Wednesday 11th December 2002

Transcription

1 Wednesday 11th December 2002

2 Alumina Limited Concise Annual Report 2002

3 Independence Day Pg.3

4 Alumina Limited Concise Annual Report 2002 Alumina Limited is a rare investment opportunity: a new company with a strong financial history. It provides a direct interest in the world s leading alumina business. It was formed following the demerger of WMC Limited on 11 December 2002: Alumina s Independence Day. (SEE SECTION 1. Pg.16)

5 Alumina Limited 2002 Alumina Limited s strength is our 40% interest in Alcoa World Alumina and Chemicals (AWAC), which has a worldwide network of refineries providing 25% of global production capacity. (SEE SECTION 2. Pg.20)

6 Alumina Limited Concise Annual Report 2002 AWAC provides consistent and reliable results, driven by an outstanding business. Historically, shareholders have been rewarded with strong growth and high dividends. (SEE SECTION 3. Pg.26)

7 Alumina Limited 2002 AWAC is the market leader because it has the technology, systems, assets and management to drive operational excellence and meet its worldwide customer needs. (SEE SECTION 4. Pg.32)

8 Alumina Limited Concise Annual Report 2002 AWAC s growth is driven by a strategy of low-risk, high-return brownfield expansion. This strategy allows AWAC to maintain its 25% share of global production capacity. (SEE SECTION 5. Pg.36)

9 Alumina Limited 2002 Independence gives Alumina Limited s management the opportunity to focus on the AWAC business with one goal in mind: creating and delivering value to shareholders. (SEE SECTION 6. Pg.38)

10 Alumina Limited Concise Annual Report 2002 Contents "Alumina Limited: a snapshot 9 "Performance 2002 in brief 10 "Chairman s Report 11 "Chief Executive Officer s Report A New Company 16 "The demerger 16 "Timeline 17 "The business AWAC: 25% of the Global Market 20 "AWAC s interests 20 "AWAC s global interests Consistent and Reliable Results 26 "Returns and cash flows 26 "Returns to shareholders 26 "Managing expenditure 27 "Operational performance 27 "Reducing costs 28 "Operating in a difficult market 30 "Other significant events 30 "Scheme booklet 2002 forecast Market Leader 32 "Sources of competitive advantage 32 "Leaders in: 34 Mining 34 Refining 34 Business systems 34 Safety Growth and Strategy 36 "Expansion of existing operations 36 "Incremental growth 37 "Acquisitions 37 "Other growth opportunities Creating and Delivering Value 38 "Senior management 38 "Alumina Limited representation in AWAC 39 "AWAC Strategic Council Corporate Governance 40 "Alumina Limited and the Board 40 "Ethical standards 41 "Share trading 42 "Disclosure 42 "Conflicts of interest 42 "Managing business risk 42 "Managing financial exposures 42 "Political donations 42 "Board of directors 44 "Former WMC directors 45 "Remuneration 46 "Shareholders 51 "Shareholder communication 51 "Dividends 51 "Share enquiries 51 "American Depositary Receipts Directors Report 52 "Independent audit report 55 "Consolidated statements of financial 55 performance 56 "Consolidated statements of financial position 57 "Consolidated statements of cash flows 58 "Notes to and forming part of the concise 58 financial statements 59 Glossary 68 Pg.10

11 Our 40 per cent interest in AWAC provides investors with a substantial and direct investment in the attractive alumina industry. Alumina Limited: a snapshot An investment in Alumina Limited is an investment in the world s largest producer and supplier of alumina. Alumina Limited is a partner in Alcoa World Alumina and Chemicals (AWAC). AWAC with Alcoa currently produces 23 per cent of the world s alumina. Our 40 per cent interest in AWAC provides investors with a substantial and direct investment in the attractive alumina industry. Alumina Limited s partnership with Alcoa is a business of mining bauxite ores, refining the ore to produce alumina and further processing of the alumina to produce aluminium metal and alumina based chemicals. Alcoa holds a 60 per cent stake in AWAC. A significant proportion of AWAC s alumina production is in the lowest-cost quartile. AWAC s interests include operations in Australia, the United States, the Republic of Guinea, Suriname, Jamaica, Brazil and Spain. Alumina Limited was created on 11 December 2002 when WMC Limited s alumina assets were demerged from the nickel, copper and fertilizer businesses. The demerger has enabled investors to benefit directly from the full value of the alumina and aluminium business. Our small and commercially experienced team is focused on delivering value through: "strategic participation in the AWAC business with our partner Alcoa "maintaining AWAC s position as market leader "paying substantial dividends to shareholders (aiming for 100 per cent of Alcoa of Australia s fully franked dividends to be distributed as far as practicable) "growing AWAC through planned and sustainable expansion "ensuring the value of the AWAC business is understood by the market and reflected in our share price. This report The purpose of this report is to introduce Alumina Limited to investors. It also outlines our performance during Due to the demerger and the necessary legal and accounting treatment, the financial results represent 11 months of the combined WMC Limited before demerger, plus one month of the new Alumina Limited. In the financial results, all WMC Resources Ltd businesses are shown as discontinuing operations and the results of continuing operations reflects the assets now held by Alumina Limited. The text does not include description of WMC Resources Ltd activities or analysis of the performance of WMC Resources Ltd for the period. For an account of the nickel, copper and fertilizer businesses of WMC Resources Ltd, refer to the WMC Resources Ltd Annual Report (see Actual 2002 EBIT Contribution by Segment Alumina & chemicals Aluminium Other Source: AWAC Results 21% 5% 74% Pg.11

12 Performance 2002 in brief What we produce "Alumina (AWAC refineries have 25% of world production capacity; Alumina Limited share = 10%) "Alumina Chemicals "Aluminium Our goals in 2002 "Create Alumina Limited through WMC demerger and create value for WMC s shareholders "Maintain partnership and active strategic involvement in AWAC "Continue to match production to market conditions "Maintain AWAC s industry leadership position "Complete transfer of Reynolds assets to AWAC Key events We delivered "Continued uncertainty in global economy "Aluminium price fell by 6.0% to an average US$0.61/lb (US$1350 per tonne) "Strengthening Australian dollar "First full year of expanded production at San Ciprian refinery "Announced Jamalco expansion of 250,000 tonnes of alumina "Announced expansion of joint venture with BHP Billiton in Suriname "Demerger overwhelmingly approved by shareholders "Alumina Limited listed on 11 December 2002 "Share price has outperformed ASX200 and industry indices "After-tax profit from continuing operations of $209.7m, 25% down on 2001 "Alumina Limited received dividends of $281m, down 25% on previous year "Final dividend of 13 cents per share "AWAC increased alumina production by more than 3% to 12.3m tonnes and aluminium by 1.5% Pg.12

13 Alumina Limited Concise Annual Report 2002 Chairman s Report Creating a new company 2002 was a year of enormous challenge and change. Shareholder approval of WMC s demerger in November 2002 created two separately listed companies: Alumina Limited and WMC Resources Ltd. This was a major achievement under onerous conditions, made possible through the dedication of WMC s directors and staff. Their performance and commitment during this time was exceptional. The demerger separated WMC s nickel, copper and fertilizer businesses from the alumina interests, in order to maximise value to shareholders for each of these assets. The intention was to create a clearer and more transparent valuation of the alumina business and allow shareholders to receive full value for their WMC interests in the event of a takeover offer. The two new resource companies provide shareholders with greater investment flexibility and choice and allow the two management teams, WMC Resources Ltd and Alumina Limited, to concentrate on their underlying business. The demerger was planned to occur in mid The timing was delayed to enable shareholders to benefit from Australian demerger tax relief legislation. The listing of Alumina Limited has been well received by the financial markets and we are making progress against our initial goals. The new Alumina Limited Alumina Limited is a partner in Alcoa World Alumina and Chemicals (AWAC), the world s largest alumina producer. Through our 40 per cent interest in AWAC, shareholders have a substantial and direct investment in a world leader with a global network of bauxite, alumina, alumina chemicals and aluminium operations. As WMC Limited and now as Alumina Limited we have a 40- plus-year history of successful partnership with Alcoa, which owns the remaining 60 per cent of AWAC and manages its day-today operations. We will continue to build on these years of success to productively develop and grow AWAC to generate strong cash flows, profits and dividends. Since the demerger we have created a new organisation, with its own distinct identity and objectives and organisational structure. Led by CEO John Marlay, Alumina Limited has a committed and competent team. The new management team is developing its own close working relationship with its counterparts at Alcoa and is focused on maintaining and enhancing shareholder value. In 2002 AWAC continued its progress on the dual goals of maintaining the low-cost profile of the AWAC operations and Pg.13

