JOC ARCHIVES

December 9, 2013

Massive investment will complete Kitimat smelter project

RIO TINTO

The recently announced US$2.7 billion investment will complete the $3.3 billion Kitimat Modernization Project in 2014. This rendering shows what the project will look like when complete.

Rio Tinto is planning to invest US$2.7 billion to complete the modernization of its aluminium smelter in Kitimat, B.C., while the company is cutting back on capital spending at projects around the world.

“For nearly 60 years, the smelter has been a major impetus for the economic development of northwest British Columbia,” said Jean Simon, president, primary metal, Rio Tinto Alcan.

“We are very proud to announce this US$2.7 billion investment to complete the modernization project. This is one of the largest private investments in B.C.’s history and it will ensure the sustainability of the aluminium business in Kitimat for decades to come.”

Rio Tinto announced on Dec. 1 that the US$3.3 billion Kitimat modernization project will be completed in 2014.

The project involves the demolition of several buildings on the site of the existing smelter and clearing space for a new plant.

The project began in 2011 and will create 2,500 jobs during the peak period of the construction phase.

When completed, the production capacity of the new smelter will increase by more than 48 per cent to about 420,000 tonnes per year.

The first production of metal is expected to come on stream in the first half of 2014 and ramp up over a nine month period.

“This project draws on two of our greatest competitive advantages – clean, self-generated hydropower and leading-edge AP smelting technology,” said Jacynthe Côté, chief executive of Rio Tinto Alcan.

“Once completed, Kitimat will be one of the most efficient and lowest-cost smelters in the world and will better position us to serve the rapidly growing demand for aluminium in the Asia-Pacific market.”

The modernized smelter will be powered exclusively by wholly-owned hydropower and use Rio Tinto Alcan’s proprietary AP40 smelting technology to reduce the smelter’s carbon dioxide emissions by about 50 per cent.

The completion of the modernization project is taking place at a time when the company is cutting back on capital spending around the world.

During an investor seminar in Sydney Australia on Dec. 3, Rio Tinto CEO Sam Walsh said total capital expenditure is forecast to be reduced to US$11 billion in 2014 and to around US$8 billion in 2015.

This is a 20 per cent reduction year-on-year.

“We have cut costs and are set to exceed our commitments made in February,” said Walsh.

“Operating costs are down $1.8 billion year to date compared to the same period last year and exploration and evaluation costs are more than $800 million lower.”

Total capital expenditure in 2013 is forecast to be less than $14 billion, which is a reduction of more than 20 per cent compared to 2012.

Rio Tinto has divested about US$3.3 billion worth of non-core assets in 2013, which has reduced employment by about 3,000 people.

In November, Rio Tinto suspended alumina production at Gove, Australia after determining the refinery is no longer a viable business in the current market environment.

Key factors influencing the decision were continuing low alumina prices, a high exchange rate and substantial after-tax losses for the refinery.

Rio Tinto Alcan’s aluminum smelter in Shawinigan, Que. also shut down production in November.

“From where I stand, we continue to see market fragility and volatility,” said Walsh.

“The impacts of decisions like quantitative easing and austerity programmes are still washing through markets around the world. But, it is a mixed story because despite this uncertainty, we are also seeing modest economic recovery.”

During the recent global financial crisis, Rio Tinto Alcan reviewed its capital expenditures and decided to move forward with the project, but investment was slowed down.

The challenging economic times provided Rio Tinto Alcan with an opportunity to reduce capital costs.

“Over the longer term, I remain optimistic about demand for our products,” Walsh said. “China’s urbanization will continue and the development of other economies as they continue to grow at pace, such as India, Vietnam, Indonesia, the Philippines, the Middle East, the former Soviet Union, South America and Africa, will also contribute to ongoing demand for our products.”

RIO TINTO

The existing aluminum smelter has been around for about 60 years.

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