| ALCAN INC Item 1A Risk Factors 24 ITEM 1A RISK FACTORS The following factors, among others, could cause actual results or outcomes to differ from the results expressed or implied by forward-looking statements and could adversely affect the Companyapstas financial performance and, consequently, the value of the Shares: Alcan is exposed to volatility in the aluminum industry and in aluminum end-use markets, which may adversely affect its financial results because such volatility may significantly reduce revenues without resulting in corresponding cost savings |
| Alcan is a leading global producer of aluminum and aluminum fabricated products |
| The aluminum industry is highly cyclical, with prices subject to worldwide market forces of supply and demand and other influences |
| Prices have been historically volatile and Alcan expects such volatility to continue |
| Although Alcan may use contractual arrangements with customers, employ certain measures to manage its exposure to the volatility of LME-based prices, and is product and segment diversified to a significant extent, Alcanapstas results of operations could be materially adversely affected by material adverse changes in economic or aluminum industry conditions generally |
| Fluctuations in currency exchange rates may negatively affect Alcanapstas financial results and cost structure |
| Economic factors, including foreign currency exchange rates, could affect Alcanapstas revenues, expenses and results of operations |
| A substantial portion of Alcanapstas revenue is determined in US dollars while a significant portion of Alcanapstas costs related to those revenues are incurred in Canadian and Australian dollars and in Euros |
| Fluctuations in exchange rates between the US dollar and these currencies give rise to currency exposure |
| Alcan conducts operations and owns assets worldwide and transacts business in a variety of currencies |
| Alcanapstas operations are energy-intensive and, as a result, its profitability may be adversely affected by rising energy costs or by energy supply interruptions |
| Alcan consumes substantial amounts of energy in its operations |
| Although Alcan generally expects to meet the energy requirements for its aluminum smelters and alumina refineries from internal sources or from long-term contracts, the following factors could materially adversely affect Alcanapstas energy position: * the unavailability of hydroelectric power due to droughts; * significant increases in the costs of supplied electricity or other energy; * interruptions in energy supply due to equipment failure or other causes; or * the inability to extend contracts for the supply of energy on economical terms upon expiration |
| Alcan obtains significant amounts of electricity and other energy under contracts that Alcan may not be able to renew or replace on comparable terms following their expiry |
| Alcanapstas profitability could be adversely affected by increases in the costs of and disruptions in the availability of raw materials |
| The raw materials that Alcan uses in manufacturing its products include alumina, aluminum, caustic soda, plastics, calcinated petroleum coke and resin |
| The prices of many of the raw materials Alcan uses depend on supply and demand relationships at a worldwide level, and are therefore subject to continuous volatility |
| Prices for the raw materials that Alcan requires may increase from time to time and, if they do, Alcan may not be able to pass on the entire cost of the increases to its customers or offset fully the effects of higher raw material costs through productivity improvements, which may cause Alcanapstas profitability to decline |
| In addition, there is a potential time lag between changes in prices under Alcanapstas purchase contracts and the point when Alcan can implement a corresponding change under its sales contracts with its customers |
| As a result, Alcan may be exposed to fluctuations in raw material prices since, during the time lag period, Alcan may have to temporarily bear the additional cost of the change under its purchase contracts, which could have a negative impact on its profitability |
| 24 _________________________________________________________________ Alcan participates in highly competitive markets |
| Alcan is a participant in the market for packaging materials |
| The packaging market is highly competitive, with competition based on cost and innovation |
| Alcanapstas operating results could be adversely affected if Alcan cannot compete effectively in this market or if the market experiences weakness |
| Alcan is subject to risks caused by changes in interest rates |
| Increases in benchmark interest rates will likely increase the interest cost associated with Alcanapstas variable interest debt in a rising rate environment and will increase the cost of future borrowings, which could harm Alcanapstas financial condition and results of operations |
| Alcan could be required to make large contributions to its defined benefit pension plans as a result of adverse changes in interest rates and the equity markets |
| Alcan sponsors defined benefit pension plans for its employees in Canada, the United States, the United Kingdom, Switzerland and certain other countries |
| Alcanapstas pension plan assets consist primarily of listed stocks and bonds |
| Alcanapstas estimates of liabilities and expenses for pensions and other post-retirement benefits incorporate significant assumptions, including expected long-term rates of return on plan assets and interest rates used to discount future benefits |
