Rio Tinto Alcan says a new $3.3-billion (U.S.) smelter in Kitimat, B.C., will have some of the lowest operating costs in the world, helping to meet its goal of increasing margins across its struggling aluminum division as prices remain sluggish.
Jacynthe Côté, chief executive officer of the aluminum division of the miner's London-based parent, Rio Tinto PLC , said that although the capital costs to upgrade Kitimat have grown 30 per cent from $2.5-billion, the project will increase capacity by 50 per cent and reduce overall production costs, alongside a selloff of higher-cost operations in other countries.
"It has been approved because it will bring good returns," Ms. Côté said in an interview on Thursday en route to Kitimat, where Rio announced that its board has approved the construction.
Plans to upgrade the 57-year-old smelter have been in the works for more than a decade. Rio committed to the project after buying Montreal-based Alcan for $38.1-billion in 2007. It put the planned upgrade on hold during the global financial crisis after being forced to make cuts to pay off massive debt it incurred from the Alcan deal.
Rio started spending on Kitimat again this year, as prices for aluminum doubled from a low just below 60 cents a pound during the 2008-09 commodities drive.
The Kitimat upgrade will go ahead even though aluminum prices have fallen about 25 per cent since last spring to about 95 cents a pound as a result of flagging demand in Europe and increases in production in China, the world's top producer and consumer of the metal.
Ms. Côté said the company expects further production curtailment across the industry, and is streamlining its business. That includes lowering operating costs and trying to sell an estimated $8-billion of assets in six countries outside Canada to help the group more than double its earnings margins to 40 per cent by 2015.
"Each commodity has its moment in the sun and in the shadow," Ms. Côté said, predicting an "upside for aluminum" in the future.
Final Kitimat approval means Rio will spend another $2.7-billion, on top of $650-million already committed, to update the smelter, including tearing down an old building and clearing space for a new plant. The new smelter, expected to begin production in the first half of 2014, will increase capacity 50 per cent to 420,000 tonnes from 280,000 tonnes.
The smelter is one of the largest private-sector investments in British Columbia and will create about 2,500 jobs during the peak construction phase, and 1,000 jobs longer-term. It will also cut greenhouse-gas emissions by about half, Rio said.
"It's going to give that plant another 50 years," said Ms. Côté. "It's good for Canada and shows Canada is a good place to do business."