a Brazilian.
• 12:22
  SPEAKER_01: And as I spoke to President Ramposa, I would love to see South Africans at the top end of our leadership 10 or 20 years from now.
• 12:32
  SPEAKER_01: So how cool would that be to see South Africans in leadership positions in Alcoa?
• 12:37
  SPEAKER_01: And obviously Hillside being tremendously successful.
• 12:40
  SPEAKER_00: No, absolutely.
• 12:41
  SPEAKER_00: I completely agree.
• 12:42
  SPEAKER_00: It would be a great sign of success as well as the integration.
• 12:45
  SPEAKER_00: So how much of the investment case depends on you getting the power agreement extended when it expires in 2031?
• 12:51
  SPEAKER_01: We have baked in very conservative estimates into our valuation for power going forward.
• 12:57
  SPEAKER_01: And we think that we can get a very competitive power rate in South Africa.
• 13:02
  SPEAKER_01: We will be there on day one.
• 13:04
  SPEAKER_01: Literally, when I was there three weeks ago, the president was interested in talking to us about extending the power contract.
• 13:09
  SPEAKER_01: And I said, we haven't closed on the asset.
• 13:11
  SPEAKER_01: We don't even own it yet.
• 13:12
  SPEAKER_01: We can't do that.
• 13:13
  SPEAKER_01: Let us wait till we get closed, and we'll be there on the first day.
• 13:16
  SPEAKER_01: Now, I will give ourselves a lot of credit.
• 13:20
  SPEAKER_01: Unlike one or two other MA opportunities over the last few years, the day we announced the agreement to acquire South 32, we had two of our top leaders in South Africa.
• 13:33
  SPEAKER_01: We had them in the president's office on the day of announcement, making sure they understood that Hillside's critically important to us.
• 13:41
  SPEAKER_01: So I th that was positive.
• 13:43
  SPEAKER_00: Very positive.
• 13:44
  SPEAKER_00: I've heard you talk about adjacency a lot to do with the other parts of the businesses that you're acquiring.
• 13:48
  SPEAKER_00: So Boddington, sitting next to Huntley and Willowdale, those three bauxite mines, talk me through that adjacency and maybe the mine plan opportunity, as if I'm a technical kind of mining engineer rather than an investor.
• 14:01
  SPEAKER_00: So what can you do with those three neighboring systems that you can't do with two neighboring systems?
• 14:06
  SPEAKER_01: Delay mine moves, be able to move bauxite back and forth between three mines and three refineries.
• 14:11
  SPEAKER_01: Mine moves are getting more expensive over time.
• 14:15
  SPEAKER_01: When you look at their mine plan, Worsley's in the south, and as you said, we're adjacent on our two leases.
• 14:23
  SPEAKER_01: They were having to go north to get into different bauxite.
• 14:27
  SPEAKER_01: If you look at our assets, our refineries are north of their refinery, and we were having to head south on bauxite mining.
• 14:35
  SPEAKER_01: So when we get the ability to be able to manage those three as a portfolio, we should be able to limit those moves and save considerable capital in the future.
• 14:47
  SPEAKER_00: Great stuff.
• 14:48
  SPEAKER_00: And y this is maybe a question that your investors would ask, putting that hat back on again.
• 14:52
  SPEAKER_00: So you talked earlier about some of the main benefits moving back into the smelting business, which didn't exist when you started looking at the acquisition.
• 14:59
  SPEAKER_00: If Illumina margins are more under pressure than they were previously, why is this a good time?
• 15:04
  SPEAKER_00: Just make the case for why go into Illumina in a bigger way and add exposure there.
• 15:09
  SPEAKER_01: I'm still a fundamental believer that there will be value accreting to the upstream part of the business.
• 15:13
  SPEAKER_01: So what do I mean by that?
• 15:15
  SPEAKER_01: It is getting harder and harder to mine bauxite around the world.
• 15:18
  SPEAKER_01: And that's because of regulatory approvals, regulatory issues around the world.
• 15:23
  SPEAKER_01: As it becomes harder to mine bauxite, it will limit the supply of bauxite, which means that returns in bauxite will be better.
• 15:30
  SPEAKER_01: Refining is not easy, right?
• 15:32
  SPEAKER_01: And you've seen it over the years.
