October 11, 2010

Dear Friend,

We were disappointed that Alcoa's EBITDA per lb fell to $0.205 per lb from $0.274 in the June quarter, and we estimate Alcoa's costs rose by about $0.05 per lb in the third-quarter due to adverse currency shifts, higher purchased metal costs, higher price-linked power costs and specific plant mishaps, which caused us to increase our alumina and ingot cost  forecasts.  Further, Alcoa's alumina revenues in 2010 are lower by 1.2%  of the LME spot price.

Our earnings estimates changed because we increased our 2010-2011 LME spot price estimates, did not increase our 2012-2015 long-term $1.20 per lb long-term aluminum price estimate and did increase our cost estimates for all years.  We raised our 2010 and 2011 earnings estimates, but cut our 2012 to 2015 earnings estimates as we kept a steady $1.20 per lb future aluminum price forecast with higher alumina and ingot costs.

These estimates or assumptions have very significant impacts, and can change dramatically from quarter to quarter or time to time.  We want you to take them literally, but want the reader or investor to appreciate their dramatic volatility.  We increased our estimate of US $ weakness and A$ strength, but did not change our long-term aluminum price forecast.  It is possible that sustained US $ weakness results in a permanent increase to the LME spot aluminum price, and it is possible we make a future increase to our long-term aluminum price basis.  For the time being, however, we have modeled a thinner profit margin.

While we cut our long-term earnings estimates by over 35% for 2012 to 2015, we only cut our price target by $2 to $16 from $18.  It is possible that higher future costs force an even higher future price.  We continue to believe that steady global economic growth, particularly for vehicles in Asia, will tighten aluminum markets in 2012 and that Alcoa represents good value here.