ITEM 1. BUSINESS . . . . . . . . . . . . . . . . . . . 1 ITEM 2.
ITEM 2. PROPERTIES . . . . . . . . . . . . . . . . . . 11 ITEM 3.
ITEM 3. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . 11 ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . 15
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS . . . . . . . . . 15 ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA . . . . . . . . . . . . 16 ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . 16 ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . 16 ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE . . . . . 16
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE . REGISTRANT 16 ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION . . . . . . . . . . . . 16 ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . 16 ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 16
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . 18
INDEX OF EXHIBITS . . . . . . . . . . . . . . . . . . . . . . 19
EXHIBIT 21 SUBSIDIARIES . . . . . . . . . . . . . . . . . . 23
(ii)
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES ----------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
Industry Overview
Primary aluminum is produced by the refining of bauxite (the major aluminum-bearing ore) into alumina (the intermediate material) and the reduction of alumina into primary aluminum. Approximately two pounds of bauxite are required to produce one pound of alumina, and approximately two pounds of alumina are required to produce one pound of primary aluminum. Aluminum's valuable physical properties include its light weight, corrosion resistance, thermal and electrical conductivity, and high tensile strength.
Demand
The packaging and transportation industries are the principal consumers of aluminum in the United States, Japan, and Western Europe. In the packaging industry, which accounted for approximately 22% of consumption in 1993, aluminum's recyclability and weight advantages have enabled it to gain market share from steel and glass, primarily in the beverage container area. Nearly all beer cans and approximately 95% of the soft drink cans manufactured for the United States market are made of aluminum. Growth in the packaging area is generally expected to continue in the 1990s due to general population increase and to further penetration of the beverage can market in Asia and Latin America, where aluminum cans are a substantially lower percentage of the total beverage container market than in the United States.
In the transportation industry, which accounted for approximately 29% of aluminum consumption in the United States, Japan, and Western Europe in 1993, automotive manufacturers use aluminum instead of steel or copper for an increasing number of components, including radiators, wheels, and engines, in order to meet more stringent environmental and fuel efficiency requirements through vehicle weight reduction. Management believes that sales of aluminum to the transportation industry have considerable growth potential due to projected increases in the use of aluminum in automobiles.
Supply
As of year-end 1994, Western world aluminum capacity from 108 smelting facilities was approximately 16.3 million tons* per year. Net exports of aluminum from the former Sino Soviet bloc increased approximately threefold from 1990 levels during the period from 1991 through 1994 to approximately two million tons per year. These exports contributed to a significant increase in London Metal Exchange stocks of primary aluminum which peaked in mid-1994. See "-Recent Industry Trends."
Government officials from the European Union, the United States, Canada, Norway, Australia, and the Russian Federation have ratified as a trade agreement a Memorandum of Understanding (the "Memorandum") which provided, in part, for (i) a reduction in Russian Federation primary aluminum production by 300,000 tons per year within three months of the date of ratification of the Memorandum and an additional 200,000 tons within the following three months, (ii) improved availability of comprehensive data on Russian aluminum production, and (iii) certain assistance to the Russian aluminum industry. The Memorandum did not require specific levels of production cutbacks by other producing nations. The Memorandum was finalized in February 1994 and is scheduled to remain in effect through the end of 1995.
_____________________ * All references to tons in this Report refer to metric tons of 2,204.6 pounds.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES ----------------------------------------------------------------------
ITEM 1. BUSINESS (continued)
Based upon information currently available, management believes that only moderate additions will be made during 1995-1996 to Western world alumina and primary aluminum production capacity. The increases in alumina capacity during 1995-1996 are expected to come from one new refinery and incremental expansions of existing refineries.
Recent Industry Trends
The aluminum industry environment improved significantly in 1994 compared to 1993. Prices of primary aluminum were at historic lows in real terms near the beginning of 1994, but nearly doubled by the end of 1994. In response to low prices of primary aluminum in 1993 and the first part of 1994, a number of smelting facilities were partially or fully curtailed. Western world production of primary aluminum declined in 1994 to approximately 14.5 million tons from approximately 15.1 million tons in 1993. Demand for aluminum products was relatively weak in 1993, but became very strong in the United States and became firm in Europe in 1994. Primary aluminum prices improved not only because of improved demand, but also because the inventories of primary aluminum on the London Metal Exchange were substantially reduced in the second half of 1994. However, significant amounts of inventory remained at the end of 1994, and some reduction of prices from year-end 1994 occurred in the first quarter of 1995 to reflect that circumstance.