• 15:33
  SPEAKER_01: If you look back at 2018 when one of our competitors had a major issue in one of their plants, aluminum prices spiked.
• 15:42
  SPEAKER_01: We refine extremely well.
• 15:43
  SPEAKER_01: I have centers of excellence that have hundreds of engineers that all they do is work on improving our refining capability and smelting capability.
• 15:53
  SPEAKER_01: So I am very bullish on the upstream part of the business.
• 15:56
  SPEAKER_01: What has changed is that with the advent of data centers and AI and the consumption of electricity, the easiness of entry into the smelting part of the business has evaporated.
• 16:10
  SPEAKER_01: It's getting harder and harder to find low-cost competitive energy, which means that the margins in aluminum have expanded.
• 16:18
  SPEAKER_01: So before, I would look at the aluminum business and I would say very low barriers to entry, high barriers to exit, margins are going to be bad for a long time.
• 16:27
  SPEAKER_01: Now, those barriers to entry got much, much higher, and competitive power is hard to find, which means that the rate of growth and smelting is going to be slower.
• 16:38
  SPEAKER_01: Add that on to the self-imposed cap in China, where they have limited their build-out of capacity in China.
• 16:46
  SPEAKER_01: That means that supply in aluminum will grow slower than what it has grown historically, ultimately should result in higher margins.
• 16:54
  SPEAKER_00: All right.
• 16:54
  SPEAKER_00: There is a very good investor case.
• 16:56
  SPEAKER_00: I'm going to come back to the data center piece of it later as well, because I think that's a really interesting development.
• 17:01
  SPEAKER_00: I just want to finish off on the broader sort of acquisition or deal.
• 17:05
  SPEAKER_00: When you think about it and put these aluminum businesses of Cell 32 together with Alcoa Fantastic on paper, you have to also integrate these companies culturally as well.
• 17:14
  SPEAKER_00: So what are you anticipating there?
• 17:15
  SPEAKER_00: Because these things can go very smoothly or sometimes they don't.
• 17:18
  SPEAKER_00: So what do you expect the cultural friction to be, perhaps?
• 17:21
  SPEAKER_01: I'm not expecting cultural friction.
• 17:24
  SPEAKER_01: What I am expecting is that we established an integration management office very early, and we have one executive sponsor who is in charge of integration management.
• 17:35
  SPEAKER_01: Who do you think that would be?
• 17:36
  SPEAKER_01: Normally it would be a COO or someone.
• 17:39
  SPEAKER_01: It's our head of HR.
• 17:40
  SPEAKER_00: Oh, wow.
• 17:41
  SPEAKER_00: Okay.
• 17:41
  SPEAKER_01: So our CHRO is the head of our integration management, the executive sponsor for the integration management office.
• 17:49
  SPEAKER_01: That's because we recognize that integration is a lot about people.
• 17:53
  SPEAKER_01: And companies that do integration poorly think it's about systems and processes and procedures.
• 17:59
  SPEAKER_01: But I fundamentally believe it's about culture and people.
• 18:04
  SPEAKER_01: And so then underneath her, we have my former head of the CFO of Australia, who is running our integration management office.
• 18:12
  SPEAKER_01: And as I told her, I'm betting my career on this deal.
• 18:16
  SPEAKER_01: You know, I'm betting my legacy on this deal.
• 18:18
  SPEAKER_01: So she's the person that I want to run the integration.
• 18:22
  SPEAKER_01: A successful integration for us looks like on day one, we can make the product, we can bill for the product, we can pay people, but also people feel that they're Alcoans from day one.
• 18:35
  SPEAKER_01: And that's, you know, that's a dream.
• 18:37
  SPEAKER_01: Over time, they will feel more like they're part of the Alcoa team.
• 18:41
  SPEAKER_01: But what I want the people of Alley Group or South 32's aluminum and alumina assets to know is that you're joining a company that this is all we do, right?
• 18:50
  SPEAKER_01: You're not part of a base metals business.
• 18:52
  SPEAKER_01: You're part of an upstream aluminum company.
• 18:55
  SPEAKER_01: What you do is what we do, and it's what we love to do, honestly.
• 18:59
  SPEAKER_00: No pressure on your head of HR then.
• 19:01
  SPEAKER_01: No, no pressure whatsoever.