| Alcanapstas results of operations, liquidity or shareholders &apos equity in a particular period could be materially adversely affected by equity market returns that are less than their expected long-term rate of return or a decline of the rate used to discount future benefits |
| If the assets of Alcanapstas pension plans do not achieve expected investment returns for any fiscal year, such deficiency would result in one or more charges against earnings |
| In addition, changing economic conditions, poor pension investment returns or other factors may require Alcan to make substantial cash contributions to the pension plans in the future, preventing the use of such cash for other purposes |
| Alcan has a unionized workforce, and union disputes and other employee relations issues could harm its financial results |
| The majority of Alcanapstas shop-floor employees are represented by labour unions under a large number of collective labour agreements in various countries, including France, Canada and the United States |
| Alcan may not be able to satisfactorily renegotiate its collective labour agreements when they expire |
| In addition, existing labour agreements may not prevent a strike or work stoppage at its facilities in the future, and any such work stoppage could have a material adverse effect on Alcanapstas financial condition and results of operations |
| Alcanapstas operations are affected by conditions and events beyond its control in countries where Alcan has operations or sells products |
| Economic and other factors in the many countries in which Alcan operates, including inflation, fluctuations in currency and interest rates, competitive factors, and civil unrest and labour problems, could affect its revenues, expenses and results of operations |
| Alcanapstas operations could also be adversely affected by government actions such as controls on imports, exports and prices, new forms of taxation, and increased government regulation in the countries in which Alcan operates or services customers |
| Alcan is exposed to market and credit risks from its derivatives portfolio and trading activities |
| Where judged appropriate, Alcan uses derivatives to hedge, among other things, exposure to changes in exchange rates, interest rates and metal prices |
| Alcan is engaged in trading activities in respect of alumina and metals |
| The Company uses derivatives as one way to protect against losses related to price fluctuations in trading activities |
| Alcanapstas use of derivatives makes it subject to certain market and credit risks |
| These risks could result in credit or derivative-related charges and losses independent of the relative strength of Alcanapstas core businesses |
| Alcan is therefore exposed to risks associated with trading activities and with the derivatives themselves, including counterparty credit risks and the risk of significant losses if prices move contrary to expectations or if Alcanapstas risk management procedures prove to be inadequate |
| The risks from its trading businesses may result in material losses which could adversely affect its results of operations, liquidity and financial position |
| 25 _________________________________________________________________ Alcan may be exposed to significant legal proceedings or investigations |
| Alcanapstas results of operations or liquidity in a particular period could be affected by significant adverse legal proceedings or investigations, including environmental, product liability, health and safety and other claims, as well as commercial or contractual disputes with suppliers or customers |
| Alcan is subject to a broad range of environmental laws and regulations in the jurisdictions in which it operates, and Alcan may be exposed to substantial environmental costs and liabilities |
| Alcan is subject to a broad range of and increasingly stringent environmental laws and regulations in each of the jurisdictions in which it has operations |
| The costs of complying with these laws and regulations, including participation in assessments and remediation of sites and installation of pollution control facilities, could be significant |
| In addition, these standards can create the risk of substantial environmental liabilities, including liabilities associated with divested assets and past activities |
| Alcan is involved in a number of compliance efforts, remediation activities and legal proceedings concerning environmental matters |
| Alcan may be subject to liability related to the use of hazardous substances in production |
| Alcan uses a variety of hazardous materials and chemicals in its manufacturing processes, as well as in connection with Alcanapstas manufacturing facilities, including the maintenance thereof |
| In the event that any of these substances or related residues proves to be toxic, Alcan may be liable for certain costs, including, among others, costs for health-related claims or removal or retreatment of such substances |
| Alcan is, and may be in the future, subject to suits regarding product liability, commercial disputes and claims by individuals, corporations and governmental entities related to its past and current activities and the activities of companies that Alcan has acquired and may acquire in the future |
| Alcan is involved in the manufacture of numerous products, including complex component and finished products |
| The production of such products, used in a variety of end-uses and integrated into separately manufactured end products, entails an inherent risk of suit and liability relating to product operation and performance |
