INTERVIEW: Alcoa CEO Says Saudi Smelter Financing Nearly Done

16th Jun 2010 09:35

By Andrea Hotter Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Financing for Alcoa Inc.'s (AA) vast aluminum project in Saudi Arabia is almost complete, with local banks providing the lion's share, the chief executive of the U.S. producer told Dow Jones Newswires. The project, a joint venture with Ma'aden, the Saudi Arabian Mining Company, will be the kind of low-cost opportunity that Alcoa looks for as it develops its business going forward, Klaus Kleinfeld said. "Everything that brings us further down the cost curve and makes us more competitive, we would consider. This (Ma'aden) is a great opportunity for us," he said. "We made a round of presentations to banks and there was a lot of strong interest from the Middle East banks and also from international banks. The financing is almost in place and should be completed shortly. The major share of the financing comes from Saudi banks," he said. The joint venture, in the new industrial zone of Raz Az Zawr on Saudi Arabia's east coast, will create the largest integrated aluminum project that has ever been built. Initial annual capacities will be a bauxite mine of 4.0 million metric tons, an alumina refinery of 1.8 million tons, an aluminum smelter of 740,000 tons and a rolling mill of between 250,000 tons and 460,000 tons. Alcoa started out with a 25.1% stake in the venture and has an option to bring it up to 40%. First production from the smelter and rolling mill is due in 2013, and first output from the mine and refinery is expected in 2014. The project requires a vast infrastructure--including a new city--that many doomsayers didn't think would ever materialize. But Kleinfeld, who joined Alcoa in 2007 from Germany's Siemens AG (SI), said the port and city are now in place, a rail link is almost finished and only the power plant remains to be built. "We have a gas allocation so that's why this is at the lowest point on the cost curve, or pretty much every element of it, from the refinery to the smelter to the rolling mill," Kleinfeld said. "It also has expansion options, even though it's already big at startup. This is a great opportunity for us to further increase our position on the primary side as well as to locate ourselves in a region which is close to where a lot of the new growth happens these days." Energy Costs Key To Project Development For aluminum producers, securing a cheap and reliable supply of energy--which accounts for around a third of smelting costs--is critical. The chief executive of Russian producer United Co. Rusal PLC (0486.HK) recently estimated that 70% of aluminum smelters lose money at below $1,900/ton. Alcoa's Kleinfeld said it is very difficult to tell what the break-even price might be, but that 70% was likely on the high side. "So many pieces have moved on the cost side--you have special deals on energy for some producers and there's also volatility on the currency side, which has had a big impact on project economics," he said. "I haven't run the numbers, but I would think that 70% is too high." About 20% of Alcoa's smelting capacity is curtailed, the result of slumping demand and prices during the economic downturn in key consuming sectors like automotives and aerospace. There are no plans to restart that idled capacity yet, however, and the company remains the world's biggest producer of aluminum with 4.0 million tons of aluminum output, of which 3.4 million tons is primary metal. "We're watching where the industry is going but given current prices (around $1,900/ton) we're not going to restart," Kleinfeld said. Other Growth Options Including In Iceland, China Growth at other Alcoa aluminum projects hasn't stalled despite the price volatility, with the focus remaining on low cost operations. A couple of years ago the company opened a smelter in Iceland, based on hydropower, and Alcoa is assessing a possible second smelter on the island. "You have a lot of areas where you do have stranded power. Even through the downturn the Iceland smelter ran full out all the time because it's very nicely positioned on the cost curve, plus very nicely positioned geographically, close to both North America and Europe," Kleinfeld said. There are plenty of project possibilities in China. In February 2009, Alcoa signed a strategic cooperation agreement with the government of Henan province. Although "nothing firm" has yet arisen, Kleinfeld said "there's power there, smelter ideas, but there are also downstream ideas." Alcoa's relationship with China, the world's largest consumer and producer of aluminum, has been on a positive footing for many years but stepped up a gear over the past decade. Aluminum Corp. of China, or Chinalco (ACH), has been on the other side of a number of ventures with Alcoa, including a deal to acquire shares in mining giant Rio Tinto PLC (RTP) which the U.S. producer has since exited. "Alcoa has a very good relationship with Chinalco formed through many things--we helped (Chinalco) to IPO their firm, we took 8% in them and then we joined to acquire 9% in Rio Tinto," Kleinfeld said. "With China as a whole we have very good relations--we've grown our business there substantially, seeing double digit growth every year depending on which business." Kleinfeld said the company plans to consider a number of options in China, including teaming up on domestic projects such as in Henan province, external joint ventures such as that being discussed at its bauxite and alumina operations in Jamaica, and through supply relationships on the alumina side. -By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; [email protected] (END) Dow Jones Newswires June 16, 2010 04:35 ET (08:35 GMT)