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Executives

Stefan Solberg – Head of IR

Svein Richard Brandtzæg – President and CEO

Jørgen Rostrup – CFO

Analysts

Jeff Largey – Nomura International

Jason Fairclough – Bank of America Merrill Lynch

Tim John – Redburn Partners

Jonathan Schroer – Unicredit

Thomas Maheras – Citi

Norsk Hydro ASA (NHY) Q4 2010 Earnings Conference Call February 16, 2011 10:00 AM ET

Stefan Solberg

Good afternoon, ladies and gentlemen, and welcome to Hydro’s earnings presentation and web presentation for the fourth quarter 2010. My name is Stefan Solberg, Head of Investor Relations in Hydro. We released our earnings today at 7:30 Central European Time and the presentation material we will use today and the fourth quarter report is available on our website, hydro.com.

Today’s presentation will be given by President and CEO, Svein Richard Brandtzæg; and Chief Financial Officer, Jørgen Rostrup. As usual, there will be an opportunity to ask questions after presentation. If you are following us via webcast, you may ask question via the web.

Before we start, I would like to direct your attention to the cautionary notes in relation to forward-looking statements that are provided in the presentation material.

And with this short introduction, I'm pleased to hand over to Svein Richard Brandtzæg who will take you through the first part of the presentation. Thank you.

Svein Richard Brandtzæg

Thank you very much Stefan. 2010 was a historic year for Hydro, very important year. First of all, we signed the Vale deal in last year. We restocked one of the biggest smelters in the world, and we also introduced the cost reduction program, the $300 program where we also have achieved good results.

When we go through the market outlook today, we can say that it looks more healthy. We see the number of inventory space are coming down due to higher demands. We see a very good order book for the first half year in downstream especially in the whole products. This is important signals for us and we see also a more healthy class of aluminiums which is reflecting a level as well cost of production.

Cost repositioning; as I mentioned the $300 program is very important for us, and we delivered more than what we planned for last year, and we are continuing our efforts to improve the cost position in the fully-owned smelters, which is about 1 million pounds capacity.

Moving on to the Vale transaction, we are now on track to close the deal. Our ambition is to close it within the end of the first quarter, and I will come back to this on some comments to this Vale deal later in my presentation.

The highlights; you have already seen the results. And with regards to the different parts of the value chain in upstream, we had a lower result of NOK200 million due to lower prices, which was partly compensated by insurance in Qatalum. In the midstream, the cost was higher, it was lower demand, normal seasonal variation utilized downtime will be also then utilized as a downtime for maintenance which increases then the cost.

Downstream; higher cost due to lower sales and maintenance work [Audio Gap] the fourth quarter in Energy with a fairly good reservoir filling compared to the Norwegian average, but in general lower than normal. But we had a good production in fourth quarter. And also due to the process, we delivered NOK300 million better results in the fourth quarter than in the third quarter. The Board of Directors are proposing a dividend of NOK0.75 per share from last year.

If you look at the demands, downstream 2% lower demand in the whole products compared to the previous quarter in the whole products, minus 5% in the Extrusion business compared to the previous quarter. In total, 3% lower, which is, we can say it’s a bit less than normal seasonal evaluation, especially I would say in whole products.

In Building System, we see an improvement compared to the third quarter, but that is sourced to a normal seasonal evaluation, because Building System it’s a bit later than other products early up and we have normally strong fourth quarter. But with Building System I will also add that we had a very weak situation in Southern Europe, especially in Portugal and Spain. 9% increase compared to the fourth quarter of 2009 and 17% increase compared to the 2009 in full-year 2010 volume.

The situation downstream is reflected on the net demand for our metal products upstream, similar situation a bit lower demand in Extrusion from stable volumes in sheet ingot and foundry alloys, 14% improvement compared to fourth quarter of 2009, and 15% improvement compared to full-year 2009, which reflects underlying improved consumption but also some restarting that has [inaudible].

Metal prices improved at about $100 per tonne over a quarter and we had to realign metal price due to forward pricing of $2,074 per tonne. Currency was quite stable, so there are few adjustments in lieu of the currency. Still a contango in the market and again over the whole year evaluation volatility, but in the positive direction over the 12 months in 2010.

The registered inventories are quite stable and unregistered inventories which we estimate about 11 million tonnes all together. And the number of inventories days all going down as you see from this slide. And if we add up all the metal that is now in the different part of the registered and unregistered inventories, it adds up to about three months of the consumption, so consumption of 41 million pounds to 42 million pounds in the beginning of this year and 11 million pounds inventory. We still see financial deals that we’re looking in the metals. The horizon is shorter now than what we had seen previously, but we still see that they are profitable on the previous six-month horizon. We expect to continue in the short term and medium term.

The ingot premiums developments again shows that the metal that we see is not available in the market. It has very high income premium in Europe, it has increased since the downturn in 2008. Finally, EBIT was stable during the last part of 2010, as we also have seen a more stable situation in Japan and Midwestern and Eastern US. But in Europe, on a record high levels influencing also the margins on the metal products side.