• 19:02
  SPEAKER_01: She can do it.
• 19:03
  SPEAKER_00: I wondered as well when I heard about this deal whether the aluminium business is South 32 with the exception, or this is the beginning of a different kind of alcohol capital allocation philosophy that maybe you're changing your view and maybe very slowly, but adding bolt-on acquisitions is a future path for you.
• 19:19
  SPEAKER_01: I would say it very differently.
• 19:21
  SPEAKER_01: I would say we have a capital allocation process.
• 19:23
  SPEAKER_01: That capital allocation process starts with maintaining the assets that we have.
• 19:28
  SPEAKER_01: We generate in the third quarter$500 million of free cash flow from the assets that we have.
• 19:32
  SPEAKER_01: It's important to be able to replenish them and make them sustainable.
• 19:36
  SPEAKER_01: That's number one.
• 19:37
  SPEAKER_01: Number two is we want the right balance sheet.
• 19:41
  SPEAKER_01: And the right balance sheet for a commodity company is fairly lightly levered.
• 19:46
  SPEAKER_01: And we will lever up to do this transaction.
• 19:50
  SPEAKER_01: As soon as we do the transaction, and quite honestly, right now, what we're looking to do is delever as quickly as we possibly can to get back to that optimal capital structure.
• 20:00
  SPEAKER_01: After that, there's really two things that we can do with excess free cash flow, and we will weigh these two up: return cash to shareholders.
• 20:07
  SPEAKER_01: Shareholders are very interested in getting cash back or further growth opportunities.
• 20:12
  SPEAKER_01: Those growth opportunities, you mentioned bolt-ons, those growth opportunities will be weighed up on the exact same metrics that we weighed up the Alley Group transaction on.
• 20:20
  SPEAKER_01: That is, can we generate value for shareholders?
• 20:23
  SPEAKER_01: Can this project return greater than cost of capital for our owners?
• 20:27
  SPEAKER_01: And if so, we will execute upon those.
• 20:30
  SPEAKER_01: We are not looking to grow just for growth's sake.
• 20:33
  SPEAKER_01: We are looking to grow one to provide better returns to our shareholders.
• 20:36
  SPEAKER_01: And the way we do that is to lower our overall cost structure.
• 20:41
  SPEAKER_01: I fundamentally believe that this acquisition of the Alley Group, adding nearly 50% of our capacity, we will do that with a fixed cost.
• 20:49
  SPEAKER_01: That's a redundancy.
• 20:51
  SPEAKER_01: But our fixed cost won't change, and therefore it should lower the cost for all of the entities in the system.
• 20:57
  SPEAKER_00: Let's zoom out now then from the MA side, because I would like to talk about Guinea, where Alcoa has been active there for six decades.
• 21:04
  SPEAKER_01: 60 years.
• 21:05
  SPEAKER_00: Yeah, really long time.
• 21:06
  SPEAKER_00: This is not a new frontier for you.
• 21:07
  SPEAKER_00: We know that.
• 21:08
  SPEAKER_00: But Guinea itself has been changing very quickly as well.
• 21:10
  SPEAKER_00: Like a lot of African countries.
• 21:12
  SPEAKER_00: What do you think's fundamentally changed?
• 21:14
  SPEAKER_00: I know you don't go back those 60 years, but what do you think's fundamentally changed about operating in Guinea compared to when Alcoa first started to now?
• 21:22
  SPEAKER_01: Wow, I would imagine, and I wasn't there 60 years ago, even I wasn't there.
• 21:28
  SPEAKER_01: But I would imagine 60 years ago in Guinea was the real frontier.
• 21:32
  SPEAKER_01: And doing something in Guinea was probably viewed as really risky and exploratory work.
• 21:39
  SPEAKER_01: That's not the case today.
• 21:40
  SPEAKER_01: Today, Guinea has infrastructure in place.
• 21:43
  SPEAKER_01: Just like any other country in the world, there's been multiple administrations over those 60 years.
• 21:48
  SPEAKER_01: We, and I say we, it's really CBG, which is a partnership between us, Rio Tinto, Dadco, and the government of Guinea.
• 21:55
  SPEAKER_01: That plant has not missed a shipment over 60 years.
• 21:58
  SPEAKER_01: And it was 60%.
• 22:00
  SPEAKER_01: 60 years ago, a really important part of the economy of Guinea.
