Rio Tinto No Closer to Decision on Gove Alumina Refinery

Researched by Industrial Info Resources Australia (Perth, Australia)--The future of Rio Tinto Limited's (NYSE:RIO) (Melbourne, Australia) Gove alumina refinery is still far from certain, as all concerned parties continue negotiations to secure a supply of natural gas for the facility. The refinery and bauxite mine on the Gove Peninsula, 650 kilometres (400 miles) east of Darwin, has lost more than $190 million per year in recent times, largely due to the high cost of operating diesel generators to power the energy-intensive refinery.

Rio Tinto previously hoped to sell the Gove operation, transferring the assets to Pacific Aluminium in October 2011, but this plan was later shelved, along with six other assets in Australia and New Zealand that were earmarked for sale. At the time, "unfavourable market conditions" were cited as the reason not to proceed with the sales.

In February 2013, the Northern Territory government committed to a 10-year deal in which it will give up its own supply of gas to keep the refinery open. In return, Pacific Aluminium Chief Executive Sandeep Biswas assured the government that the private sector would fund the construction. However, it appears very little has been done to further the project, with Pacific Aluminium yet to make its final investment decision.

The Gove operations, consisting of both a refinery and open pit bauxite mine, produce about 8.2 million tonnes per year of bauxite and 2.6 million tonnes per year of alumina, and are considered one of Rio's worst-performing assets. Pacific Aluminium has said it is considering closing the refinery and downsizing to mining bauxite only, if a cheaper energy source cannot be found.

It now appears that the Northern Territory government is pressuring Rio to make a decision. "The future is bright for Rio, for Gove and for the refinery; it now comes down to commercial considerations for Rio," said Chief Minister Adam Giles while visiting the Ranger Uranium Mine. "Rio was born out of being an Australian company. What we want to see is Rio back Australia, back the Northern Territory and back Gove."

A small liquefied natural gas (LNG) import facility has been suggested as a potential alternative to the construction of a long-distance pipeline across some of Australia's harsh territory, but no official comment has been made.

Historically, mechanical and energy limitations have hindered Gove from operating at its nameplate capacity. Underutilization of the plant inflated the per-unit cost of production, exacerbating the profitability problems faced by Pacific Aluminium and Rio Tinto.

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