In China, we still see that they are balancing their supply-demand situation. China reduced the production end of 2010 with about 10% and achieved their energy efficient targets. We expect that the volumes that was taken down in the end of last year will be restarted after the Chinese New Year.

We also see there are new capacity coming on stream in the Northwest part of China, which will replace capacity that was in the Southeast part of China. That is a development that will probably continue and we’re also estimating that there could be a balanced situation in China at least in 2011, maybe also longer term into future. But it’s still a question how long China can continue to supply aluminium according to the domestic demand.

If you go back, China continue to import scrap from the external markets into the Chinese recycling and remelting abilities, and it could be [inaudible] products and China is in the export of metal in the semi fabrication, especially in semi fabrication. But there are also some metal that goes into the finished – it goes into the finished products in China that are exported out of China, but that is more difficult to measure.

The world outside China is in the situation where we still see some of our capacity, more production than demand but to a lesser extent than what we have seen for the last couple of years, so it moves into more healthy situation. The growth last year was about 19% adding up to 24.3 million tonnes aluminium consumption. Growth this year is expected to be about 10% and we feel that there was a healthy balance going forward between supply and demand even with the slightly over capacity currently seen in the market.

Off the 3.5 million tonnes that was curtailed during the crisis, 1.1 million tonnes has been restocked or on the way to be restocked and there are about 1.3 million tonnes that should be restocked depending on the industry conduct of demand that could come into the markets. But so far there is still a substantial amount of aluminum capacity, production capacity without heads to tails. And there are very limited new capacity that are available and on stream to be pushed into the steel markets. China, less than 17 million tonnes of consumption last year, 21% growth and we expect it to grow 10% in 2011.

The Energy situation in the Nordic markets developed positively year-on-year, meaning that the energy price decreased. We have had higher reservoir level than average in Norway in the beginning of the quarter and we had a good production, good prices that was influenced by the cold weather condition and low reservoir fillings that was about 45% in the end of the quarter, which again was 25% lower than normal and 20% lower than in 2009, and also the fact that the nuclear power stations in Sweden didn’t produce as much as the capacity. So that we certainly did in price developments in the Nordic markets in the fourth quarter which gained by again NOK300 million better result than in the third quarter last year.

We continued the high grading of our portfolios downstream. And in China, we have decided to invest a new extension capacity for high-end extension general engineering market and also a new quest for the precision tuning market which is targeting the automotive heat exchanger markets which is again precision tubing and multi-port extrusions that goes into radiators, air condition systems, heat exchangers in China.

We are launching a new product line in the Building Systems in Europe that is available also across for the global market which is again strengthening our position in Building System market targeting the energy efficient building solution.

In Norway, we have decided to close the Karmøy extrusion plant and consolidated the production into total Norwegian extrusion plants and then we will keep the market share and we will also increase the total production in Norway, but with less production line, meaning that we are now reducing the cost of production in our extension also in Norway.

In Spain, we are continuing restructuring process. We are not going to close down extrusion in Spain, but there will be a close connection, de-manning and optimization of the product portfolio to two different plants which also will reduce the cost level of extrusions in Spain.

In Energy, we are investing in more renewable energy to power plants that will be contracted and added into the total capacity of 9.4 terawatt hours which is the average capacity in Norway. We are upgrading the Rjukan system which is about 3 terawatt hours system and then we will also get some a bit higher [inaudible] but also it’s a maintenance and renewal of capacity in addition to the Herva upgrades, and we are now investing NOK1.2 billion into the energy system in Norway to strengthen the system when it is for renewal and also for increased capacity.

We continued technological development, research and development, and innovation. And in the downstream we see quite interesting changes in the markets, especially when high volume costs are now produced with volume wide solutions in aluminium. Previously Audi; for example had the Audi A8 in aluminium, but now they are also now producing Audi A6 which is high volume cost with body sheets in aluminium, which is driving the demand in automotive which is only one example. There are several examples of this going forward and also what we see today.

We are also contributing with our technology in solutions which is reducing the emissions from – for example diesel engines as we have shown here. We are also moving into solar, solar energy solutions which previously was supplied by copper. And with the copper price today it is a very good business case to change to aluminium, and we have now passed corrosion test which was done by different research institutions in Switzerland and Germany, certainly met us 10 years corrosion testing. We have passed test which has simulated a 20-year lifetime of these solutions, so we are well ahead of the requirements for the solar solutions where we use aluminium as the basic material.

In primary production, we are continuing with our cost reduction efforts. We had the target of $40 per tonne an improvement in 2010. We delivered more than $50 in cost reduction. It is our wholly-owned smelters which accounts for about 1 million tonnes capacity. Of course, this is not including changes in alumina price or petrol, coke, or the ingots, that is general market development, but we are targeting the cost that we can influence directly ourselves.

This is about reduction of manning, it’s of productivity increase, it’s about improved technologies, improved utilization of our competence, and a systematic way of running the operations so we get higher outputs, higher ad points [ph], and less cost, less maintenance, and improvements in productivity.