14 continuing to grow the AWAC business. The improvements in operations are discussed in the CEO s report. A key objective for 2003 is to increase the market s understanding of the long-term strength of the AWAC business and to have this recognised in Alumina Limited s share price. We believe that shareholders will see the value of the AWAC business through consistent returns in terms of dividends, profits and share price growth. Returns to shareholders Alumina s profit for 2002 fell compared to the previous year but was consistent with the forecast made in the Demerger Scheme Booklet. Dividends of 18 cents a share were declared including a 13 cent final dividend. Our intention is to fully distribute to shareholders, to the extent practicable, all fully franked dividends received from AWAC. Since AWAC was established in 1995, more than 100 per cent of net income has been distributed in dividends and capital returns to AWAC s owners (annual dividends to Alumina averaged $226 million since 1995). Of these distributions, 86 per cent of dividend distributions have been fully franked. Historically, Alumina Limited s AWAC interest has rewarded shareholders with share price growth as well as dividends and we intend that this continue. The Demerger Scheme Booklet provided a forecast of profit for 2003 based upon expectations at the time of world economic growth. Geopolitical developments since that time have weakened world economic activity and these circumstances may impact on the company s results for However, with AWAC s world-class assets operating efficiently and with our operating objectives firmly in place for 2003, we are confident that Alumina Limited will continue to deliver excellent value to shareholders. " Donald Morley Chairman AWAC 100% Capex and Net Cash flow ( ) Board Developments The high standards of corporate governance and ethics that we adhered to before the demerger will continue under the new Board and management. I am delighted that Peter Hay, Ron McNeilly and Mark Rayner have been elected to Alumina Limited s Board. They have the knowledge and background that we require. Executive remuneration is strongly linked to company performance so that the interests and long-term returns to shareholders remain paramount. We will continue to outline remuneration practices in the Annual Report to ensure a high degree of transparency. The Board and management are committed to working closely together so that the complementary skills of directors and management are fully utilised. The Board recognises the contribution of our dedicated employees and their commitment to the company s success. US$m Outlook The outlook for 2003 is somewhat uncertain, with the outcome of global political issues and economic growth affecting most markets. World commodity markets and the fragile recovery of the US economy reflect this situation. Capital expenditure Net cash flow Source: AWAC Audited Statements Pg.14

15 Alumina Limited Concise Annual Report 2002 Chief Executive Officer s Report Results meet targets It was a remarkable year, with WMC transforming into a new company Alumina Limited to focus solely on its alumina and aluminium interests. Shareholders now have a direct investment in a worldwide resources business with strategic strength and a history of consistent performance. aluminium prices were the major contributor to the reduced profit in AWAC s world-class assets delivered a solid return on equity of 19 per cent in 2002, an excellent result especially during a low point in the economic and market cycles. Cash flows (before capital contributions and dividends paid to partners) for AWAC for the year were US$348 million and an average of US$380 million over the last 5 years. AWAC s debt is minimal and the level of capital expenditure required in 2002 was again relatively low at US$112 million. The AWAC 2003 Business Plan includes sustaining capital expenditure less than depreciation. It is AWAC s strong and consistent cash flows that generate reliable returns for shareholders. AWAC s operational strength As the CEO of Alumina Limited, I am impressed with AWAC management s focus on achieving world s best practice throughout its business activities results AWAC s leading position in the worldwide alumina market and its low-cost operations have returned a strong financial result for Alumina Limited in a challenging environment. Alumina Limited s financial results for the year were in line with targets and expectations. Profit after tax, from continuing operations, was $210 million. This result is in line with the Demerger Scheme Booklet forecast, but is 25 per cent lower against the performance of the business in Weakening alumina and The financial results for 2002 were assisted by a relentless drive to improve cash operating costs, a commitment to customer needs and to continually improving what already is a successful business. Employee know-how and technological skills contributed to increased production in 2002 of 12.3 million tonnes, partly as a result of production creep and de-bottlenecking. New record production levels were achieved at the San Ciprian, São Luis, Jamalco and Suralco refineries, and at the Portland aluminium smelter. The ability to utilise technology and other improvements throughout AWAC s network contribute to a capital efficient increase in production capacity. Pg.15

16 Alumina Limited Concise Annual Report 2002 Chief Executive Officer s Report (CONTINUED) The effort undertaken to increase labour productivity and reduce bauxite costs at both Point Comfort and Jamalco in 2002 will position AWAC well in Total production and sales volumes are expected to rise in AWAC acquired in 2002 a further 6 per cent interest in Halco and a further 5 per cent interest in MRN, adding to the company s bauxite assets. AWAC s integrated worldwide network spans bauxite mining to marketing alumina. AWAC delivers what their customers need high quality alumina. AWAC s flexibility in production capacity, location and quality of product is an important strength as a longterm supplier to many of the world s largest alumina customers, including the three largest western non-integrated smelters. AWAC is a world leader in safety. In 2002, lost workdays declined to 0.70 per million hours from 0.85 in the previous year. The Jamalco refinery had no recordable injuries in 2002, a superb achievement. The Victorian aluminium smelting operations also recorded 2.5 million hours free of lost workdays. Alcoa of Australia has publicly advised that emissions from the liquor burner at the Wagerup refinery have been reduced by more than 90 per cent since it was installed in A significant investment in plant at the Wagerup refinery to reduce odour emissions from the plant was completed prior to June 2002 and is successful. Since that time this operation has continuously operated well below the licence requirements for odour emissions and complaints from the local community have materially reduced. Alcoa of Australia takes the concerns of its employees and nearby residents of Wagerup seriously and its objective is to provide certainty that the community s environment is a safe one. It has worked closely with employees, residents, local shires and the Western Australian Government to address these concerns, including establishing an employee rehabilitation program and community consultation processes. Planned and sustainable growth We believe that AWAC has the investment options and capability to retain and enhance its market position, currently 25 per cent of global production capacity. With AWAC s strategy to expand its operations and continuously improve costs, there are several opportunities to meet increased demand for alumina. For example, the agreement reached with the Jamaican Government on a substantial reduction in bauxite royalties, together with a workforce restructuring and improved production efficiency, has enabled a 250,000 tonne expansion of the Jamalco refinery to 1.25 million tonnes during This gives Jamalco an excellent future as a lower-cost producer and potential for further expansion. AWAC has been developing a number of strategic initiatives to secure long-term growth. A letter of intent was signed in 2002 with BHP Billiton that will permit the expansion of the joint venture Suralco refinery in East Suriname. Developments in West Suriname are also promising, with AWAC participating in work on the feasibility of development of a new integrated hydroelectric power facility. Significant brownfield expansion of production at Jamalco, Pinjarra and Wagerup in Australia and São Luis in Brazil are available. This growth will involve the use of proven AWAC technology and operational processes that reduce the investment risk and cost. Pg.16

