Letter to shareholders

Svein Richard Brandtzæg - we are proud and happy to welcome to our company close to 4000 skillful Brazilian coworkers

The turning point that initiates a new era

Last year was a turning point for Hydro. Partly because we emerged from the crisis as a stronger company. Partly because the completion of Qatalum gives Hydro an important presence in the best quartile of the world's primary aluminium production. But first and foremost because the acquisition of Vale's aluminium operations in Brazil initiates a new era in our history. After a decade of restructuring, demergers and the sale of businesses in the former industrial conglomerate, Hydro has expanded with determination to become a fully integrated aluminium company.

Transforming transaction

The Vale deal transforms Hydro as a company. One of the world's largest bauxite mines and the largest alumina refinery in the world now supplement the part of the value chain in which we have had been engaged on a much lesser scale. We are proud and happy to welcome to our company close to 4,000 skillful Brazilian colleagues. Brazil, Germany and Norway are now our three largest countries in terms of employees. Furthermore, with the acquisition, Hydro is now long in raw materials for several decades to come, securing new and exciting strategic opportunities.

Not least, Vale has now become Hydro's second-largest shareholder. The deal is more than a transaction. It is a partnership in which Hydro and Vale are creating a common future in aluminium.

Responsible challenger

Agenda 2010 - our two-year program to meet the challenges of the financial crisis - has been successfully implemented. It has now been replaced by a new ambition: To lift Hydro to the highest level of the world's aluminium industry. We want to challenge our competitors, customers, suppliers and decision-makers - and first and foremost, we will challenge ourselves - to be ambitious and innovative in our mission to create more viable societies with aluminium.

We will challenge established truths. We will seek to set new standards in our business development, in our interaction with customers, through our research and development and in how we manage our social responsibility. We will be responsible, reliable and innovative.

We will use our creative and systematic genes to make the impossible possible. At the same time, we will fight complacency. We have demonstrated our ability to act swiftly and forcefully to improve when necessary. We will continue this, not because we are forced to do it, but because we want to stretch a little further every single day.

Raise to a new and higher level

A main priority is to improve competitiveness at our primary aluminium plants which have a high cost level. The implementation of our ambitious program to reduce cash cost by $300 per metric ton is ahead of plan. Completing the Qatalum ramp-up and stabilizing operations in the first quartile are key milestones going forward.

Within our Rolled Products and Extruded Products business areas, we are focusing on margin improvements and high-grading our product portfolio. Areas like building systems and litho are already excellent examples. Rolled Products has emerged from delivering chronic weak results to becoming a solid contributor to cash flow. Aiming for 10 percent return on capital is no longer a far-off vision.

During the crisis we shielded our R&D investments. Now we can begin to harvest from this priority. We want innovation to distinguish all parts of our businesses - in products, processes, marketing, and partnering with our customers. Our future relies to a high degree on our ability to give our metal the properties that our competitors are not able to match.

We intend to make aluminium the preferred material in cars, building façades, in solutions for thermal and photovoltaic solar energy and in heat exchangers. The excellent properties of aluminium, together with booming prices on competing metals like copper, give aluminium the advantage in more and more areas.

Part of the solution

It is not a contradiction in Hydro to create profitability and to promote viability. These are two equally important and fully compatible objectives. In a world that increasingly understands the need to act in order to combat climate change, one can only succeed by adapting processes and products to meet this challenge.

Aluminium and aluminium solutions can contribute to more energy-efficient buildings, lighter vehicles using less fossil fuel and making fewer emissions, lighter packaging that also makes foods and drinks last longer, and materials for the renewable energy industry. Contributing to reducing the vast global waste of energy and lowering CO2 emissions is an important corporate responsibility, but to Hydro it is also a formidable business opportunity.

In 2009, we set a target to reduce emissions in our production of primary aluminium from 1.85 metric tons of CO2 equivalents per metric ton of aluminium to 1.52 in 2013. Our test cells in Årdal, Norway, surpassed the target already in 2010. We are also progressing in the rest of our production, but we recognize that it will be harder to reach the goal the closer we get. Our ambition to develop the next generation of electrolysis technology, with significantly reduced energy consumption, will be important to Hydro's cost level and to the global climate.

In the same spirit, we are aiming to multiply Hydro's production of recycled and remelted aluminium. It certainly is a paradox that a Europe short of energy is exporting so much aluminium "scrap," which is in fact energy in solid form. By taking a lead in reshaping the European aluminium recycling business, we foresee a significant business opportunity for Hydro that can also help Europe save a valuable energy resource.

Challenge responsibly

I am convinced that there is a link between the ability to avoid accidents and the ability to deliver impressive operational and financial results. Being good at the one thing should provide the foundation for being good at the other, too. So I won't hesitate to state that safety should have first priority in Hydro.

After a considerable reduction in recordable injuries in 2009, far more than the 20 percent target, we experienced a setback in 2010. This is not acceptable. Even though plants operated by Hydro did not have any fatal accidents in 2010, two occurred in part-owned companies. And in January this year, an electrician died in France at a Hydro plant under construction. We will work hard to reduce the number of accidents by 28 percent in 2011, and by a further 20 percent every year going forward.

We view social responsibility, too, as an investment rather than a cost. Hydro is affiliated with the UN initiative Global Compact, we take part in the World Business Council for Sustainable Development, and we are evaluated by institutions like the Dow Jones Sustainability Indexes and FTSE4Good.

Being good at doing our homework in advance, being open to dialog and practicing zero tolerance against corruption, are not hindrances to developing the business, but ways to reduce financial, legal and reputational risk. Acting responsibly saves time and money and promotes our reputation, and should be regarded an investment in new business opportunities and long-term partnerships.

Being responsible is even more important as we now manage the extraction of bauxite in areas with vulnerable societies and ecosystems. We shall manage our responsibility according to the highest standards.

It will require vast investments to manage and utilize the resources and opportunities we have acquired in Brazil. Success is not secured merely by closing the deal. It is now that the thorough, long-term and ambitious work begins, to realize the full potential in the Vale investment.

The last couple of years have shown me the outstanding potential within Hydro's people and organization when we have to perform in order to thrive. In 2011, I am excited about what can be achieved when mobilizing the same spirit in a more normal and promising economic climate.

Updated: October 11, 2016