So this is going to be further developed this year, and we have a target of $125 upon on top of the $50 we achieved last year. So in the end of the year, a cost position of our smelter should be $175 per tonne lower than what it was before we started this $300 program. Most of the $300 program will be delivered in the end of 2013 and we are on good track.

Qatalum is now back on track with regard to stocking up one of the biggest smelters in the world and we are expecting full production in June. I was in Qatar one-and-a-half week ago and saw the production, had a look into the performance of the production which is now very healthy and very good. It is very early, but they are achieving at least 5% current efficiency and even running with higher current density than the main place density which means that we get more capacity out of each individual electrolyte cells. And imported more than 400 electrolyte cells that have been stocked and is of course line D is in production and line A is now on the way to be stocked. In total, there are 704 electrolyte cells in the two lines.

We had a delay of the startup of the – only due to the problem with the current supply in August which has now been rectified, but we also discovered that there were cracks in some water pumps in impellers for water cooling system that was going to be used for the steam turbines which is then the part of gas power station that has also now been rectified that it gave us a delay up to 8 weeks, but still now means that we will be in production for full capacity in June this year.

Insurance from the power outage in August is recognized of 300 million and reported in the Q4 results and this represents less than 50% of coverage. And, of course, job number one is to bring Qatalum to speed but also to gain the cost level in the lowest profile which is now with a market condition in 2010 with alumina price and so on, it will be $1400 to $1500 per tonne.

The closing of the Vale deal is just around the corner. We expect the deal to be closed within the end of first quarter. We are ready with the organization and that means that the people that are working in Vale aluminium assets today will be taken over by Hydro and be integrated in our company as soon as we are closing the deal, 4,100 employees the management of Paragominas the bauxite mine, the management of Alunorte and the management of Alpart the alumina refinery and smelters will continue to be a part of the business and the Vale chain, and they will be organized within the new bauxite alumina organization. So we will have a small head office in Rio with some few experts from Norway, that of course this will be a big and important organization that will continue to drive the raw material business and the smelter in Albras forward.

And the target now is to increase – after the closure to increase the Alunorte production towards the capacity and from 5.1 million tonnes to 6.3 million tonnes and then also to produce even more bauxite from alumina which was at the level of 7.5 million tonnes in 2010. The reason for the – that it takes time to close the deal, it’s of course transfer of a very high number of mining rights that has to be approved by the higher authorities in Brazil and has to be then transferred to the company. This is now on track. And as I mentioned we are now ready to close the deal within the end of the first quarter. Vale will have 22% ownership of Hydro after closing the deal and they will have one Board member in the Board of Directors in Hydro after the closing.

All-in-all 2010, as I mentioned, very important year for Hydro. We have improved the underlying EBIT, the NOK6.1 billion booked out in 2009 which was really [inaudible] for the company and for the aluminium industry in general. We introduced Agenda 2010 as a part of the program to compete [ph] the prices as a stronger company. And we see today that we have reduced the cost in the company substantially compared to the level we had before the crisis started in the end of 2008. We have improved at the time the operation performance and productivity and we see now more healthy prices and demands going forward.

And with our Vale deal, we are not only securing the raw materials to exceed the production, we have of aluminum, but we will also move into a substantial and long position in raw materials which we certainly will use in a positive way for this company and its shareholders.

We have maintained a solid financial position through the crisis and also the deal has been done in a way that will continue to have a strong financial position, including, of course the license this last summer. We have reduced the operating capital dates which has been also part of the 2010 agenda. We are now ramping up Qatalum and we are continuing to increase the focus on the cost reduction program which will bring our smelters through more competitive situation.

So with this, I will divert to our CFO, Jørgen Rostrup. Please.

Jørgen Rostrup

Thank you, Brandtzæg. Let’s move over to the financials and start with the underlying EBIT numbers. As you can see, we have a reduction of 377 million fourth quarter compared to third quarter. And the predominant reason for that is lower aluminium prices in this quarter. It has been partly mitigated by the insurance proceeds and also by higher volumes in particular on the Energy side.

In addition, there are higher cost in fourth quarter compared to third quarter. The key element in that is seasonal maintenance cost as we talked about the loss in third quarter and the results were higher activity level in fourth quarter typically than in third quarter due to mitigation period in third quarter and thereby also their mining cost are higher. And as Brandtzæg said, we also run in some productivity improvement programs that paid some charges.

I’m going to go through the business areas a little bit later. If you just look a little bit on the orders in eliminations, you see that we have a charge that is on level of first and second quarter but higher than the third quarter on that line. It’s a negative direction of 118 million.

One-third of that is related to those elimination that we talked about earlier on for example gains or losses on inventories. The two-thirds are related to increased planning costs on a new bauxite alumina area and the Vale acquisition related cost, there are some near-end [ph] adjustments for employee cost and there are also some accrual effects for internal cost allocation which means basically proliferations between the quarters and they will be superior we assume in the first quarter.