17 Clarification area Wagerup Plans for 2003 AWAC will continue to review its operations to ensure they continue to meet performance targets and fits within long-term strategy. This process has identified AWAC s specialty chemical business as a sale opportunity. Alumina Limited expects no abnormal costs as a result of the divestment as the assets are expected to be sold at full value. AWAC management has identified further improvements in operating costs in The strengthening of the Australian dollar in early 2003, if continued through the year, would adversely affect profit for Following the demerger, Alumina Limited had approximately $535 million of bank financed debt. This is low cost funding and we will continue to review our funding structure to ensure it continues to be the most economical available. In early 2003, LME aluminium prices have traded at slightly above second half 2002 prices. It remains difficult to gauge the direction for alumina and aluminium markets in The expectation is for an increase in worldwide aluminium production in 2003 but the level of demand and stocks will be highly dependent on improving economies in most countries. Alumina spot prices have sharply increased during the first quarter of 2003 to above US$200 per tonne. The majority of AWAC s alumina is sold under long-term contracts to its customers. It is difficult to predict the full year impact on aluminium and alumina prices at this time. We expect further growth in western-world alumina demand to continue in Demand for smelter grade alumina in China continues to grow substantially above western-world demand. This growth is a result of the significant rise in domestic aluminium consumption, and that trend in consumption is expected to continue for the foreseeable future. The demand for Chinese alumina imports has created short-term market tightness and a consequent rise in spot alumina prices in recent months. AWAC s long-term safety goal is to have zero workplace injuries. In 2003, specific new initiatives to reduce the ergonomic risk in all operations are being implemented and we are also seeking to continue to reduce the cause of environmental noncompliance incidences. The program of property acquisition adjacent to the Wagerup refinery and the government and community consultation processes are being actively managed. Alumina Limited s management are committed to ensuring AWAC continues to be successful in delivering superior returns. I believe AWAC s position and potential for growth are unique with its well established world-class assets, excellent cash flow, and a leading market position. Alumina Limited s strong balance sheet and prospects for growth make this an attractive investment for our shareholders. " John Marlay Chief Executive Officer Pg.17

18 Alumina Limited Concise Annual Report 2002 SECTION 1. A New Company Alumina Limited represents an outstanding opportunity to invest in the largest single-purpose alumina company in the world and the third largest resource company in Australia. Alumina Limited is a rare investment opportunity: a new company with a strong financial history. It provides a direct interest in the world s leading alumina business. It was formed following the demerger of WMC Limited on 11 December 2002: Alumina s Independence Day. Alumina Limited is not a typical new company. As part of WMC Limited, it has a history going back more than 40 years. It has a strong financial history and market position. Yet, the new start that was delivered following demerger enables the management of Alumina Limited to pursue a business strategy independent of other WMC businesses. Management s initial focus has been to establish Alumina Limited as a stand-alone entity. An important function is to generate a better understanding among shareholders and the financial markets of Alumina Limited s business and why they can expect Alumina Limited to deliver excellent long-term returns to shareholders. Alumina Limited represents an outstanding opportunity to invest in the largest single-purpose alumina company in the world and the third largest resource company in Australia. The demerger The demerger of WMC in December 2002 resulted in the formation of two separate entities: Alumina Limited and WMC Resources Ltd. Alumina Limited s principal asset is the 40 per cent interest in the operating entities that form Alcoa World Alumina and Chemicals (AWAC). Following the demerger, eligible WMC shareholders received one WMC Resources Ltd share for each WMC share that they held. These shareholders continued to hold the same number of shares in WMC immediately after the demerger, however those shares traded under the new name of Alumina Limited on the ASX from 4 December Shares in WMC Resources Ltd also commenced trading on the ASX on that date. The combined share price of the two companies since that date has endorsed the demerger decision. The demerger was originally intended to occur earlier than December However, the demerger was delayed until Australian demerger tax relief legislation was enacted. That legislation gave tax relief to WMC shareholders who held their WMC shares on capital account. Before demerger WMC Limited Copper-uranium Alumina Nickel Fertilizers Development projects After demerger Alumina Limited Alumina (AWAC interests) WMC Resources Ltd Copper-uranium Nickel Fertilizers Development projects Pg.18

19 Operator closing valve in clarification area Wagerup Alumina Limited 2002 Timeline Key events/dates of Alumina Limited s involvement in the alumina industry: Late "Joint exploration (with two other Australian 1950s "companies) of bauxite deposits and secured other resources "Formation of the integrated aluminium company, Alcoa of Australia (AoA), with WMC holding a 20% interest, and the Aluminum Company of America with a 51% interest and the obligation to provide the technology, aluminium industry expertise and finance. "AoA Construction begins at Kwinana and Point Henry "AoA First ingot poured at Point Henry, using US-sourced alumina "AoA First export shipment of Kwinana alumina to Japan "AoA Pinjarra alumina refinery commissioned "AoA Wagerup alumina refinery commissioned "50 millionth tonne of alumina shipped. "Production begins at Portland Smelter "WMC progressively increased its holding in AoA to 48.25% "Alcoa World Alumina and Chemicals (AWAC) formed. WMC s interest in AWAC is 40% (including 39.25% of AoA) "100 millionth tonne of alumina shipped "AWAC acquires Inespal s refinery in Spain "AoA expansion at Wagerup completed. Annual operating capacity is increased from 1.75 million tonnes to 2.2 million tonnes "Demerger of WMC results in formation of Alumina Limited. Pg.19

20 Alumina Limited Concise Annual Report A New Company (CONTINUED) Relative Performance Since Listing Indices Rebased to Dec Dec Dec 02 3 Jan Jan Jan 03 2 Feb Feb Feb 03 Alumina Limited ASX/Standard & Poor s 200 Index Bloomberg Europe Metals and Mining Index Global Aluminium Index Source: Share price and indices data from Bloomberg The business Alumina Limited s partnership with Alcoa is a business of mining bauxite ores, refining the ore to produce alumina and further processing of the alumina to produce aluminium metal and alumina-based chemicals. Pg.20

21 Alumina Limited 2002 Haulpak at bauxite mine Willowdale Mechanical repairs Willowdale Pg.21

22 Alumina Limited Concise Annual Report 2002 SECTION 2. AWAC: 25% of the Global Market AWAC s global interests include operations in Australia, the United States of America, the Republic of Guinea, Suriname, Jamaica, Brazil and Spain. Alumina Limited s strength is our 40% interest in Alcoa World Alumina and Chemicals (AWAC), which has a worldwide network of refineries providing 25% of global production capacity. AWAC was formed on 1 January 1995 and comprises a series of operating entities (including Alcoa of Australia) in which Alcoa has a 60 per cent interest and Alumina Limited a 40 per cent interest (39.25 per cent interest in the case of Alcoa of Australia). AWAC s global interests include operations in Australia, the United States of America, the Republic of Guinea, Suriname, Jamaica, Brazil and Spain. Their alumina production capacity is Alumina Limited s Ownership in AWAC Alumina Limited 40% Alcoa World Alumina and Chemicals (AWAC) Bauxite mines Alumina refineries Alumina-based chemicals Aluminium smelters Alcoa Inc. 60% approximately 13.2 million tonnes a year. Of that, about 7.8 million tonnes are in Australia, 2.3 million tonnes in the United States of America, 1.3 million tonnes in Spain, 1.0 million tonnes in Suriname, 0.5 million tonnes in Jamaica and 0.2 million tonnes in Brazil. AWAC s management continues to pursue AWAC s historic practice of increasing production capacity over time. However, this is done with full regard to current and expected market conditions. AWAC s flexible contract arrangements and work practices enable production levels to be adjusted in either direction to respond to market demand. In 2002, AWAC employed more than 11,000 people worldwide. AWAC s interests Within Australia In Australia, bauxite is sourced from AWAC s 100 per cent owned Huntly and Willowdale bauxite mines, located in the Darling Ranges, south of Perth. They supply AWAC s three alumina refineries in Western Australia. The Kwinana, Pinjarra and Wagerup refineries have capacities of 2.1 million tonnes, 3.4 million tonnes and 2.3 million tonnes, respectively. Total alumina production in 2002 for the three refineries was virtually the same as in Pinjarra increased production to a record level, while production declined slightly at Wagerup and Kwinana. Alumina produced in Australia by AWAC is shipped to its primary aluminium smelters at Point Henry and Portland in Victoria, or to overseas customers, principally in the United States, Canada, the Middle East, Europe and South Africa. AWAC also produces primary aluminium in Victoria. Through Alcoa of Australia, AWAC owns and manages the smelter at Point Henry, near Geelong, Pg.22