When previously curtailed smelting capacity is restarted, it will result in an increase in the demand for alumina to supply those operations. In addition, in the last several years, large amounts of alumina have been imported into the Commonwealth of Independent States. Consequently, management believes that alumina demand and prices will strengthen as smelters are restarted.
Supply and demand fundamentals for the flat-rolled aluminum products business, particularly in the can sheet business, improved in 1994 because of higher demand and a reduction of supply. Management believes that supply and demand for these products will move toward being in balance. The demand for aluminum extrusions and forgings in 1994 also improved compared to 1993, and supply and demand for these products also is expected to move toward being in balance.
Overall, management believes that there will be relatively strong demand for aluminum for the near future, barring an economic recession. This demand is expected to come both from continued growth in the developed markets through increased penetration of the automotive sector, and from general uses in emerging markets.
The Company
General
Kaiser Aluminum Corporation ("the Company") is a direct subsidiary of MAXXAM Inc. ("MAXXAM"). The Company, through its subsidiary, Kaiser Aluminum & Chemical Corporation ("KACC"), operates in all principal aspects of the aluminum industry the mining of bauxite, the refining of bauxite into alumina, the production of primary aluminum from alumina, and the manufacture of fabricated (including semi-fabricated) aluminum products. In addition to the production utilized by KACC in its operations, KACC sells significant amounts of alumina and primary aluminum in domestic and international markets. In 1994, KACC produced approximately 2,928,500 tons of alumina, of which approximately 71% was sold to third parties, and produced 415,000 tons of primary aluminum, of which approximately 54% was sold to third parties. KACC is also a major domestic supplier of fabricated aluminum products. In 1994, KACC shipped approximately 399,000 tons of fabricated aluminum products to third parties, which accounted for approximately 6% of the total tonnage of United States domestic shipments in 1994. A majority of KACC's fabricated products are used by customers as components in the manufacture and assembly of finished end-use products. Note 11 of the Notes to Consolidated Financial Statements contained in the Company's 1994 Annual Report to Shareholders (the "Annual Report") is incorporated herein by reference.
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES ---------------------------------------------------------------------
ITEM 1. BUSINESS (continued)
The following table sets forth total shipments and intracompany transfers of KACC's alumina, primary aluminum, and fabricated aluminum operations:
Sensitivity to Prices and Hedging Programs
The Company's operating results are sensitive to changes in the prices of alumina, primary aluminum, and fabricated aluminum products, and also depend to a significant degree upon the volume and mix of all products sold and on KACC's hedging strategies. Through its variable cost structures, forward sales, and hedging programs, KACC has attempted to mitigate its exposure to possible declines in the market prices of alumina, primary aluminum, and fabricated aluminum products while retaining the ability to participate in favorable pricing environments that may materialize. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Trends Sensitivity to Prices and Hedging Programs."
Production Operations
The Company's operations are conducted through KACC's decentralized business units which compete throughout the aluminum industry.
o The alumina business unit, which mines bauxite and obtains additional bauxite tonnage under long-term contracts, produced approximately 8% of Western world alumina in 1994. During 1994, KACC utilized approximately 80% of its bauxite production at its alumina refineries and the remainder was either sold to third parties or tolled into alumina by a third party. In addition, during 1994 KACC utilized approximately 29% of its alumina for internal purposes and sold the remainder to third parties. KACC's share of total Western world alumina capacity was approximately 8% in 1994.
o The primary aluminum products business unit operates two domestic smelters wholly owned by KACC and two foreign smelters in which KACC holds significant ownership interests. In 1994, KACC utilized approximately 46% of its primary aluminum for internal purposes and sold the remainder to third parties. KACC's share of total Western world primary aluminum capacity was approximately 3% in 1994.
o Fabricated aluminum products are manufactured by three business units - flat-rolled products, extruded products, and forgings - which manufacture a variety of fabricated products (including body, lid, and tab stock for beverage containers, sheet and plate products, screw machine stock, redraw rod, forging stock, truck wheels and hubs, air bag canisters, and other forgings and extruded products) and operate plants located in principal marketing areas of the United States and Canada. Substantially all of the primary aluminum utilized in KACC's fabricated products
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES ------------------------------------------------------------------
ITEM 1. BUSINESS (continued)
operations is obtained internally, with the balance of the metal utilized in its fabricated products operations obtained from scrap metal purchases.