If we look at the Group variance analysis, there is 0.3 billion positive effect from the increase in energy production. The energy production increased by 0.8 terawatt hours in the quarter from third quarter. And external spot sale had the same type of increase 0.8 terawatt hours.

And then associated companies are better with 0.1 billion which is due to Qatalum and not at least insurance proceeds in that business. When it comes to the negative effects we have 0.4 billion in effect from lower achieved aluminium price. In the quarter, we had 0.1 billion in negative effect on volumes which is maybe a little bit less than what we could expect in what is normally a seasonally weaker quarter at least in particular on the Vasstøl [ph] site. And then we have negative effect of 0.3 billion when it comes to, in particular, cost elements I had mentioned on the previous slide.

If you then look at key financials; revenues are up 5% for the quarter, it’s up 12% for the year. Obviously, the early development is due to prices down and volumes. On the quarter, it’s more increased revenues on Energy and some increased revenues on external phase of alumina and then also a different development on the derivative effect that we are also contributing to this revenue line.

If you then look further down on a quarterly basis, there is a gain on items excluded of 180 million, which means that we are reporting a larger EBIT than our underlying EBIT that we are concentrating our estimations around.

On financial income, we have a positive line of 292 million for the quarter. This is predominantly due to two reasons. One is income due to large cash positions on our accounts and the second reason is depreciating Euro to the Norwegian Kroner and our intercompany balances in Euro as we had talked about earlier and that has no cash effect, it has its opposite effect on the equity and the balance sheet.

There are details on this further back for your information for later study. And then when we look at the taxes for the quarter, we had a tax rate of 38%, which is the combination of a lower more normal tax rate for the underlying business, plus the surplus tax or reserve tax on Energy that we have for the Norwegian hydro power business. For the year, we have a tax rate of 43%. It’s the same two first reasons and then in addition the fact that the company said do not consolidate the 20, 50 companies. They had the negative results for the year in total and that’s an off tax number that is thereby increasing there the tax rate as such.

I think also as Svein Richard said, we should know that we have improved the underlying EBIT with more than 6 billion and all this has been improved obviously from 2009 for the year in total.

If you look a little bit at items excluded, they are in total a gain here on 180 million. As I said, the three first element are all driven by the development in commodity prices, whether it is aluminium or coal or pet coke, and they have increased during the quarter and they are resulting in totaling on an unrealized gain of some 220 million due to the effect they’ll have on our derivative contracts and unrealized gain on 220 million.

Then we have rationalization charges of 130 million, 50% of this is related to Primary Metal, and you might say in related to the $300 program, it is primarily due to reduction in people on the Norwegian smelters and Norwegian technology units. We don’t expect much more of these kind of elements due to the $300 program that might be strong, but we don’t expect major numbers going forward. And then the other half is related to Extrusion and extruded products. And as Svein Richard said both through the Norwegian restructuring and to [inaudible] issues that he touched on.

When we look at the bottom line, the other line up 91 million. Svein Richard said that we have insurance proceeds of 300 million in total for the quarter, which is 50% of the $100 million that Qatalum has in their insurance proceeds for the quarter. 210 million of those are underlying EBIT and 91 million is on item excluded relative to the damaged asset in the incident that we had in orders last year.

If you then move to the business areas, we see that Primary Metal was down some 200 million quarter-on-quarter to 191 million in fourth quarter. Alumina production was fairly stable, Primary Metal production was fairly stable, and also the sales from the Primary Metal area was stable. Prices were down from $100 or NOK1000 approximately and this had an effect of approximately 350 million on the quarter.

I think we have, as Svein Richard said, moved our cost improvement program according to plan, but we have some seasonal cost increases in the quarter that are influencing the number. But more important is the Qatalum charge 136 million then influenced by 210 million positive due to the insurance compensation in the quarter. The alumina result has been more or less stable.

Going forward, we have sold most of our aluminium production for first quarter at price of 2300 and some dollars as a fee; I think it is $250 above the level of restoring in the fourth quarter. We are expecting some increases on the raw material side. One for the very simple reason obviously on the alumina side that that is an effect of the raising aluminium, but we also see on pet coke due to the general development in that market and new contract, and also some increase on the Energy side due to annual adjustment in the contracts that we have. This will give some interest.

If you look at metal market, we have a 100 million lower result in the quarter. But if you take out the currency effect and the inventory evaluation effect, the reduction in the performance is $42 million down to $73 million for the quarter. The two main reasons for this is on the remelting side they had higher maintenance cost and some fixed cost elements. And on the third-party marketing side that gives us a margin for the marketing effort we have exited some contracts to give room for the Qatalum contracts coming in and obviously lower volumes from Qatalum and as expected it’s giving out some lower earnings from third-party sales. Except on that, on the trading basis and on the components basis, on the remelting it’s been a stable and okay quarter.

We expect also our first quarter to be fairly good actually. We see several markets as Richard said for the first half of 2011. And we expect higher volumes coming out of the ramp-up of Qatalum that will bring effect to these.