23 and holds a 55 per cent controlling interest and management of a smelter at Portland. In 2002, Portland production increased by 3 per cent. Point Henry production for 2002 was similar to Nearly half of this is sold to the neighbouring Kaal Australia rolling mill. United States of America Point Comfort Refinery Alcoa World Alumina LLC owns 100 per cent of an alumina refinery at Point Comfort in Texas. It has a nominal capacity of 2.3 million tonnes a year and is the swing capacity in the AWAC system. Most of the refinery's smelter grade alumina is sold to smelters in the United States. With increasing demand from United States smelters, Point Comfort was able to increase alumina production during During the year, AWAC completed favourable changes in Point Comfort s contract price for bauxite and introduced greater flexibility in staffing. Republic of Guinea Halco AWAC has a 43 per cent interest in Halco, a Guinean bauxite mining company. Halco is an international mining consortium that owns 51 per cent of Compagnie Bauxite de Guinée, the manager of a number of bauxite mines at Boké in Guinea, West Africa. The Republic of Guinea owns the remaining 49 per cent of Compagnie Bauxite de Guinée. Long-term agreements to purchase bauxite mined by Compagnie Bauxite de Guinée expire after Suriname Suralco AWAC owns 100 per cent of Suralco, which owns 55 per cent of a 1.9 million tonne capacity alumina refinery at Paranam, bauxite mines in north-east Suriname and south of Paranam, and hydroelectric facilities at Afobaka Lake. The refinery is owned by a joint venture held 55 per cent by Suralco and the remainder by San Ciprian alumina plant Spain Pg.23

24 Alumina Limited Concise Annual Report AWAC: 25% of the Global Market (CONTINUED) ,7, Pg.24

25 Alumina Limited ,10,11,12,13. AWAC s Global Interests AWAC Bauxite and Alumina Operations USA 1. Point Comfort R Jamaica 2. Clarendon B R Brazil 3. São Luis R 4. Trombetas B Spain 5. San Ciprian R Suriname 6. Paranam R 7. Moengo B 8. Accaribo B Australia 9. Kwinana R 10. Huntly B 11. Pinjarra R 12. Willowdale B 13. Wagerup R 14. Portland S 15. Point Henry S Guinea 16. Sangaradi B B AWAC Bauxite Mines R AWAC Alumina Refineries S AWAC Aluminium Smelters an affiliate of BHP Billiton PLC. Suralco acts as manager of the joint venture and operates the refinery. Production for 2002 was slightly above the previous year. Jamaica Jamalco AWAC has a 50 per cent interest in Jamalco, the owner and manager of bauxite mines, an alumina refinery and port facilities in Jamaica. The other 50 per cent is owned by Clarendon, a Jamaican Government company. Jamalco's alumina refinery has a nominal capacity of 1.0 m tonnes a year. AWAC is currently expanding the Jamalco refinery by 25 per cent to 1.25 m tonnes a year at a cost of US$115 million. A bauxite levy was removed, effective from the beginning of 2003, assuming the planned mechanical completion of the expansion occurs by December Increased production is due to commence in The removal of this levy and the expansion will significantly lower costs. A further expansion of the Jamalco refinery is currently being evaluated. The refinery produces smelter-grade alumina, with AWAC s share of production for 2002 increasing significantly. The production in 2001 was affected by a labour strike late in that year. Brazil Abalco Abalco, an AWAC entity in Brazil, is a participant (18.9 per cent) in a consortium that owns the Alumar alumina refinery at São Luis in north-eastern Brazil. Abalco has disproportionate rights in any expansion of the Alumar refinery. The refinery has a nominal production capacity of 1.3 million tonnes of smeltergrade alumina a year and AWAC believes there are opportunities to expand beyond this production capacity. Approximately half of the output is consumed at an adjacent smelter with the remainder exported to third-party customers. There was an increase in AWAC s share of alumina production for 2002 to more than 240,000 tonnes. Production in 2001 was affected by energy rationing caused by drought conditions affecting hydroelectric power generation. Pg.25

26 Alumina Limited Concise Annual Report AWAC: 25% of the Global Market (CONTINUED) Spain San Ciprian refinery AWAC has 100 per cent ownership of the San Ciprian alumina refinery, which is located on the eastern coast of Spain. The refinery has an annual production capacity of 1.3 million tonnes having completed a 0.22 million tonne expansion in This expansion enabled alumina production to increase in Approximately 70 per cent of alumina produced at the San Ciprian refinery is sold to Alcoa's smelters in Spain. The balance of production is mainly sold as commodity-hydrate alumina to AWAC's chemicals business and to other chemical manufacturers in Europe. Alumina-based chemicals AWAC is a major producer of alumina-based chemicals. The majority of chemical-grade alumina for AWAC s chemical plants is sourced from the Point Comfort, San Ciprian and Kwinana alumina refineries. AWAC sells industrial chemicals to customers in a broad spectrum of markets for use in refractories, ceramics, abrasives, polymer additives, chemicals processing and other speciality applications. AWAC also has interests in 17 aluminabased chemicals plants in Australia, the United States of America, the Netherlands, Germany, Spain, Japan, India and China. Milling area Pinjarra Shipping AWAC owns and operates a shipping business that provides transportation services to AWAC s alumina business and to third parties, including Alcoa. Operating both owned and chartered vessels, the shipping business transports dry and liquid bulk cargoes, including bauxite, alumina, caustic soda, fuel oil, petroleum, coke and limestone. Pg.26

27 Alumina Limited 2002 Maintenance on stock pile conveyer Pinjarra Pg.27

28 Alumina Limited Concise Annual Report 2002 SECTION 3. Consistent and Reliable Results During 2002, Alumina Limited delivered strong financial results that were on target. This was due to AWAC s robust operational performance during difficult market conditions. AWAC provides consistent and reliable results, driven by an outstanding business. Historically, shareholders have been rewarded with strong growth and high dividends. During 2002, Alumina Limited delivered strong financial results that were on target. This was due to AWAC s robust operational performance during difficult market conditions. The AWAC Agreements provide that AWAC must distribute through dividends in each financial year at least 30 per cent of the net income of the prior year and AWAC must endeavour to distribute dividends above 30 per cent of the net income of AWAC consistent with prudent financial management and in the context of the strategic and business objectives of AWAC. Returns and cash flow Alumina Limited s equity share of AWAC* after tax profit in 2002 was $216 million compared to $279 million in the previous year, a drop of 23 per cent. Cashflow from operating activities for continuing operations in 2002 was $273 million, down 27 per cent from $374 million in This was due to lower realised alumina and aluminium prices, and a stronger A$/US$ exchange rate, but was in line with the forecast provided in the Demerger Scheme Booklet. * Alumina Limited accounts for its interests in the AWAC joint venture on an equity accounting basis. Returns to shareholders Alumina Limited s share of dividends received from AWAC for 2002 was also lower at $281 million, down $96 million from the record dividends received in Around 93 per cent of these dividends were fully franked. Directors declared a dividend of 18 cents a share for the year. Based on AWAC s strong cash flows, we intend as far as practicable to continue distributing to shareholders all fully franked dividends received. Dividends Received by Alumina Limited (Franked and unfranked) A$million Franked Unfranked Source: Alumina Limited 2002 Pg.28

