Saudi Arabian Mining Company’s (Maaden’s) plans to develop a fully integrated, world-class aluminium industry in the kingdom were thrown into doubt in December 2008 when its UK/Canadian equity partner Rio Tinto Alcan pulled out of the joint venture. The global economic crisis forced the firm to scale back its investments worldwide.
But in late 2009, the US-based Alcoa – Rio Tinto’s closest rival – announced it would form a joint venture with Maaden instead to develop a low-cost aluminium complex, targeting growing markets in the Middle East and the wider region.
Key fact: The smelter planned by Maaden and Alcor will have an initial capacity of 740,000 t/y
The new venture will include a bauxite mine with an initial capacity of 4 million tonnes a year (t/y), an alumina refinery with an initial capacity of 1.8 million t/y, an aluminium smelter with an initial ingot, slab and billet capacity of of 740,000 t/y, and a rolling mill with hot-mill capacity of between 250,000 and 460,000 t/y.
Maaden will own 60 per cent of the joint venture, with Alcoa controlling the remaining 40 per cent through an investment partnership in which it will own 20 per cent and its partners will participate through financing and represent the other 20 per cent.
The US firm and its partners will invest $900m over a four-year financing period and will be responsible for their pro rata share of the project financing.
The key challenge is to get this done on time and under budget. It’s a big endeavour but we have done it before
Kevin Dowery, Alcoa spokesman
“We will be part of the world’s pre-eminent and lowest cost integrated aluminium facility. All the elements of this project have the ability to be expanded, so there is the opportunity to be close to strong markets […] to be a part of upstream and mid-stream initiatives,” says Alcoa spokesman Kevin Dowery.
Despite Rio Tinto’s initial involvement with Maaden, Alcoa had always kept a close eye on the project, says Dowery.
“There is not a project anywhere in the world we don’t have discussions about. Rio Tinto had to step down for a number of reasons. As soon as that happened we were contacted and we said would love to work with Maaden.”
- $10.8bn – The initial cost forecast for the Ras-al Zour aluminium project
- $8bn – The revised costs of the scheme after prices fell last year
- $900m – The sum Alcoa and its partners will invest in the scheme over four years
- $1bn – Value of the construction contract to build Maaden’s alumina
While there are similarities between the two schemes, Alcoa has not simply stepped in to replace Rio Tinto in a like-for-like replacement, but is partnering Maaden to deliver a completely unique project, says Dowery.
The mill will focus on the production sheet, end and tab stock for the manufacture of aluminium cans, and other products to serve the construction industry. Bauxite feedstock for the planned alumina refinery will be transported by rail from a new mine at Al-Ba’itha, near Quiba in the north.
Alcoa’s partnership brings enormous value, not just in terms of technology, resources and experience, but commitment to sustainability, says Abdallah Issa al-Dabbagh, Maaden’s president and CEO.
The firm’s involvement in the Ras al-Zour project is tangible evidence of the impact of investment in infrastructure by the government and will act as a catalyst to other industry sectors. “The positive impact of the government’s vision in developing the kingdom’s infrastructure including the new railway network and deepwater port at Ras al-Zour is clearly demonstrated by the realisation of this scheme and others,” says Al-Dabbagh.
“Collaboration in clean and efficient power generation also ensures it is both highly competitive and sustainable.”
The capital investment is expected to be about SR40.5bn ($10.8bn) subject to the completion of feasibility studies and an environmental impact assessment.
While construction timetables are tight, they are realistic, says Dowery. The first phase of the project to come online in 2013 will comprise the smelter and the rolling-mill, with the refinery to follow in 2014.
“The key challenge is to get this done on time and under budget. It’s a big endeavour but we have done it before and we will do it again,” he says.
Alcoa’s president and CEO, Klaus Kleinfeld, says the Al-Zour project is a mutually beneficial opportunity for Alcoa. “This joint venture is a great opportunity for Alcoa, Maaden and for Saudi Arabia. “We are creating a fully-integrated aluminium complex, that will be the most technologically advanced and cost efficient in the world,” he says.
“By changing the operating dynamics and cost base within our industry, the complex will be a model for the growth of aluminium in competition with other metals and is designed with the potential for future expansion.”
Alcoa says it will provide technological know-how, management expertise and support during the design, construction and operation of the mine, refinery, smelter and rolling mill. It will also arrange the supply of alumina feedstock to the smelter from outside the kingdom until the project refinery comes on stream.