Our Rolled products, we see a result of NOK105 million compared to NOK227 million in the third quarter. This is a decrease of some NOK120 million. But for us, the quarter has been good and Rolled products for the year, it has been good. This is an all time high results for our Rolled business area. They are approaching total capital fortunately and we are in a way quite happy with the performance in Rolled products, as we are also seeing that the industry looks more healthy than it has been in a long, long time.

So we will do our almost to run this business in a profitable and healthy way going forward. There has been planned maintenance as we had talked a lot about and also some physical developments compared to the third quarter. And third quarter also had a lower activity level vacation brings down the place [ph] hosting in that quarter. Fairly limited that when I talk about, fairly limited sales to decrease in the quarter. Only 2% for which in a way that also little bit better than what we have seen previously for fourth quarter.

Going forward, I also said it looks quite healthy for the first half. At least I know this is typical visibility that we have. We have good order books I think we should say for the first half. We don’t see any warning signals for the second half. Its simply that we typically have a half a year of visibility. Maybe a difference between Rolled and Extruded is that, Rolled has not insignificant part of their business being a global business. So they have global customer, are marketing their products globally, but Extruded products is much more European [ph] and low business small business activity.

Obviously for Extrusion in plants by the German export out of Europe of products, that is kind of more a secondary effects. So what we see on Extrusion now is probably that they have soft results due to the fact that Europe still weaker than the exporting markets outside Europe. So they are benefiting on the Rolled side on the export markets. They are benefiting to a lesser degree in Extrusion, although some affects as I said comes from the German market as it looks right now. And also the construction market being a major part of the Extrusion business in Europe is also the second reason here. In the Southern part of Europe is soft on the construction market side, and we don’t see that is kind of changing.

We had 5% lower volumes that was more as expected NOK60 million effect of that and higher maintenance costs had also cost related to these productivity improvement programs that we talked about. Going forward we see a good sales in first quarter and second quarter. We see margins holding up. They have done so through fourth quarter, but we do not satisfied to see any change in the construction market in Liberia. We maybe see some improvements in the French markets, but not further to the soft either yet.

When it comes to Energy, we said last quarter that we expected significantly higher production in fourth quarter. I said we are off 0.8 terawatt hours which has also been the effect on the Net spot sales part. And the improvement is resulted in NOK313 million to NOK482 million underlying in fourth quarter. We estimate that this will continue in first quarter.

We are as an industry in the Nordic countries low on reservoirs, maybe marginally better than the industry on average, but still low reservoirs. But nevertheless we assume that we will hold up production in the quarter one, because that makes sense from a value point of view to do so. I’m not going to talk a lot about pensions, but every year we have to know we are looking into the net pension liability. And what our exposure is, this is both on calculating the adjusted net debt but also from estimating the pension costs for the coming year. And the news you’ll today here is that they are stable this year.

As you might remember in last year we took it down by some NOK5.5 billion, simply due to the criteria, the interest rates and salary assumptions, etcetera that we use for this calculation. And we are maintaining more or less the level that we had as of last year. But you know there is – this is a very volatile number. It’s dependant on the interest rates while we do the calculation. I’m not say that our accountants and [inaudible] deciding the accounting rules in this world. And its not helping us fully here with the way that probably should calculate this number. But this year is stable situation and we have assuming the net sale ratio [ph] – the net pension cost for next year approximately after NOK700 million more or less in line with what you saw in 2010.

And the Board of Directors have proposed a dividend as Richard said up NOK75, and this will be up for final decision at the Annual General Meeting in May. This will mean payout of NOK1.5 billion. And we are basing this on the improved earnings and improved earning outlook, more predictable market conditions as we see it. We think we have a solid balance sheet. Also have enclosed the volatile section and we think we will generate good cash flow going forward. This relates to an underlying EPS of NOK1.40 whereas reported EPS on NOK1.33.

It is a payout ratio on a four years basis 2007 to 2010 of 55%. It is a payout ratio of [inaudible] isolated of 80% but over the – hopefully low part of the cycle we are gradually approaching relative to the 30% over the cycle payout ratio that we have in our policy. I think I would more or less cash flow generation for the quarter has been fairly solid, but as we rather move to the next one it shows the effect for the year. We have generated some operations NOK6.4 billion, and this will include approximately NOK2.5 billion investments out of the NOK6 billion which is the NOK2.5 billion related to our current portfolio generating portfolio, then you are left with NOK4 billion plus in cash generation office sustaining to CapEx activity. And then you have NOK3.5 billion in capital expenditures on Qatalum.

In another word that Richard also touched on was operating capital. We have increasing operating capital of close to NOK2 billion, but a net operating capital days are significantly going down throughout the year. And over three years, if you take 2009 and 2010, we have generated close to NOK4 billion in operating capital. So we are still happy with that. And then obviously you see the effect of the rights issues. We will have a billion – NOK1.1 billion in cash outlay when we close dollar, that is one that tents to volumes transactions. But still after the volume transaction we should have a strong financial position. You can then divest around NOK6 billion for the Vale assets and cash, and we are taking some debt on Board. But we should still be in a with a very strong balance sheet. And you also see that there is a host of development on the adjusted net debt basis for the goods.