| Companies that Alcan has acquired and that Alcan may acquire in the future may be subject to similar risk of suit and to pending litigation |
| Alcan maintains product liability and other insurance to cover liability contingencies |
| Alcanapstas policies, however, are subject to deductibles and recovery limitations, as well as limitations on contingencies covered |
| Suits against Alcan could be resolved in a manner that materially and adversely affects its financial condition, and Alcan could be subject to future material product liability, tort or contractual suits, and to proceedings imposed by governmental entities |
| Alcan may not be able to successfully implement productivity and cost-reduction initiatives |
| Alcan has undertaken and may continue to undertake productivity and cost-reduction initiatives to improve performance |
| There can be no assurance that these initiatives will be completed or beneficial to Alcan or that any estimated cost savings from such activities will be realized |
| Alcan has made significant capital expenditure commitments to expand and modernize production capacity |
| Alcan commonly undertakes significant capital projects |
| Alcanapstas involvement in large capital investments subjects it to certain risks, including risks of unanticipated delays, complications and increased costs related to project execution |
| Alcan may be required to commit to capital spending for particular projects over the course of several years during which market conditions may change, which could reduce the attractiveness of the project relative to other potential investments |
| Alcan derives significant cash flows under supply agreements and other arrangements with Novelis, that encompasses most of Alcanapstas former rolled products business, that Alcan spun off to its shareholders in January 2005 and is now an independent company and an important customer |
| In the event that Novelis &apos business is subject to downturns or disruptions, Alcanapstas cash flows could be negatively affected |
| Alcan does not control Novelis and cannot provide any assurance regarding its operations |
| Novelis may make strategic decisions that are disadvantageous to Alcanapstas commercial relationship with it |
| Alcan must compete with other market participants for continued business from Novelis, and Novelis could become a competitor to Alcan over the long-term |
| In connection with the Novelis Spin-off, Alcan entered into agreements with Novelis to license and supply intellectual property, sell assets, lease properties, supply materials, assist with transitional activities, provide personnel and other resources, as well as take part in other exchanges and transactions |
| No assurance can be given that the terms of such arrangements are not inferior to the terms that Alcan may have been able to achieve with respect to such matters in the market from a third party |
| 26 _________________________________________________________________ Alcan could be adversely affected by changes in the business or financial condition of significant customers |
| A significant downturn in the business or financial condition of its significant customers could materially adversely affect Alcanapstas results of operations |
| In addition, if Alcanapstas existing relationships with significant customers materially deteriorate or are terminated in the future, and Alcan is not successful in replacing business lost to such customers, Alcanapstas results of operations may be harmed |
| The markets for Alcanapstas products are highly competitive and the willingness of customers to accept substitutions for Alcanapstas products is high |
| The markets for aluminum and packaging products are highly competitive |
| In addition, aluminum competes with other materials, such as steel, plastics and glass, among others, for various applications in Alcanapstas key customer sectors |
| The willingness of customers to accept substitutions for Alcanapstas products, the ability of large customers to apply buyer power in the marketplace to affect the pricing for fabricated aluminum or packaging products, or other developments could adversely affect Alcanapstas results of operations |
| Future acquisitions or divestitures may adversely affect Alcanapstas financial condition |
| Alcan has grown partly through the acquisition of other businesses including Pechiney |
| There are numerous risks commonly encountered in business combinations, including the risk that Alcan may not be able to effectively integrate businesses acquired or generate the cost savings and synergies anticipated |
| As part of its strategy for growth, Alcan may continue to make acquisitions, divestitures or strategic alliances, which may not be completed or may not be ultimately beneficial to Alcan |
| Alcan may not be able to successfully develop and implement new technology required to achieve continued profitability |
| Alcan has invested in and is involved with a number of technology and process initiatives |
| Several technical aspects of these initiatives are still unproven and the eventual commercial outcomes cannot be assessed with any certainty |
| Unexpected events may increase Alcanapstas cost of doing business or disrupt Alcanapstas operations |
| Unexpected events, including, but not limited to, supply disruptions, labour disputes, failure of equipment or processes to meet specifications, war or terrorist activities may increase the cost of doing business or otherwise impact Alcanapstas financial performance |
| The above list of important factors is not all-inclusive or necessarily in order of importance |