Saudi's Ma'aden to Split $10 Billion Aluminum Project in Two

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Researched by Industrial Info Resources (Sugar Land, Texas)--The Saudi Arabian Mining Company (TASI:MAADEN) (Ma'aden) (Riyadh, Saudi Arabia), a leading mining and minerals exploration and production company, has announced that it will commission the $10 billion Ras az Zawr aluminum smelting complex project in two phases because of delays, cost overruns and funding woes. The phased strategy will help the company secure financing for the project. Ma'aden is primarily involved in gold mining and in the production of phosphate and aluminum, among other products.

The project comprises an alumina refinery with a capacity of 1.4 million tons per year, a bauxite mine, an aluminum smelter with a capacity of 720,000 tons per year, a power and desalination plant, and a port. In the first phase, Ma'aden plans to build the 1,800- to 2,400-megawatt (MW) power and desalination plant and the aluminum smelter in Ras az Zawr. Alumina required for the smelter will be purchased from the open market in the first phase. In the second phase, the company plans to construct the alumina refinery and a bauxite mine at Al-Zubairah in the Qassim province to provide feedstock for the smelter. The mined bauxite will be transported by rail to Ras az Zawr. The second phase is slated to begin about 12 months after the completion of the first phase. Commercial production from the plant was originally scheduled to start in 2011.

In October 2008, Bechtel Corporation (San Francisco, California), one of the world's largest engineering and construction companies, was awarded the engineering, procurement, construction and project management (EPCM) contract to build the aluminum smelter. The company is re-estimating the costs for the first phase of the project as EPC prices have significantly decreased over the past six months.

Ma'aden is scouting for a partner to provide technical assistance for the refinery. The EPCM contract for the refinery was awarded to Fluor Corporation (NYSE:FLR) (Irving, Texas) last year. Work has not started on the refinery and remains deferred until Ma'aden finds a new partner for this phase.

In 2007, Ma'aden and Alcan Incorporated (Montreal, Quebec) formed a 51:49 joint venture company Alumco for the Ras az Zawr smelter project. However, a friendly acquisition of Alcan by Rio Tinto Incorporated (NYSE:RTP) (London) to form Rio Tinto Alcan Incorporated altered the role of Alcan in the project. Rio Tinto Alcan withdrew as an equity partner, as it was unable to finance the project under the equity scheme because of huge debts. The company also incurred heavy losses because of a slump in commodity prices. In March 2009, Rio Tinto Alcan signed a cooperation agreement with Ma'aden limiting its role to providing assistance only for setting up the smelter.

The cost of the project, initially estimated at $7 billion, rose to nearly $10 billion in 2008 because of a rise in borrowing costs because of the credit crunch and a rise in EPC prices. However, the project cost is likely to come down by over 20% following a drop in EPC prices. According to Fluor, the cost of construction equipment will be at its lowest by the end of 2009 or early 2010, at nearly 15% lower than 2008 levels. A fall in the prices of raw materials, increased competition, and lower contractor costs are some of the factors that are influencing the downward trend in EPC prices. Fluor predicts that material costs will start to increase by 2011.

Ma'aden plans to develop the project solely on its own through internal accruals and debt funding. The company is hopeful of financing the first phase of the project by April 2010 and plans to launch a debt-funding scheme by the third quarter of 2009. In July 2008, the company raised $2.5 billion through an initial public offering.

Ma'aden is setting up the plant as the costs for producing aluminum in Saudi Arabia are among the lowest in the world. The company will be able to produce aluminum at a cost of about $1,000 per ton while the global average market rate is around $2,400 per ton. However, a drop in global demand will make it challenging for the company as aluminum output worldwide is estimated to drop by 6.7% this year. Aluminum prices have fallen by over 50% in the second half of 2008. The metal is now trading at $1,445 per ton after reaching a high of $3,380 per ton last July.

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