Alumina -------
The following table lists KACC's bauxite mining and alumina refining facilities as of December 31, 1994:
____________________ Although KACC owns 49% of Kaiser Jamaica Bauxite Company, it has the right to receive all of such entity's output. Alpart bauxite is refined into alumina at the Alpart refinery.
Bauxite mined in Jamaica by Kaiser Jamaica Bauxite Company ("KJBC") is refined into alumina at KACC's plant at Gramercy, Louisiana, or is sold to third parties. In 1979, the Government of Jamaica granted KACC a mining lease for the mining of bauxite sufficient to supply KACC's then-existing Louisiana alumina refineries at their annual capacities of 1,656,000 tons per year until January 31, 2020. Alumina from the Gramercy plant is sold to third parties. KACC has entered into a series of medium-term contracts for the supply of natural gas to the Gramercy plant. The price of such gas varies based upon certain spot natural gas prices. For 1995 KACC has, however, established a fixed price for a portion of the delivered gas through a hedging program.
Alumina Partners of Jamaica ("Alpart") holds bauxite reserves and owns a 1,450,000 tons per year alumina plant located in Jamaica. KACC has a 65% interest in Alpart and Hydro Aluminium a.s ("Hydro") owns the remaining 35% interest. KACC has management responsibility for the facility on a fee basis. KACC and Hydro have agreed to be responsible for their proportionate shares of Alpart's costs and expenses. The Government of Jamaica has granted Alpart a mining lease and has entered into other agreements with Alpart designed to assure that sufficient reserves of bauxite will be available to Alpart to operate its refinery as it may be expanded to a capacity of 2,000,000 tons per year through the year 2024.
Alpart has entered into an agreement for the supply of substantially all of its fuel oil through 1996. The balance of Alpart's fuel oil requirements through 1996 will be purchased in the spot market.
KACC holds a 28.3% interest in Queensland Alumina Limited ("QAL"), which owns the largest and one of the most efficient alumina refineries in the world, located in Queensland, Australia. QAL refines bauxite into alumina, essentially on a cost basis, for the account of its stockholders pursuant to long- term tolling contracts. The stockholders, including
KAISER ALUMINUM CORPORATION AND SUBSIDIARY COMPANIES ------------------------------------------------------------------
ITEM 1. BUSINESS (continued)
KACC, purchase bauxite from another QAL stockholder pursuant to long-term supply contracts. KACC has contracted to take approximately 751,000 tons per year of capacity or pay standby charges. KACC is unconditionally obligated to pay amounts calculated to service its share ($78.7 million at December 31, 1994) of certain debt of QAL, as well as other QAL costs and expenses, including bauxite shipping costs. QAL's annual production capacity is approximately 3,300,000 tons, of which approximately 934,000 tons are available to KACC.
KACC's principal customers for bauxite and alumina consist of large and small domestic and international aluminum producers that purchase bauxite and reduction-grade alumina for use in their internal refining and smelting operations and trading intermediaries who resell raw materials to end-users. In 1994, KACC sold all of its bauxite to one customer, and sold alumina to 12 customers, the largest and top five of which accounted for approximately 19% and 82% of such sales, respectively. Among alumina producers, the Company believes KACC is now the world's second largest seller of alumina to third parties. KACC's strategy is to sell a substantial portion of the bauxite and alumina available to it in excess of its internal refining and smelting requirements pursuant to multi-year sales contracts. Marketing and sales efforts are conducted by executives of the alumina business unit and KACC. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - Trends - Sensitivity to Prices and Hedging Programs."
Primary Aluminum Products -------------------------
The following table lists KACC's primary aluminum smelting facilities as of December 31, 1994: