Chinalco refuses Yarwun funding

China's state owned resource company, Chinalco has refused to confirm funding to Rio's Yarwun alumina refinery in Queensland. The future of the refinery is now in doubt until the Foreign Investment Review Board decides on the Rio-Chinalco $US 19.5 billion deal.

As part of the Rio-Chinalco deal, Chinalco had agreed to provide $US 500 million in return for a 50 percent stake in the Yarwun refinery and had separately agreed to consider funding the expansion of Yarwun 2, which is about 29 percent complete.

This is the second time that Rio has agreed to push the deadline for Chinalco to decide on whether it would fund the Yarwun refinery, pushing the deadline from May 31 until June 15, which is also FIRB's deadline to announce its decision on the Rio-Chinalco deal that would give the Chinese company an 18 percent stake in Rio Tinto.

Tim Schroeders, Pengana Capital analyst said, "It is highly likely FIRB will impose conditions on the deal if it approves it, so why would they (Chinalco) back themselves into a corner and commit at this stage when FIRB's decision is two weeks away. The Queensland Government will be extremely disappointed if this expansion does not go ahead and this may or may not have ramifications for how FIRB makes its decision."

Rio had warned the Federal Government in February that opposing its proposed deal with Chinalco could cost 2150 jobs, almost all of them in Queensland. There had been some speculation at the time that there would be some job cuts from the possible cancellation of the Yarwun 2 alumina refinery expansion, separate from the 14,000 jobs that Rio had axed globally. There were plans to employ an extra 600 workers as construction ramped up.

However, the Queensland Government is also concerned that approving the deal could jeopardize plans by Chalco -- Chinalco's Hong Kong-listed arm -- to develop the multi-billion-dollar Aurukun bauxite mine and alumina refinery. Last month, Chalco told Queensland Premier Anna Bligh that a recent slump in aluminium prices had weakened the case for a stand-alone refinery at Bowen.

Chalco had stated earlier that 2300 people would be employed to build the mine and refinery, however, has now told the state Government that it may instead consider helping Rio with its Yarwun 2 expansion.

Rio approved the $US1.8 billion Yarwun expansion in July 2007. It was expected to more than double the refinery's production, from 2 million tonnes of alumina to 3.4 million tonnes by 2011. But a plunge in global commodity prices has meant that price of aluminum has dropped about 52 per cent in the past year and demand is continuing to fall.

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