29 AWAC Alumina Yearly Production 000 tonnes 15,000 12,000 9,000 6,000 Quality control at Kaal Australia rolling mill 3,000 0 The practice of AWAC, confirmed by the Strategic Council in September 2002, has been to distribute 100 per cent of cash flow from the AWAC entities. Alumina Limited expects AWAC to continue this practice while it is consistent with the prudent financial management of AWAC Year Source: Alumina Limited Managing expenditure AWAC had cash of US$96 million and debt of US$50 million as at 31 December Alumina Limited s borrowings were $535 million at 31 December 2002, lower than forecast in the Demerger Scheme Booklet due to the timing of dividend receipts. Capital expenditure of US$112 million in 2002 was 72 per cent of depreciation compared with 68 per cent in AWAC s sustaining capital expenditure in 2003 is again expected to be less than depreciation. Disciplined capital expenditure helps AWAC to continue generating high levels of dividends. AWAC Alumina Capacity Excludes St. Croix 000 tonnes 15,000 12,000 AWAC earned an impressive 19 per cent return on equity in 2002 when alumina and aluminium prices were at low levels. 9,000 Operational performance AWAC s robust operational performance in 2002 resulted from increased production partly offsetting the impact of falling prices on profits. Alumina production declined in 2001 as demand for alumina fell. As demand increased in 2002, AWAC lifted alumina production levels by 3%. Increased production: Alumina Limited s equity share of alumina production increased by 3.5 per cent to 4.9 million tonnes. AWAC s total production was 12.3 million tonnes. 6,000 3, Capacity Source: Alumina Limited Pg.29

30 Alumina Limited Concise Annual Report Consistent and Reliable Results (CONTINUED) The first full year of expanded production at San Ciprian (220,000 tonnes of extra capacity) contributed to this result as did the return to normal production levels at Jamalco following a strike in the fourth quarter of Aluminium production in Australia increased in 2002, with record aluminium production being achieved at Portland in the second half of Reducing costs The total cost of alumina and aluminium production in 2002 in US$ terms was similar to the previous year. Increased production from Jamalco after resolution of the labour dispute offset the Exchange Rate Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q US$/AU$ Source: 98 Fx Converter 99 Onwards WMC Limited/Bloomberg Pg.30

31 Alumina Limited 2002 Stacker in standing area Pinjarra Precipitation tanks Pinjarra Pg.31

32 Alumina Limited Concise Annual Report Consistent and Reliable Results (CONTINUED) increased production from the higher cost facility at Point Comfort. The recent large increases in crude oil prices will have an impact on energy costs at San Ciprian and Jamalco refineries, which utilise fuel oil for energy production. At Point Comfort, natural gas cogeneration facilities purchase gas on both longand short-term contracts. Operating in a difficult market Poor market sentiment and sluggish United States and European economic growth, a downturn in equity markets and anticipated higher exports of aluminium production from China, all impacted on lower LME prices. The benchmark LME cash price for aluminium averaged US$0.61/lb for 2002, a drop of US$0.04/lb from The aluminium price in the first half of 2002 traded between US$0.61/lb US$0.64/lb. From mid-july to late-october, it weakened and traded in the range of US$0.58/lb US$0.61/lb. In the last quarter of 2002, the aluminium price moved up into the US$0.63/lb US$0.64/lb range, supported by cuts in US$ interest rates and a devaluing US dollar. However, prices continue to face capping by high inventory levels, which have crept up from a ratio of approximately 10 weeks of consumption in early 2001 to a closing level for 2002 of over 11 weeks. AWAC sells approximately 40 per cent of its alumina production to Alcoa s primary metal group. The price paid for most of AWAC production is based on a weighted average of external AWAC sales. Most of the remaining production is sold by contract to third parties. Most of AWAC s long-term contracts include terms with pricing components linked to differing LME aluminium prices, fixed prices and spot prices. Other significant events Prior to the company s demerger, WMC conducted a feasibility study to determine the viability of acquiring and developing a titanium dioxide project (Corridor Sands) located in Mozambique from Southern Mining Corporation Limited. Following successful completion of the feasibility study, WMC Resources Ltd agreed on 9 December 2002 to acquire 100 per cent of Corridor Sands. The first tranche of the cost of acquisition of US$62.5 million was satisfied through the issue of 14,080,604 shares in both Alumina Limited and WMC Resources Ltd. The final tranche of up to US$25 million will be paid by WMC Resources Ltd. Scheme Booklet 2002 forecast Alumina Limited performed in line with the forecasts that were outlined before the demerger in the Demerger Scheme Booklet. Key comparisons are: Alumina Limited Pro forma Actual Forecast Net profit attributable to members of Alumina Limited $million Alumina Limited s dividend received from AWAC $million Net cash flow after tax and before financing activities $million AWAC (100% basis) Profit after tax (US$million) Alumina production ( 000 tonnes) 12,440 12,310 Aluminium production ( 000 tonnes) Market assumptions LME Aluminium (US$/lb) US$/A$ exchange rate Pg.32

33 Aluminium Price US$/tonne LME Source: Alumina Limited 1000 Jan 2000 Apr 2000 Jul 2000 Oct 2000 Jan 2001 Apr 2001 Jul 2001 Oct 2001 Jan 2002 Apr 2002 Jul 2002 Oct 2002 Alumina refinery Pinjarra Pg.33

34 Alumina Limited Concise Annual Report 2002 SECTION 4. Market Leader A network of refineries across the globe, which enable AWAC to respond and cater to the needs of customers everywhere. AWAC is the market leader because it has the technology, systems, assets and management to drive operational excellence and meet its worldwide customer needs. Sources of competitive advantage AWAC s management is focused on further strengthening its position as number one alumina producer in the world. This involves identifying and continually evaluating AWAC s sources of competitive advantage. These sources include: "Large long-life bauxite reserves that are sufficient to meet the expected requirements of the alumina-refining operations for the foreseeable future. "A network of refineries across the globe, which enable AWAC to respond and cater to the needs of customers everywhere. "Low-cost production, with the average alumina production cost position straddling the first- and second-lowest cost quartiles on a global basis. "Three of the world s six lowest-cost refineries: Pinjarra, Wagerup and Kwinana. "Management that consistently delivers strong performance in safety, the environment, cost reduction, disciplined and profitable growth, and return on capital. "Technological leadership, with continued use of the world s best available technology in order to increase capacity, reduce the cost of production and operate more efficiently in all stages of the production process. "Integrated operations, with significant synergies achieved through integration of bauxite, alumina and aluminium operations. While the cost of purchase and transport of bauxite is a major factor for many producers, AWAC is able to take advantage of the proximity of ore source to much of its refining capacity. "As a global operation with mining, refining, smelting and chemical operations ranging across many cultures, AWAC encourages the cross-sharing of ideas and problem resolution to maximise returns. AWAC s shipping business services both AWAC and third parties "AWAC is ungeared (with gross debt of US$50 million as at 31 December 2002 offset by cash of US$96 million at balance date). Pg.34

35 Pot room Portland Alumina Limited 2002 Leading Alumina Producers 000 tonnes Alumina Industry Estimated Cash Cost Curve US$/tonne 15,000 12,000 9,000 6,000 3,000 0 AWAC Chalco Alcan BHP Billiton Glencore Kaiser Rio Tinto 2002 world production Company production (kt/a) AWAC Position Source: Brook Hunt Source: Brook Hunt Pg.35