Both Alcoa and Maaden propose to work with leading international and local firms on the design and construction of the complex.
Maaden had originally awarded the construction contract for the alumina refinery to the US’ Fluor Corporation in late 2008.
However, Maaden decided to retender the deal in October 2009 following Rio Tinto’s withdrawal from the project as equity partner and subsequent technical co-operation agreement in March 2009.
In December 2009, Maaden retendered a $1bn construction contract to build the 1.8 million-t/y refinery, after appointing a new partner to provide technology to the facility. Firms who met the 15 December 2009 bid deadline include Fluor with Australia’s WorleyParsons; France’s Technip; the US’ Bechtel; and Canada’s SNC Lavalin and Hatch. An award is expected in the first quarter of this year and construction is expected to take two-and-a-half years to complete (MEED 17:12:09).
The refinery will produce alumina (aluminium oxide), the raw material from which aluminium is smelted, from the mineral bauxite.
In April 2009 Maaden said it would split the $10bn aluminium project into two smaller phases to help it secure financing. It will first develop a power plant and an aluminium smelter at Ras al-Zour. This will begin operating with alumina bought on the open market.
The alumina refinery will form part of a second phase, along with the development of bauxite mine at Zubairah in Qassim province to feed the smelter in the long term.
Originally, Maaden planned the joint venture with Canada’s Alcan, which was to have taken a 49 per cent stake in the project. However, the 2007 acquisition of Alcan by Rio Tinto to form Rio Tinto Alcan left the merged entity with huge debts. This, coupled with the fall in commodity prices in late 2008, left Rio Tinto Alcan unable provide the equity for the Maaden scheme (MEED 09:4:09).
In December 2008, Rio Tinto announced it was shedding 14,000 jobs worldwide and would slash investment budgets for 2009 in a bid to rein in debt.
Oman, Qatar and the UAE have also recently started up new aluminium smelters, but Dowery dismisses the suggestion that the region will be oversupplied with aluminium over the next couple of years.
“When we hear [there will be an oversupply], we assume they are not familiar with the figures. The consumption of aluminium is set to double by 2020. There need to be many projects on stream. There are not enough even on the drawing board currently to handle the demand. There is never a bad time to bring online the lowest-cost facility in the world,” he says.
Initially, the cost of the Ras al-Zour aluminium project was forecast at more than $10bn. Now the forecast cost has fallen to about $8bn. The US’ Bechtel Corporation, which won the contract for the engineering, procurement and construction and management (EPCM) on the aluminium smelter in October 2008, is currently working on a new assessment of the cost of developing the first phase of the project, following a fall in construction materials prices over the past six months.
In February, MEED reported that Maaden is planning to launch the financing deal for the aluminium smelter in the second quarter of 2010, with local Riyad Bank and the UK’s Standard Chartered acting as financial advisers on the scheme.
The majority of funding is likely to come from the local Public Investment Fund and the Saudi Industrial Development Fund, according to a Riyadh-based source close to the project.
Alcoa had a strong finish to the financial year in 2009 with fourth quarter results generating free cash flow of $761m, a $947m improvement from the third quarter of 2009. It was driven by strong cash from operations performance of $1.1bn, a $940m increase from the third quarter. Despite the strong showing, the fourth quarter of 2009 also showed a loss of $266m from continuing operations.
Kleinfield says 2009 was a tough year for the aluminium industry, citing a price crash and the credit crunch as key factors. Alcoa has reshaped its portfolio to “focus on key strategic assets and industry-leading businesses,” he says.
The venture with Maaden is clearly a part of this new direction for the firm, whose positive quarterly results were the first since the second quarter of 2008 when the economic downturn began to impact results.
The region already has five smelters in operation by Qatar Aluminium (Qatalum) Dubai Aluminium (Dubal), Oman’s Sohar and Aluminium Bahrain (Alba). A smelter operated by Emirates Aluminium (Emal) in Abu Dhabi is expected to reach full capacity by the end of 2010 (MEED 23:04:09).
The Middle East is emerging as a significant producer of aluminium and Saudi Arabia is keen not to be left behind. But it has the added advantage of access to bauxite, which means it will be able to build an integrated industry with significantly lower operating overheads than its Gulf competitors.