• 22:05
  SPEAKER_01: Fast forward to today, and Guinea's grown.
• 22:07
  SPEAKER_01: Guinea has brought in Iron Ore and Simandu, the large Rio Tinto Chauco project.
• 22:13
  SPEAKER_01: They have bauxite mining outside of CBG.
• 22:16
  SPEAKER_01: So Guinea has evolved pretty rapidly.
• 22:19
  SPEAKER_01: Now, Guinea is interested in going downstream.
• 22:22
  SPEAKER_01: All right.
• 22:22
  SPEAKER_00: That's what I was about to say.
• 22:23
  SPEAKER_00: It wants to change further.
• 22:24
  SPEAKER_01: Guinea wants what Australia has, and they would like a refining business.
• 22:29
  SPEAKER_01: And ultimately, they'd like a smelting business.
• 22:31
  SPEAKER_01: And we will look at refining opportunities in Guinea.
• 22:34
  SPEAKER_01: And as I say to the Minister of Mines, who's a really fantastic guy, it's got to meet the return hurdles.
• 22:40
  SPEAKER_01: You know, we've run the business very financially oriented.
• 22:44
  SPEAKER_01: And I'd love to be in Guinea 50 or 60 years from now.
• 22:47
  SPEAKER_01: It needs to be able to be financially viable.
• 22:50
  SPEAKER_01: And so that's what we'll look at.
• 22:52
  SPEAKER_00: Yeah, watch this space.
• 22:53
  SPEAKER_00: I want to come back to that data center piece because I think that's a really interesting situation.
• 22:57
  SPEAKER_00: There's so much buzz around AI and data centers at the moment.
• 23:00
  SPEAKER_00: But you've previously said that Alcoa had 10 sites that it was considering selling into the data center market.
• 23:07
  SPEAKER_00: Do you think energy is going to become a meaningful second business for Alcoa?
• 23:12
  SPEAKER_01: No, I don't.
• 23:13
  SPEAKER_01: There are three ways that I'm thinking about the impact of and I lumped together data centers and artificial intelligence.
• 23:20
  SPEAKER_01: The first is the massive use of electricity.
• 23:25
  SPEAKER_01: Historically, smelters were built where there was stranded electricity that could be had at competitive power rates.
• 23:34
  SPEAKER_01: And the way to monetize that stranded energy was to turn it into aluminum and ship it somewhere else.
• 23:40
  SPEAKER_01: Today you can monetize that stranded energy by turning it into aluminum or by building a data center.
• 23:48
  SPEAKER_01: And so what that means is that places that are very quickly building a data center industry, energy prices are higher.
• 23:56
  SPEAKER_01: So for instance, in the US, Microsoft is willing to pay$100 a megawatt hour for take-a-pay contract electricity for the next 20 years.
• 24:08
  SPEAKER_01: Any aluminum company in the world that would be looking to build a primary aluminum smelter should be looking at sub$40 a megawatt hour.
• 24:17
  SPEAKER_01: So Microsoft and the hyperscalers are willing to pay two and three X for that electricity.
• 24:24
  SPEAKER_01: What that comes back to is what we discussed earlier, and that is the barriers to entry in the aluminum smelting space are getting higher and higher every day.
• 24:33
  SPEAKER_01: The second impact for Alcoa is given the fact that we started in 1888, we have a series of closed assets around the world that used to be mines, refineries, smelters that we have to maintain for as long as we own them.
• 24:51
  SPEAKER_01: What has evolved is that there is value in some of those sites to be converted into data centers.
• 24:58
  SPEAKER_01: So we have said we want to monetize$500 million to a billion dollars worth of asset sales on our closed or curtailed sites and turn them into data centers, amongst other things, but primarily data centers.
• 25:10
  SPEAKER_01: We just announced our first in the third quarter up in Messina East, New York.
• 25:14
  SPEAKER_01: It's a site that's been closed down for 15 years, not to be confused with Messina West, which is an operating smelter and will continue to operate.
• 25:21
  SPEAKER_01: But there used to be a second smelter in the town of Messina, and we're selling parts of that land to a data centered developer who is going to pay us upwards of$300 million over time as they build out that data center.
• 25:34
  SPEAKER_01: One of the questions that immediately comes to mind is there's societal pushback on data centers.