Svein Richard if you will wrap it up?

Svein Richard Brandtzæg: Yes, just headlines for us in the near future. Its first of all to close the Vale deal, I mean to get the 4,100 new employees and the assets in Brazil. The second priority is of course it could also be the first one to get the least positioning of the cost level at Spain, reduction of NOK300 is target. We had also reduced NOK425 on what we did also last year.

So this is a repositioning program that continues, and of course ramping of Qatalum in full speed, that we expect according to the plan will be in June. And then we will always keep strong focus on operational excellence and those markets and all good customers. So that concludes our presentation. And Stefan?

Question-and-Answer Session

Stefan Solberg

Let's now open up for questions. (Operator Instructions) Jeff Largey from.

Jeff Largey – Nomura International

Hi its Jeff Largey from Nomura. I had a couple of questions. The first was if there was any guidance on the insurance benefit for the first quarter? The second question I have is on the LME-linked alumina contracts. If you can shed a little more color on what’s happening there? Is that an increase say percentage wise versus the aluminum price.

And then the third question I had was just looking at your comments towards aluminum demand, I think its known you’ve given that 7% growth number for 2011, it seemed like you were more subdue talking about 2012, and didn’t give a specific number, but I was just curious if you could share with us your thoughts towards 2012, if you just see a moderation in demand or maybe some of the restarting benefits comes to an end?

Svein Richard Brandtzæg

I think we have to start with the last set of questions, with regards to the demand 2012. We see at least the development goal is going further in the right directions. 7% in the real growth [ph] by China, 10% brought in China in 2011. We see the long-term development in the next tenure, [inaudible] expected increase in demand of 7% to 8%. The institutions that are even more optimistic. But underline, we see that we are moving into much better and more healthy situation with regards to demand and better situation with regards to supply and demand balance, which is quite important.

Then we go to the alumina pricing. It is too early for us to give you full comment on this but we see at least that also maybe to alumina price and percentage of LME that’s going in a positive direction, which of course is quite interesting for us, now that we are entering situation that would be long, not only in bauxite but also alumina. So we will come back to details about this at later stage and maybe Jørgen can answer the insurance question.

Jørgen Arentz Rostrup

I will do that and maybe to add on the alumina side, that regardless of the transaction that we are closing, we have participated and intent to continue to participate on timing various mechanisms for marketing the alumina that we are selling in the market. And there are indexes now that look promising and that’s viewed for that asset kind of truth [ph]. So there is an increasing liquid market to shorter term and we have a said already done contracts based on the index is slightly down on the normal LME linked but as you know, this will have limited effect on our net term earnings, because the volumes are more locked in regardless of how weather is old volumes or the near volumes.

When it comes to the insurance side, Richard – this quarter Qatalum has insurance proceeds of $100 million. And our 50% of that is the time fixed is NOK300 million. So that’s essential way to look at it. And as I said, we’re flipping it between underlying and reported or item excluded in order to make off the NOK300 million. Then we had said that we – as far as we are concerned, we assume this to be less than 50% of the total expected proceeds – insurance proceeds which means that we assume that Qatalum will see more than $200 million of insurance proceeds when this exercise is concluded.

We are very hesitant to comment on the timing of that, how much for being in first quarter and how much from being second quarter. When is the [inaudible] so on, because that is up to Qatalum to decide and be in charge of? They are working on this and they are progressing fine with insurance companies. And as we said in third quarter, these are discussions that are complex, Its a large case. But its moving along, and you will see some in first quarter maybe and you will maybe see some in second quarter but we will have to come back to that.

Stefan Solberg

Okay, Jason Fairclough.

Jason Fairclough – Bank of America Merrill Lynch

Jason Fairclough, Bank of America Merrill Lynch. Just a couple of questions on the cost saving programs, and I have to confess I’m still confused by this one. So you’ve done NOK50 per tonne so far there NOK250 more to go. And this is – is this nominal or is it real? Should we expect to see the costs essentially down or is it just that they are not going to go up as much?

Svein Richard Brandtzæg

We have created a best case for this program which is excluding alumina and all the raw material. So we are now targeting what we can influence also. Of course we are pushing down also the cost of raw materials there with regards to petrol coke for example. You have tough negotiations but that is outside the program. And what we can influence now is on maintenance cost is on probably more cost. So that means that we are also targeting productivity improvements, we’re targeting utilizing technology to get high occurrence efficiency, lower [inaudible] consumption which is a part of the program. There are several factors in addition to reducing the mining which is also important part.

Jørgen Arentz Rostrup

Yes. And if you look at this chart that Richard used when he commented on this, it is going down by NOK50 literally, but with Svein Richard’s comments you have to be careful using that number that accurate because there are obviously movements and I talked about we expected from the first quarter some movements in energy and petcoke. Petcoke is obviously a fairly liquid thing because its based on a contract strategy but there is an underlying uptick in energy costs since it uses indexation in those contracts.

So its not the number that I can assure – that we can assure you that it was able read out from quarter-to-quarter. But on those elements we are going to follow it very accurately any quarter.

Stefan Solberg

[inaudible]

Tim John – Redburn Partners

Tim John [ph] at Redburn Partners. Just a quick question about Qatalum, you mentioned that some of the parts now operating above main play capacity, could you give more detail about that? And secondly, you talked about moving Alunorte and Paragominas from example Alunorte 5.8 to 6.3. Could you give an idea of the timeline you envisage for us?

Svein Richard Brandtzæg

With regards to Qatalum, we have increased the current density at the higher level than was the main play current density. So that means that we are targeting. And we are now operating at a level which has full capacity. We’ll give production volume above 600,000 tonnes at the current – at what we have as a current density and a current efficiency today. We are operating at higher current density and at the current efficiency, that is the best watch and also what is our target but we are achieving that target at earlier stage. What I can also say is that there are several other operational performance indicators that are really in the right – on the right side of the line, I mean on the percentage side which is done also assuring that we are now on the right path with regards to delivering Qatalum on two productions in June this year.

With regard to Alumina production, this is a both operational performance to introduce our production systems, as we have introduced along the value chain if you do and make sure that we get more out of the existing capacity. So its about the operational improved performance.

Tim John – Redburn Partners

You mentioned about the filings and deals in which your other metals looks up now having some shorter visibility about three or six months. Does this mean that you anticipate any of these ending this year, and that means the market is a little more metal is becoming available?

Jørgen Arentz Rostrup

We also have but this is quite dynamic and we have seen these deals has been looking in protection within longer period of times. Now its becoming a bit shorter as we of course indicated previously. We know that this is – it depends very much on the interest rate and the company rule and increase in interest rate interest will result support [inaudible] Qatalum, but we have seen previously that when the new interest decreases then the Qatalum also increases. So its very difficult to say what is going to happen, maybe if you can fill out.

Svein Richard Brandtzæg

I absolutely support the short answer to me, we don’t expect – we have no reason to expect any other development and we also see it today very, very seemed to be a lot of interest in investing in this different type of commodities. And we’ve seen also the metal change, but we see maybe a shorter duration as we were pointing too but we don’t have any other observation on it.

Jonathan Schroer – Unicredit

Yes, Jonathan Schroer from Unicredit. I have two questions. The first refers to the environment enrolled products that you addressed and you said that you see this environment getting better. Is this mainly because of the resurgent of German manufacturing this year or is there more to within that and then if you could explain why the margin, the underlying margins fell in this quarter, and what would you expect then going forward for 2011. The other question is I know there is a new figure in the items excluded from underlying EBIT. And this refers to derivatives on raw material contracts. If you could explain what is behind that figure?

Svein Richard Brandtzæg

Maybe I can answer the first one and then Jørgen take the last one. The Rolled [ph] products we have seen the development for the whole products industry, its going in the operation. This is also very much of about supply demand balance. We know that demand has gradually been picking up but I’ve seen over supply situation for quite sometime.

We don’t know that [inaudible] has shutdown their [inaudible] sometime ago. I think that’s pretty good situation, whereas the markets went definitely, if I had to be stepped in the right directions. And what we seen normally stuff with a demand we have today. That's quite a good situation for the world products industry and you see also that demand is going, growing right direction and the order books for the first half year is more or less true in our case. So if you want to order our platform products here, we can give that in the second half but not in the first half.

And the margins are firm developing good direction. So I think that is the answer of the first part of the question.

Jørgen Arentz Rostrup

We had our petcoke contract which has an LME link which gave a embedded derivative on this contract LME a different cap on the petcoke contract. So its the petcoke contract that follows the petcoke markets but within LME cap on the contract. And because of that we have businesses and embedded to relative and we have now realized things and most of this contract. Right now we have a game on it because we have this cap. So its following the same principles for item excluded that we have tried to fix to every quarter. Its challenging for us also.

Unidentified Analyst

Hi gentlemen, just a question back on Qatalum, In I think it was October you said that the total operating loss associated with outage was going to be about NOK600 million, I mean obviously there was another NOK100 million or so associated with asset rattles [ph]. And now we’ve had about NOK300 million insurance payments coming in which is going to be less than 50% of the coverage you expect to get. Are we going to see more operating losses in the underlying numbers coming through in Q1 and Q2, also considering that you say your total coverage will be around $200 million which is an excess of NOK1 billion. So where is the difference there?

Jørgen Arentz Rostrup

First of all I think that we also said that we would have approximately NOK400 million in fourth quarter operating off, I think the number is without insurance proceeds NOK350 million. So we came out also after guiding on that one. I think it is fair to assume that for the first quarter also would have numbers significantly influenced by the ramp-up of Qatalum. It is obviously a mix of reduced volumes. It is a result of still high ramp-up activity. And there was element in the fourth quarter of increased representation memos [ph] at again running those assets in collaboration. And then I am hesitating to kind of bring all this together because when is insurance proceeds coming and so and so forth.