36 Alumina Limited Concise Annual Report Market Leader (CONTINUED) Leaders in mining AWAC invests heavily in the future, with its bauxite mines having a life of up to 80 years. In mining bauxite, AWAC utilises the latest technology and systems. For example, in 2002, AWAC used world-first Fourier Transform Infra-Red (FTIR) Robotics technology for the exploration drilling analyses of chemical properties. FTIR facilitates the sampling of large numbers of bauxite ore samples prior to mining. It provides a detailed profile of the ore body and results in tighter mining practices which in turn lead to a reduction in the flow of impurities into the refinery system. At the Kwinana refinery, an eight-stage process of moving bauxite ore from the train into the refinery was reduced to five stages with the acceptance of just-in-time principles and the utilisation of Alcoa Business System methodologies of standardised processes, visual controls and binary communication. Leaders in refining AWAC s refineries are among the largest and most efficient in the world. All AWAC refineries have received ISO9000 quality accreditation. Leaders in business systems Alcoa Business System The key to AWAC s efficiency, and the factor that most sets it apart from its competitors, is the Alcoa Business System (ABS). ABS has been designed to provide customers with exactly what they need, when they need it and at the lowest cost. To achieve this lower cost, ABS provides a disciplined method of eliminating waste, in all forms, throughout the organisation. ABS is an integrated and effective process that embeds improved productivity, technology enhancement and capital intensity across the business. It integrates the marketing of alumina to customers, operating efficiency, the application of technology and capital investment decisions. Leaders in safety AWAC is committed to leading the way in the area of workplace safety. AWAC s safety management systems provide for continued improvement in the identification, assessment and control of health and safety risks. In 2002, AWAC once again achieved further improvements in its safety results. For the year of 2002 the lost workday rate average was 0.70 per million hours worked, down from 0.85 for 2001 and has halved since Elimination of injuries is always the goal. One area that AWAC is targeting with particular vigour is ergonomic-related injuries. Ergonomic-related injuries, particularly sprains and strains, comprise a major component of serious injuries within AWAC s worldwide interests. AWAC has developed a strategy aimed at reducing such injuries. The strategy includes education and training, risk identification, hazard analysis and control, managing work-related musculo-skeletal disorders, record keeping and technology transfer. An indication of AWAC s commitment to safety in all its operations is the fact that the Jamalco refinery had no recordable injuries for Pg.36

37 Alumina Limited 2002 Stacker operator in standing area Pinjarra Milling area Pinjarra Pg.37

38 Alumina Limited Concise Annual Report 2002 SECTION 5. Growth and Strategy These potential expansion opportunities exceed a total of three million tonnes of alumina capacity. AWAC s growth is driven by a strategy of low-risk, high-return brownfield expansion. This strategy allows AWAC to maintain its 25% share of global production capacity. AWAC is a significant global business with a history of strong profits and growth, delivered through a consistent business strategy. Key elements of the growth strategy are brownfield expansion of existing operations and increasing capacity through operational improvements. Expansion of existing operations Brownfield expansions typically require less than half the per unit capital expenditure, and are of lower risk, than greenfield startups. Yet they can be expected to produce the same, if not better, operating results. AWAC is currently expanding its operations at the Jamalco refinery. Potential brownfield expansion opportunities exist at operations at Wagerup and Pinjarra, and in Suriname, São Luis and a further expansion of Jamalco. These potential expansion opportunities exceed a total of three million tonnes of annual alumina capacity. This expansion capacity equates to approximately two years of recent growth in the global alumina market. On 17 October 2002, AWAC announced that it had signed a letter of intent with BHP Billiton, its 45 per cent partner in a joint venture in Suriname, covering several issues, including: Pinjarra refinery Pg.38

39 "Continuation of mining and refining of bauxite in eastern Suriname beyond the existing term of the current joint venture agreement (2006). "Preparation for an approximate 12 per cent expansion of operations at the Paranam refining facility, to capture operatingcost efficiencies. "Investigation of bauxite mining and refining opportunities in western Suriname over the next two years. Separately, AWAC will explore the feasibility of establishing hydroelectric power opportunities in western Suriname that can be used for future development needs. Incremental growth AWAC has successfully pursued a strategy of achieving incremental growth in refinery capacity. Basically, a small annual increase through each site can prove just as profitable, and far less costly than investing in greenfield operations. This growth is achieved by a combination of de-bottlenecking operations and improved efficiencies. De-bottlenecking involves optimising a process plant through minor capital expenditure and procedural change. Acquisitions AWAC has the expertise, borrowing capacity and track record to acquire under-performing assets and improve their relative cost position and profitability. In late 2002, as forecast in the Demerger Scheme Booklet, Alumina Limited contributed A$24 million to AWAC for the acquisition of a further 6 per cent interest in Halco (a bauxite mining asset in Guinea), as well as A$48.6 million to AWAC for the acquisition of a further 5 per cent interest in MRN (a bauxite mining asset in Brazil). These purchases result from the Alcoa merger with Reynolds Metals and the subsequent transfer of Reynolds bauxite assets to AWAC. Other growth opportunities A decision by Alcoa and Chalco to proceed with the 50/50 joint venture with respect to Chalco s bauxite alumina and aluminium facilities at Pingguo in China may be formalised in the second half of Any decision by AWAC on the acquisition of the Pingguo bauxite and alumina assets is still to be made and is subject to a successful conclusion to negotiations on the joint venture. The Pingguo alumina refinery is being expanded in 2003 to a capacity of 850,000 tonnes per annum. Alcoa acquired a greenfield bauxite deposit in Juruti, Brazil in 2000 as a result of its merging with Reynolds in Alumina Limited and Alcoa continue to have discussions on the Juruti deposit. Pot room operator Portland Pg.39

40 Alumina Limited Concise Annual Report 2002 SECTION 6. Creating and Delivering Value An experienced management team who understand the environment within which they operate and how to achieve the goal of creating and delivering value. Independence gives Alumina Limited s management the opportunity to focus on the AWAC business with one goal in mind: creating and delivering value to shareholders. Senior management The job of creating and delivering value to shareholders is in the hands of an experienced management team who understand the environment within which they operate and how to achieve the goal of creating and delivering value. The senior management team is: John Marlay BSc GAICD Chief Executive Officer: joined WMC in August 2002, following a role as Head of Strategy for RMC Group PLC in London. Mr Marlay was previously Executive General Manager Business Integration, Hanson PLC from , and Executive General Manager, Europe for Pioneer International Ltd from He has held senior management roles with James Hardie Industries Limited and Esso Australia Ltd. Robert Davies CMA, Canadian designation Chief Financial Officer: responsible for finance, accounting, treasury, investor relations and tax. Mr Davies was with WMC for over six years with his final position being General Manager Treasury and Tax, also being responsible for investor relations and risk management. Mr Davies previously held the position of Treasurer at WMC and held various corporate and operations finance roles over a 20 year period with Utah International and then BHP in Canada, United States, Chile and Australia. Stephen Foster BCom LLB(Hons) GdipAppFin (Sec Inst) "John Marlay "Robert Davies "Stephen Foster General Counsel & Company Secretary: responsible for legal, company secretarial, shareholder services, insurance and human resources, joined WMC Limited in November 2002, following more than three years with Village Roadshow Ltd as Business Affairs Manager (Projects). Mr Foster previously held legal positions with WMC s Legal and Treasury departments from and with Arthur Robinson & Hedderwicks (now Allens Arthur Robinson) from Pg.40

41 Alumina Limited representation in AWAC Alumina Limited has proportional representation on the Board of Directors of Alcoa of Australia and on the holding company for American operations. While Alumina Limited has the right to proportional representation on the board of directors of any AWAC entity, Alumina Limited generally only seeks representation on boards of entities whose revenue exceeds 25 per cent of the consolidated revenue of AWAC. Alumina Limited s objectives are to seek to ensure: "the AWAC business continues to be managed as a world leader in safety and its leading market position produces strong dividends for shareholders "the development of a long-term strategy that results in growth in AWAC that provides the potential for capital growth in shareholder equity in Alumina Limited "the continuation of the close joint venture relationship with Alcoa "shareholders are well informed on the value of AWAC and that this is reflected in the share price "the development of a range of options to facilitate the expansion of production to meet the growth in worldwide alumina demand. AWAC Strategic Council The strategic direction and business of AWAC is managed by the Strategic Council, a five-member body, which is established under, and governed by, the AWAC Agreements. Three members are appointed by Alcoa, of whom one is Chairman, and two by Alumina Limited, of whom one is the Deputy Chairman. The role of the Strategic Council is to consider decisions relating to: "the long-term strategy for AWAC "the development, acquisition and disposal of assets "funding and dividend policy "capital, operating budgets and equity calls of AWAC companies. Alumina Strategic Partner Strategic Council (Alcoa and Alumina) Strategy Investments Dividends AoA AWALLC (Alcoa and Alumina) Governance Performance AWAC Management (Alcoa) Marketing Operations Alcoa Business System (ABS) Alumina Limited 2002 Pg.41

