Rio Tinto to approve $5.1b Qld bauxite mine

Rio Tinto expects its $US4.8 billion ($5.1 billion) South of Embley bauxite project near Weipa in Queensland to deliver returns comparable to its lucrative Pilbara iron ore operations, and is likely to approve its development this year, UBS analyst Glyn Lawcock said.

Mr Lawcock tips South of Embley – which is critical to extending the life of bauxite mining at Weipa – will deliver an internal rate of return of about 29 per cent.

“Rio expects the return on this project to be ‘comparable to the Pilbara’ (i.e. greater than 20 per cent),” Mr Lawcock wrote from a tour of Rio’s Alma smelter, in Canada.

“Rio Tinto Alcan is particularly bullish on the outlook for bauxite, with material demand growth and the Indonesian ban impacting the market. Rio is well positioned to benefit from this.”

Rio’s aluminium division, under new chief Alfredo Barrios, is likely to approve the South of Embley project this year.

JP Morgan analyst Jason Steed, who has also been on the Rio North American site tour, said the focus for growth at Alcan is “clearly weighted towards bauxite over aluminium and alumina, with the South of Embley project well advanced at the planning stage”.

Rio is the largest global producer of bauxite, with a current long position of 18 million tonnes, including Gove.

The South of Embley project would initially produce 22.5 million tonnes of bauxite each year, but 10 million tonnes per annum would be replacement tonnage for Weipa, with the possibility to expand to 50 million tonnes per annum.

Mr Lawcock’s return figure is based on the 22.5 million tonnes per annum run rate.

He values the project at $US4.8 billion, and tips it will cost $US2 billion to $US2.5 billion and take three years to develop.

Rio Tinto Alcan has improved earnings before interest, taxation, deprecation and amortisation by $1.5 billion since 2011 and is likely to build on this next financial year. Most of its assets are in Canada and Australia.

Cost-cutting is helping “create momentum” in the division and the miner is well positioned for a recovery in aluminium prices, Mr Lawcock said.

Mr Steed noted that “the cost reductions across Rio Tinto Alcan have been some of the most impressive achieved across the broader company”.

About $231 million was cut in 2013, and sustaining capital expenditure fell to $847 million, from $955 million in 2012.

“Importantly, management believes these reductions can be maintained,” Mr Steed said.

“When asked whether a 40 per cent margin is achievable from the division, management noted this relies on higher prices (primary metals division is already first cost quartile).”

Rio management has a positive market view on bauxite but are more cautious on alumina and aluminium, Mr Steed said.

“Rio remains bullish on the market over the long term and believes the current outlook is improving,” he says.

Management said it was too hard to predict whether Indonesia will ease the bauxite export ban in the medium term, Mr Steed wrote.

“But (they) did note there were powerful individuals in the country that owned deposits that were frustrated by the new rules. There is currently no activity on the ground. Management believes China still has excess inventory which will take nine to 12 months to reach normal levels.”

Rio predicts aluminium demand will grow at 5 per cent each year to 2020, taking the market to more than 70 million tonnes per annum.

Rio’s Kitimat aluminium smelter project in British Columbia remains on track for commissioning in the first half of 2015, but analysts were not updated on the $3.3 billion capital expenditure budget, which Mr Steed suspects will creep upwards.

Copyright and Exemption Declaration :¢ÙAll articles, pictures and videos that are marked with "China Aluminum Network" on this website are copyright and belong to China Aluminium Network (www.alu.com.cn). When transshipment, any media, website or individual must list the source from "China Aluminium Network (www.alu.com.cn)". We seek legal actions against anyone that disobey this. ¢ÚArticles that marked as copy from others are for transferring more information to readers, do not represent or endorse their opinions or accuracy and reliability. When other media, website or individuals copy from our website, must keep the source. Anyone that changes the articles' sources will hold the responsibilities for copyright and law problems. We also seek legal actions against anyone that disobey this. ¢ÛIf any articles copied by our website concern the copyright and other problems, please contact us within one week.