Rio Tinto Alcan is pushing ahead with construction of a $3.3-billion (U.S.) smelter in Kitimat, B.C., even as stagnant prices have spurred a selloff of other aluminum assets.
London-based Rio Tinto PLC , which acquired Montreal-based aluminum giant Alcan for $38.1-billion in 2007, is expected to announce Thursday it has final approval to modernize the 57-year-old smelter to double its capacity.
Approval will see Rio spend another $2.7-billion on Kitimat, after already setting aside $650-million towards the upgrade, raising the construction price tag more than 30 per cent from $2.5-billion. The plan includes demolishing a building and clearing space for a new plant.
The project, one of the largest private-sector investments in the province in many years, will create hundreds of jobs and will be a huge economic boon for the depressed northwestern region after the collapse of the forest industry.
Many mining companies have seen project costs soar due to higher energy, labour and raw materials costs. At the same time, commodity prices have plummeted because of concerns about Europe's debt crisis and China's economic growth.
Companies such as Rio, the world's second-largest miner, are forging ahead with new projects in the belief that any downturn won't be as severe as the crisis of 2008-09.
Rio said this week it expects to increase capital spending 17 per cent next year to at least $14-billion on developing projects and said it continues to sell everything it produces, despite global economic turbulence.
"While there are signs of nervousness, we believe the impact of current economic concerns on our business is manageable, unless financial markets substantially deteriorate," said Rio Tinto chief executive Tom Albanese.
The company cited aluminum as one of its poorer performing commodities, priced well below the industry's marginal cost of production, and said that division is expected to break even in the second half of the year.
Aluminum is trading around 90 cents a pound, down from about $1.27 a pound when Rio bought Alcan in 2007.
"At $3.3-billion, the rebuilt Kitimat is very capital-intensive," said BMO Nesbitt Burns analyst Tony Robson. "It will be difficult for Rio Tinto Alcan to get a return on this investment unless metal prices stay high for a long period a time."
Rio has responded to tighter market conditions by scaling back its aluminum business outside Canada, looking to sell 13 assets in other parts of the world. Some of those include operations it picked up in Europe and the United States with the purchase of Alcan, along with other assets in Australia and New Zealand. It's also planning to permanently close its Lynemouth smelter in northeast England.
The green light for Kitimat's construction will put an end to more than a decade of expectation within the coastal town in northern B.C. that was planned and built by Alcan in the 1950s.
Rio has spent millions since about 1997 to put together an economic expansion project. When it bought Alcan, on what turned out to be the eve of the global financial crisis, it was obliged to make a business case for the Kitimat modernization and expansion to Rio's board. The project was then shelved when commodities prices sank during the recession. Rio started spending on Kitimat again this year.
The updated smelter will increase capacity 50 per cent to 420,000 tonnes from 280,000 tonnes by 2014. Emissions will be reduced by 50 per cent.
Jacynthe Cote, chief executive of Rio Tinto Alcan, will be in Kitimat Thursday to make an announcement "regarding the company's multi-billion dollar growth plans," the company said in statement Wednesday. Ms. Cote will be joined by B.C. Premier Christy Clark.
Kitimat Chamber of Commerce president Tony Brady said the new smelter is "the most important thing to happen to Kitimat since the first time Alcan built its smelter. It's long overdue."
Kitimat Mayor Joanne Monaghan is looking forward to full construction after so many false starts. "We were waiting and waiting for it," she said. "It would be great to have the expansion finally announced."