42 Alumina Limited Concise Annual Report 2002 SECTION 7. Corporate Governance Alumina Limited is committed to protecting and enhancing shareholder value and adopting benchmark governance policies and practices. This includes ensuring that all regulatory requirements are met and ethical standards maintained. We manage resources responsibly, and seek to provide a high level of transparency in reporting to shareholders and stakeholders. Alumina Limited and the Board The Board, working with senior management, is responsible to shareholders for our overall business performance. It approves company goals and direction, strategic plans, operating budgets and performance targets. The Board ensures that appropriate policies, procedures and systems are in place to manage risk, optimise business performance and maintain high standards of ethical behaviour and legal compliance. Board composition The Alumina Board has five directors four non-executive directors, including the Chairman, and one executive director. The Board considers relevant experience, diverse perspectives and complementary business skills when nominating and appointing new directors. A balance is sought between independent business experience and industry knowledge. Details of each director s skills and experience are set out on pages 44 and 45 of this report. Directors are subject to re-election by rotation at annual general meetings and retire at 72 years of age, as stipulated in the Corporations Act. There is no maximum term for directors and no share qualification. In meeting their obligations relevant to their duties and responsibilities as an Alumina Limited board member, directors may seek independent professional advice at the company's expense, after consultation with the Chairman. Board changes Mr Don Morley, Mr Peter Hay, Mr Ronald McNeilly and Mr Mark Rayner were elected to take office as non-executive directors on 11 December 2002 and Mr John Marlay was also elected to take office as director and appointed Chief Executive Officer on 11December Mr Robert Davies was appointed as alternate director for Mr Mark Rayner on 11 December Chief Executive Officer Our most senior employee, the Chief Executive Officer, is selected by the Board and is subject to annual performance reviews by the non-executive directors. The Chief Executive Officer recommends policy, strategic direction and business plans for Board approval and is responsible for managing day-to-day operations. Board and committee meetings Board meetings are held monthly (except January) and on other occasions, as required. To increase business knowledge, it is intended that Board visits will be made to operational sites. The Audit Committee consists of four non-executive directors, and meets at least four times a year. The committee assists the Board in fulfilling its responsibilities for company accounts and external financial reporting. This is achieved by ensuring that Pg.42

43 Conveyer belt storage area Pinjarra appropriate processes are in place to support the Board to exercise due care, diligence and skill in relation to Alumina Limited s reporting of financial information, applying accounting policies, financial management and internal financial control systems. The Committee operates under a charter, which is available to shareholders of the company on request. The Committee is responsible for the appointment and compensation of external auditors. It reviews the adequacy of audit programs conducted by independent external auditors annually, particularly in relation to the scope and quality of the external audit. The Committee also annually reviews the internal audit function to ensure it is adequately resourced, used effectively and coordinated with the external auditors. The Committee also meets regularly with management, and internal and external auditors, to ensure that adequate controls and practices are in place. The Compensation Committee consists of four non-executive directors, and meets at least two times a year. Its role is to establish and review company remuneration and compensation plans, policies and practices, including remunerating non-executive directors, the Chief Executive Officer and senior executives, and succession planning. On behalf of the Board, the Committee considers remuneration strategy in relation to employees generally with regard to community and industry standards and, where possible, verifies its appropriateness using external information and advice to ensure that: "employee interests are aligned to corporate objectives "the company can attract, develop and retain motivated and talented employees "the integrity of the company's reward program is maintained. The Compensation Committee also determines actual payments to all directors and reviews director remuneration annually based on independent external advice with regards to market practices, relativities, and the duties and accountabilities of directors. Ad hoc Board Committee meetings may be convened occasionally to consider appropriate matters. Directors attendance at board and committee meetings is detailed on page 47 of this report. The Nomination Committee consists of four non-executive directors, and meets as necessary. Its role is to review the membership of the Board, having regard to the present and future needs of the company and to make recommendations to the Board on its composition. If a new director is required, the Committee is to identify for the Board potential candidates with the appropriate mix of skills and experience, with the assistance of external consultants as necessary or desirable. Ethical standards The Alumina Limited Code of Conduct sets parameters for ethical behaviour and business practices for directors, employees and contractors. The Board reviews and updates the code (if necessary or appropriate). The Board is also available to any employee for guidance on ethical issues. Pg.43

44 Alumina Limited Concise Annual Report 2002 Corporate Governance (CONTINUED) Share trading The Company has established a policy on the trading of its shares by its directors and employees. Directors and employees are prohibited from engaging in short-term trading of any Alumina Limited securities, or buying or selling Alumina Limited shares if they possess unpublished price-sensitive information. In addition, directors and senior management must not buy or sell Alumina Limited shares in the period between the end of the half or full financial year and the release of those results. Directors and senior management must also receive approval from the Chairman, Chief Executive Officer or Company Secretary before buying or selling company shares. Disclosure The company has in place comprehensive policies and procedures for the purposes of compliance with its continuous and periodic disclosure obligations under the Corporations Act, and the ASX Listing Rules, including a Continuous Disclosure Policy. The Board also recognises its disclosure obligations under the Corporations Act and the Australian Stock Exchange and New York Stock Exchange Listing rules and has comprehensive policies and procedures in place to meet these obligations. The Company Secretary has primary responsibility for meeting stock exchange disclosure requirements. Conflicts of interest Alumina Limited s directors are required to disclose to the Board details of transactions that may create a conflict of interest. Directors do not participate in Board discussions or vote on matters in which they have a material personal interest. The Board has in place procedures to assist directors in meeting their obligations to disclose potential conflicts of interest. Any work undertaken by the external auditors, Pricewaterhouse- Coopers, that does not directly relate to auditing, must be approved by the Chief Financial Officer. In addition, work involving fees between $50,000 and $250,000 also requires approval from the Chief Executive Officer and Audit Committee Chairman. For work where fees exceed $250,000, the proposed services must be put to a competitive tender with a requirement for the Chief Financial Officer, Chief Executive Officer and Audit Committee Chairman to approve inclusion of PricewaterhouseCoopers in the tender list. Any such work undertaken by Pricewaterhouse- Coopers must also be reported to the next Audit Committee meeting. During 2002, we paid PricewaterhouseCoopers $704,000 to audit the parent entity and controlled entities; and $4,412,000 for other services, primarily for work on the WMC demerger and taxation issues. The PricewaterhouseCoopers partner responsible for the Company s audit has recently been rotated and there will be periodic rotation of the audit partner. Managing business risk Our risk management policy and procedures cover safety, health, environment, property, financial reporting and internal control. Our internal audit plan is being developed with particular emphasis on financial reporting and internal controls. Managing financial exposures The Board's objective for managing financial exposure is to preserve the value to shareholders of their direct interest in AWAC and the financial results of the AWAC business. Our policy is to not hedge price risk exposures. Political donations We have previously donated to political parties having regard to policies that impact on our company and shareholders. No political donations were made during In future, donations will not be made by the company to political parties. Pg.44