• 25:40
  SPEAKER_01: In the case of Messina East, we have engaged the community, and the community is very interested in having a data center.
• 25:47
  SPEAKER_01: It will mean higher tax revenues and some level of additional jobs in the community.
• 25:52
  SPEAKER_01: So they're thrilled to have a data center there.
• 25:54
  SPEAKER_00: It's so fascinating because I remember all the discussions through the years, power contract is expiring in a couple of years, back and forth.
• 26:01
  SPEAKER_00: It's probably not even a you're not even in the conversation anymore.
• 26:03
  SPEAKER_00: If you're going up against a data center for that energy.
• 26:06
  SPEAKER_01: Oh, if we're going up against a data center, aluminum doesn't win.
• 26:09
  SPEAKER_01: But those are the first two.
• 26:10
  SPEAKER_01: The third is the one that's to me the one that I really haven't figured out yet.
• 26:14
  SPEAKER_01: And that is how is AI going to change the actual mining, refining, and smelting processes?
• 26:20
  SPEAKER_01: And we, very similar to other companies, we're using a case-by-case basis, boiling up from the bottom, saying that there's applications for AI in the company.
• 26:31
  SPEAKER_01: What we're not doing is we're not going out and spending$100 million and saying Alcoa is going to be a new AI company and we're going to AI everything within the company.
• 26:40
  SPEAKER_01: I think that's a great way to lose$100 million and that we're actually just being very targeted, very pinpoint on use cases.
• 26:47
  SPEAKER_00: It's a fascinating situation.
• 26:48
  SPEAKER_00: And I think the pushback has been interesting as well.
• 26:51
  SPEAKER_00: So you've spent the first part of your tenure, we'll call it that, making Alcoa a lot stronger.
• 26:56
  SPEAKER_00: And now you're asking the business to become bigger and more complex.
• 26:59
  SPEAKER_00: So what's the hardest part of being the CEO of Alcoa, do you think, for this next chapter?
• 27:05
  SPEAKER_01: I wouldn't say it's hard.
• 27:06
  SPEAKER_01: I would say it's a fun challenge.
• 27:08
  SPEAKER_01: We are having our organization, I believe, fundamentally engaged and really thrilled to be back on a growth trajectory.
• 27:18
  SPEAKER_01: We have spent the last 15 years rightfully getting smaller, getting simpler.
• 27:24
  SPEAKER_01: This is a new trajectory for the company.
• 27:26
  SPEAKER_01: And it's not like we're going to go alcohize the Ali Group assets.
• 27:30
  SPEAKER_01: We're going to take the best of both worlds.
• 27:31
  SPEAKER_01: We're going to learn from them, and we're going to make sure we capture all that knowledge.
• 27:35
  SPEAKER_01: And we're not going to stop.
• 27:37
  SPEAKER_01: You know, we've got a lot of momentum.
• 27:39
  SPEAKER_01: We're going to keep changing the company.
• 27:41
  SPEAKER_01: And it's a new energy and feeling within the company.
• 27:44
  SPEAKER_00: I was going to ask you if we were sitting here in 10 years, another anniversary, 20 years anniversary since the separation, what would you hope we're saying about the South 32 deal?
• 27:53
  SPEAKER_00: But it sounds like potentially some other changes along the way as well.
• 27:56
  SPEAKER_00: But what would you hope that we're sitting here talking about?
• 27:58
  SPEAKER_01: 10 years out, um, it is going to be amazing.
• 28:03
  SPEAKER_01: Alcoa 10 years out.
• 28:05
  SPEAKER_01: 10 years from now, we will have mining assets in Australia, Guinea, and Brazil.
• 28:12
  SPEAKER_01: So it'll be tripolar mining assets.
• 28:15
  SPEAKER_01: We'll be able to serve our customers around the world from mining, refining, and smelting.
• 28:20
  SPEAKER_01: That's all global.
• 28:21
  SPEAKER_01: South 32 will be completely integrated, part of Alcoa.
• 28:25
  SPEAKER_01: They'll consider themselves Alcoans.
• 28:27
  SPEAKER_01: We will have crept the assets in South 32.
• 28:30
  SPEAKER_01: We'll get that one to 2%.
• 28:31
  SPEAKER_01: We're going to get all the synergies that we said, and I hope more.