But I think you should be assuming that, well I would like to say that you should assume that both first quarter and second quarter will be influenced by that, the fact that there is a large ramp-up taking place in the company.

Unidentified Analyst

And then just in terms of what’s included in the underlying number and what’s not. So the NOK90 million that you’ve excluded from underlying EBIT has to do with the assets that were written off. So you’re only going to include insurance proceeds associated with basically cover and operating losses.

Jørgen Arentz Rostrup: Write down on those assets which was primarily first sale of metals, if you remember and we took that as an item excluded. So since then its my sense to take that insurance proceeds related to that same write off at [inaudible]. The other insurance proceeds are always then related primarily to business interactions. That is an underlying item and we verify thereby direct the proceeds for that line.

Stefan Solberg

We will take [inaudible] two questions from the web which comes from Luc Pez from Exane BNP Paribas. First question is if you can quantify the cost inflation that you’re facing in the upstream business excluding the cost of total [inaudible]. Second goes to strategy for downstream business, if we would consider telling in this business.

Jørgen Arentz Rostrup

Well I don’t know where our analyst is located but your trend I find is not very good at least. And well on cost inflation, again it’s a very comprehensive question, because obviously when we are talking about getting the dollar to turn down, we are then including a lot of elements that require underlying exposed to cost inflation typically the Norwegian salaries and other input costs in Norwegian centers. On the other side what were the commodity markets are moving up and down is also hard to judge on. So I had – don’t have advanced answer to that. Our key priority is to make sure that we are doing the at most on the elements that we can influence.

We saw a tendency that the cost of element on the Norwegian [inaudible] was going the wrong way. We saw first an ambition or a potential for $100 per account and we’re working on those. We also saw that about taking firmer actions on organizational issues and structural issues and how we purchase and how we do maintenance on what we could say the cultural size that potential much, much larger the way we felt it. But the kind of to single out these different elements its at resulting our [inaudible] comments.

Svein Richard Brandtzæg

The second part of [inaudible], our mission is to continue development in your company. We are utilizing the competence below the whole value chain. We are growing the aluminum markets though innovation and technology. We also bringing back metal units to recycling into the value chain combining that with primary metals. And so far we see that the we have spent a good [inaudible].

Stefan Solberg

There are no further question from audience? Okay, that one.

Thomas Maheras – Citi

Thomas Maheras from Citi. Could you just quickly talk a little bit more about Norwegian energy prices, you said that volatile that you think they’ll stay high, I’m just looking at the start of 2011 on the chart. It looks like they’ve retreated quite a little bit. Could you just sort of shed a little bit of light on any visibility that you have?

Jørgen Arentz Rostrup

Well, first of all high or low is obviously relative term. So as far we probably need to clarify that, but the Nordic energy market which is a combined market and a liquid market actually as you probably know, its very influenced by the water and snow available in the reservoir. So there is a big variation whether we produce from a normal position of 9.4, 9.5 kind of dollars [ph] per year down to just below – above 7.5 hours or as given in 2008, 11.5 to 7 dollars. So it’s a big outcomes and that is obviously very often also then reflected on the other players in the industry.

And then you have a second factor and that is import in to the Nordic countries because in particular deficit times we are very much dependant on the import and that is typically cold days production from another Germany and Denmark studies the marginal supplier into the Nordic countries. So we have an influence of continental energy prices into our systems, when we are in balanced situation. But on the balance, it is the hydro power that is deciding the pipeline. And we have had volatile prices going up and down. Its also very much influenced by how cold and how warm it has been. And in fourth quarter we had periods with record cold weather and we used electricity very much for heating up houses in the Nordic countries much more to what you’re using in England and what we’re seeing on the continents.

So these had an immediately important fact and now we have a warmer time period and we see it immediately on the [inaudible] metals. But we are running our systems. We are running it basically on the forward curve. And we are done viewing whether we want to produce today or tomorrow and that is based on the forward curve, our inventories and what they think about inflow over the next period. So we might look in the mirror and see that we shouldn’t have producing 50 along with that weights for 52, but overall we are optimizing what we think is an optimization of the water value [ph]. Based on that, even with no reservoir if we think in sense to have a high production into long as you see the markets now because the prices are definitely higher in Q1 than they will be in Q2 and Q3 the way its mixed out.

If you get there is very, very low continued inflow of snow that is in the winter, so you could expect a low or weak meting season. While then this will change. But that is the way we have to balance without and that we knew that that cushions for the various drives [inaudible]. The basics are there are no fundamental change in this business. We think it will be a significant cost – cash contributor going forward. We think the assets are important to us but also our quite valuable in our portfolio and we intent to develop its SQ [ph] that we can going forward.

Stefan Solberg

This was also important from the previous Energy business and [inaudible].

Jørgen Rostrup

Well I’ll start doing this.

Stefan Solberg

We’ll have one more questions if there are any. Okay, well that completes the presentation and we look fourth quarter results. So thank you for joining us this afternoon. Thank you.

Svein Richard Brandtzæg

Thank you.

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