45 Alumina Limited 2002 Pg.45

46 Alumina Limited Concise Annual Report 2002 Corporate Governance (CONTINUED) "Don Morley "Peter Hay "Ronald McNeilly "Mark Rayner Board of directors Company directors in office at 31 December 2002 were: Mr Don Morley BSc MBA FAuslMM Chair: Elected as director (non-executive) and appointed Chairman of Alumina Limited effective on 11 December, Director of WMC as the Director of Finance from 1983 until April 2001, Chief Financial Officer from April 2001 April 2002 and an Executive Officer of WMC from May 2002 October Mr Morley retired from his executive duties with WMC on 31 October Mr Morley is also a director of Iluka Resources Ltd. Mr Morley is a member of the Audit Committee, Compensation Committee and the Nomination Committee. Mr Peter A F Hay LLB Director: Elected as director (non-executive) of Alumina Limited effective on 11 December, Chief Executive Officer and member of the board, and former National Executive Chairman, of the national law firm Freehills; Director of Pacifica Group Limited; and former Chairman of the Board of Freehill Hollingdale & Page, Melbourne. Mr Hay is a member of the Audit Committee, Compensation Committee and the Nomination Committee. Mr Ronald J McNeilly BCom MBA FCPA FAICD Director: Elected as director (non-executive) of Alumina Limited effective on 11 December, Deputy Chairman BHP Steel Limited; Executive Director Global Markets BHP Billiton Limited from ; Executive Director and President of BHP Minerals from ; Chairman of Ausmelt Limited; Director of GH Michell Holdings Pty Ltd; Deputy Chairman of Worley Limited; Chairman of Melbourne Business School Limited; Past Director of BHP Billiton Limited, QCT Resources Limited and Tubemakers of Australia Limited. Mr McNeilly is a member of the Audit Committee and Chair of the Compensation and Nomination Committees. Mr Mark R Rayner BSc (Hons) ChemEng FTSE FAusIMM FIEA FAICD Director: Elected as director (non-executive) of Alumina Limited effective on 11 December, Director of Pasminco Limited since 1989 and Chairman since 1992; Director of Mayne Nickless Limited from and Chairman from ; Director of Boral Ltd since February 1996; Director of National Australia Bank Limited from and Chairman from Mr Rayner is a member of the Nomination Committee, Compensation Committee and Chair of the Audit Committee. Pg.46

47 Andrew G Michelmore BEng(Chem) MA(Oxon) FIEAust FIEChemE A director since August 2002 until his resignation on 11 December Tommie C-E Bergman DipEng DipMktg FAIM FAICD A non-executive director since January 2001 until his resignation on 11 December Professor Adrienne E Clarke AO PhD FAA FTSE A non-executive director since July 1996 until her resignation on 11 December Peter J Knight CitWA BEHon FlEAust CPEng FTSE FAICD FAIM A non-executive director since August 1997 until his resignation on 11 December M John Phillips AM BEc FCPA FAIB A non-executive director since July 1996 until his resignation on 18 June "John Marlay Mr John Marlay BSc GAICD Chief Executive Officer: Elected to take office as director and appointed Chief Executive Officer on 11 December, Joined WMC in August 2002, following role as Head of Strategy for RMC Group PLC in London. Mr Marlay was previously Executive General Manager Business Integration, Hanson PLC from He has held senior management roles with Pioneer International Ltd, James Hardie Industries Limited and Esso Australia Ltd. Former WMC directors The directors of WMC Ltd (as Alumina Limited was formerly known before the demerger) resigned as directors on 11December Roger A G Vines CitWA BE HonDSc FAIM FAuslMM FTSE A non-executive director since February 1999 until his resignation on 11 December Ian E Webber AO FTSE FCIT FAIM A non-executive director since June 1997 until his resignation on 11 December David E Meiklejohn BCom DipEd FCPA FAIM FAICD A non-executive director since April 2002 until his resignation on 11 December Mr John Phillips, a non-executive director since 1996, retired on 18 June 2002, and accordingly, the appointment of Mr Donald Morley as an alternate director for Mr Phillips also ceased on that date. Mr Morley was subsequently appointed as alternate director for Mr Tommie Bergman on 11 July Mr Morley resigned as alternate director on 4 September lan G R Burgess AO BSc FTSE HonDSc A non-executive director since 1993 and Chairman since April 1999 until his resignation on 11 December Hugh M Morgan AC LLB BCom FCPA FTSE FAusIMM FAIM ComplEAust A director since 1976 and Chief Executive Officer since December 1990 until his resignation on 11 December Pg.47

48 Alumina Limited Concise Annual Report 2002 currently 9 per cent of their fees and will not receive any other retirement benefits. Executive director and senior executive remuneration Corporate Governance (CONTINUED) Remuneration Non-executive director fees Prior to demerger Total remuneration for non-executive directors is determined by resolution of shareholders. The maximum aggregate remuneration approved for directors is currently $950,000. During 2002, $852,422 was paid. After demerger The compensation committee determines actual payments to directors and reviews director remuneration annually based on independent external advice with regards to market practices, relativities, and the duties and accountabilities of directors. The remuneration for each non-executive Alumina Limited director is $85,000 per annum. The remuneration for the Chairman, Mr Morley, is $212,500. It is intended that non executive directors will have the capacity to direct part of their fees towards the purchase of shares in Alumina Limited. Directors do not receive any payment for participation in Board Committees. Non-executive director retirement benefits Prior to demerger Non-executive directors with more than five years service were previously entitled to retirement benefits equalling the total fees paid in the three years before retirement. Directors with three to five years service previously received pro rata benefits. Nonexecutive directors also received the 9 per cent superannuation levy. Mr M John Phillips retired during the year and received an additional retirement benefit for his services with the company based on the above calculation. After demerger Non-executive directors will receive a superannuation guarantee contribution, required by government regulation, which is Prior to demerger Prior to demerger, long-term performance incentives were based on option plans established under the WMC Employee Share Scheme which usually allotted five-year options annually. All share allotments to executive directors were subject to shareholder approval. On 13 August 2002, WMC announced its decision to suspend future option allotments to senior management under the WMC Employee Share Scheme. After demerger In February 2003, a share plan for employees was introduced. The plan provides reward for employees based on Alumina Limited s performance against two peer indices. Actual rewards depend upon the performance of Alumina Limited exceeding the performance of a percentage of companies in an index on a total shareholder return basis. All rewards for employees through this plan are directed to purchasing Alumina Limited s shares, with executive officers required to hold shares equivalent in value to 0.5 times their salary. These Alumina Limited shares may only be released to executives once the multiple is exceeded and then only those shares over the multiple. The total gross cost (pre tax) of the Share Plan in 2003 is expected to be approximately $460,000, assuming all shares granted vest to employees. Alumina Limited executives receive competitive remuneration packages, which include a fixed annual salary, inclusive of superannuation benefits, a variable short-term incentive which is performance related, and annual long-term incentive taking the form of participation in the Alumina Employee Share Plan, which is based on achieving long-term goals for shareholder return with mechanisms to ensure ongoing significant holdings of Alumina Limited shares. The cost and value of overall remuneration components are considered as a whole and are designed to ensure an appropriate balance between fixed and variable performance-related components, in the short- and long-term. The Alumina Limited Compensation Committee reviews these executive remuneration packages and other employment terms annually. This review is based on performance goals set at the start of the year, relevant market information and independent expert advice. Alumina Limited s variable remuneration is based on achievement of key performance indicators applicable to the individual and the company. Rewards to executives are linked to creating value for shareholders. Pg.48

49 Stacker service personnel in standing area Pinjarra Alumina Limited Directors Attendance At Meetings January To December 2002 Board Board Audit Compensation Board of WMC meeting committee committee committee Superannuation meetings meetings meetings Fund Pty Ltd Directors Eligible Attended Eligible Attended Eligible Attended Eligible Attended Eligible Attended to attend to attend to attend to attend to attend T C-E Bergman I G R Burgess A E Clarke P A F Hay P J Knight J Marlay 1 1 D E Meiklejohn A G Michelmore R J McNeilly H M Morgan D M Morley M J Phillips M R Rayner I E Webber R Woodall 3 3 R A G Vines Pg.49