• 28:35
  SPEAKER_01: In addition to that, we will have an opportunity 10 years from now to determine whether we implement Elisys.
• 28:44
  SPEAKER_01: So we haven't talked much about it.
• 28:45
  SPEAKER_01: We haven't.
• 28:46
  SPEAKER_00: I love it.
• 28:47
  SPEAKER_01: But Elisys is the low carbon smelting process that 10 years from now we will be saying it works, it's economic.
• 28:54
  SPEAKER_01: And I can tell you today it works.
• 28:56
  SPEAKER_01: Right.
• 28:56
  SPEAKER_01: So today we can make metal from both the commercial size pot and the small pot that is P1020 grade.
• 29:03
  SPEAKER_01: And we've already done it.
• 29:04
  SPEAKER_01: And so the commercial size pot works.
• 29:07
  SPEAKER_01: And so now it's just a matter of getting the economics to work.
• 29:10
  SPEAKER_01: And so over the course of the next 10 years, our partner, Rio Tinto, is going to do a lot of implementation.
• 29:16
  SPEAKER_01: And we will be sitting here a decade out being able to make that choice.
• 29:20
  SPEAKER_00: I remember when I first heard about that concept, I just thought it was fascinating.
• 29:23
  SPEAKER_01: It's interesting, right?
• 29:24
  SPEAKER_01: We smelt the exact same way that our founder, Charles Martin Hall, figured out how to smelt.
• 29:30
  SPEAKER_01: All right.
• 29:30
  SPEAKER_01: So the smelting process hasn't fundamentally changed in 130 years.
• 29:34
  SPEAKER_01: It's gotten more efficient, it's gotten bigger.
• 29:36
  SPEAKER_01: But if you look at a pot from 130 years ago, you would recognize it as a pot today, just smaller and less efficient.
• 29:44
  SPEAKER_00: Well, I'm very keen to see where that goes.
• 29:47
  SPEAKER_00: I think it's fantastic.
• 29:48
  SPEAKER_00: Very soon you're going to be ringing the New York Stock Exchange bell on the anniversary, the 10th anniversary of Alcoa Corporation.
• 29:55
  SPEAKER_00: What does that mean to you?
• 29:56
  SPEAKER_01: It's very exciting.
• 29:58
  SPEAKER_01: And as I look back over the 10 years, what we're going to do on November 2nd is celebrate the people who have made this happen.
• 30:06
  SPEAKER_01: We have people coming from all over the world to help ring the bell, right?
• 30:10
  SPEAKER_01: So I've got people coming from as far away as Australia, Brazil, Quebec, Norway, and we have one Icelander coming, and they're going to come and help us ring the bell.
• 30:19
  SPEAKER_01: And it'll be a celebration of the people who made it happen.
• 30:22
  SPEAKER_01: Ten years, it's been a great ride.
• 30:28
  SPEAKER_00: And ringing that bell is actually pretty cool as well, I think.
• 30:31
  SPEAKER_01: It's very cool.
• 30:32
  SPEAKER_01: I won't personally be ringing it.
• 30:33
  SPEAKER_01: I'm going to let somebody else ring it.
• 30:35
  SPEAKER_01: I haven't determined who yet, but one of our employees will ring it, and it's really exciting.
• 30:39
  SPEAKER_01: If you've never done it, it's amazing to stand above the exchange and ring the bell.
• 30:44
  SPEAKER_00: And if you could put a message on the screen so that the aluminium industry could see it, what would it say?
• 30:50
  SPEAKER_01: Alcohol's here and Alcoa is strong.
• 30:52
  SPEAKER_01: And in the future, Alcoa is going to be a big part of the aluminum industry.
• 30:55
  SPEAKER_00: Well, there you go, Bill.
• 30:56
  SPEAKER_00: Thank you so much.
• 30:57
  SPEAKER_00: You are now officially off the record.
• 30:59
  SPEAKER_01: Thanks.
• 31:00
  SPEAKER_00: Thanks to everyone for listening and for being with CPAL for this episode.
• 31:04
  SPEAKER_00: I hope you enjoyed the conversation as much as I have.
• 31:06
  SPEAKER_00: We're going to be back with more stories very soon, so please make sure you subscribe so you don't miss any episodes.