Just as state energy company Saudi Aramco is seeking to extend its oil sector footprint through integration from wellhead to refinery, Saudi Arabia Mining Company (Maaden) is pursuing the same integration model as it seeks to establish the kingdom as a global aluminium producer.

The project fits well with the government’s wider plans for developing the kingdom’s economy

While regional rivals are dependent on imported alumina, state-owned Maaden has the advantage of being able to exploit local bauxite deposits at Al-Zabirah in Qassim province in the kingdom’s northeast. By developing the mine and a refinery, it will be able to deliver a secure, stable and highly competitive supply of alumina to its planned aluminium smelter to be built at Raz al-Zour.

It will be the largest fully integrated aluminium project ever built and will have significant advantages

Source close to Maaden

Maaden was first awarded a licence in May 2001 to explore and investigate the reserves.  Initial studies revealed the area between Qassim and Hail contained more than 90 million tonnes of bauxite deposits, which would facilitate bauxite production of 3.5 million tonnes a year (t/y) to meet the alumina supply target of 1.4 million t/y and aluminium output of 650,000 t/y for a period of more than 30 years.  Subsequent studies confirmed Maaden could increase these capacities to about 4 million t/y of bauxite, 1.8 million t/y of alumina and 740,000 t/y of aluminium.

Making headway

After a few false starts and a change in equity partner, Maaden’s vision is finally making headway. The company announced in December 2009 an agreement with Alcoa of the US to execute a SR40.5bn ($10.8bn) integrated aluminium project. Under the deal, the smelter and rolling mill are scheduled to become operational in 2013, and the mine and refinery will start up in 2014.  

Maaden will own 74.9 per cent of the joint venture and Alcoa’s stake will be 25.1 per cent, although Alcoa has an option to increase its stake by a further 15 per cent. Alcoa will leverage its global marketing network to sell the metal, and will provide the alumina to the smelter in the two years before the refinery starts up. Since the signing the deal in December, the aluminium project has gained momentum. In May, the US’ Fluor Corporation was awarded a series of contracts, to provide programme management consultancy (PMC) and engineering, procurement and construction management (EPCM) services for projects related to the development. 

Fluor will provide PMC services for the entire scheme, as well as EPCM services in a 50:50 joint venture with Australia’s WorleyParsons for the mine and alumina refinery. Fluor will also provide EPCM services for the site’s rolling mill and for the integrated infrastructure at Ras al-Zour. The firm expects to book about $3bn of work for the complex by the middle of this year.

The project fits well with the government’s wider plans for developing the kingdom’s economy. It will expand the country’s industrial base, enhance diversification away from hydrocarbons, and provide an impetus for downstream industries to be set up, as well as creating jobs for young Saudis.

Officials say aluminium smelting complements the kingdom’s resource base, since energy costs account for nearly 40 per cent of the total cost of production. Cost savings from the company’s access to low-cost energy, combined with the integrated production model should deliver competitive margins to the sponsors.

“The power is going to be their advantage – they consume a lot of power, a 50-60MW power station [is required] just for power and steam plant of the alumina refinery,” says Mark Campodonic, senior consultant at UK-based SRK Consulting.

The Saudi government’s 66 per cent ownership of Maaden provides an additional layer of support for energy supplies.

“Because Maaden is heavily government backed, even if it doesn’t own the energy assets, you could say they are integrated and that puts them in a quite attractive position,” says Massimo Rossi, an analyst at the London-based Commodities Research Unit. “They are well positioned because [with the mine] they would contain the costs of shipping and according to company strategy [Alcoa] have a commitment to provide alumina to them – up to the point when the alumina refinery will be up and running. But they will be better off when the refinery is in place.”

Another attraction is an agreement with the Royal Commission for Jubail and Yanbu to share the development and usage of the Jalamid to Riyadh rail link, cutting down on transportation costs. Common infrastructure – including serviced land, roads, drainage, lighting and a power grid connection, as well as accommodation – will be shared with Maaden’s planned phosphate and aluminium projects.

The quality, scale, and efficiencies of this infrastructure are designed to yield significant competitive advantage to the Maaden-Alcoa joint venture. The port and railway are due to begin operations later this year and will also be used by Maaden’s phosphate operation in Jalamid when it begins production later this year.

Competitive advantages

Maaden will also benefit from the port at Ras al-Zour, 80 kilometres northeast of Jubail, through which it will be able to export alumina and aluminium, and di-ammonium phosphate and ammonia for the company’s separate phosphate project.

“The distance of 80 kilometres is not too bad. Anything above 150,000km starts to get expensive when you are looking at $800,000 a kilometre of rail at a rough cost,” says Campodonic.

Although the Maaden smelter will have a lower initial production capacity than its regional rivals – Dubai-based Dubal’s has a capacity of 1 million t/y and Bahrain’s Alba 870,000 t/y – the integration provides a competitive advantage unique to the kingdom.

“It will be the largest fully integrated aluminium project ever built and will have significant competitive advantages beyond those of scale. These include long-term access to energy at competitive rates, local input of all raw materials, the world’s best practice operating systems, and highly efficient technology throughout,” says a source close to Maaden.

In addition, the complex will boast the world’s most technically advanced rolling mill and the only one in the region capable of producing food-grade aluminium can body, end and tab stock, which will ensure that maximum value is created for the project’s customers, shareholders and the kingdom’s economy. The smelter is intended to be a catalyst for the creation of downstream industries to service both domestic and export markets. Land has been set aside at Ras al-Zour for downstream development adjacent to the refinery and rolling mill. 

Saudi Arabia’s vertically integrated project to develop its own supply chain from mine to end-product, while controlling the energy resource, looks highly attractive for its investors. “You have a confirmed bauxite feed, you have got an alumina refinery and a constant feed of alumina to the smelter and low energy costs,” says Campodonic.

“You can lose money at the mine or at the smelter, but you can make money with a cheap smelter in an area with low energy costs.”

But the project still faces some tough challenges, not least because of the estimated $10.8bn price tag attached to it. 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.

The UK’s Standard Chartered and the local Riyadh Bank are acting as financial advisers for the debt financing for the $5bn aluminium smelter and $2.5bn rolling mill. The debt portion of the financing deal is expected to be split between a riyal and dollar tranche, and the tenor on the debt will be over 15 years.

Making a profit

A research note on Maaden issued by local investment bank NCB Capital in January 2010 notes that although the project’s prospects look strong because of the high margins, the value generated from the project is not as compelling. The reason for this, it says, is the massive capital expenditure required to generate these earnings; resulting in a low return on investment.

Under the bank’s base case Ebitda (earnings before income, taxes and depreciation) margin scenario, the selling price of aluminium has to be $3,842 a tonne (74 per cent above the current market level) in order to break even. The idea of sustaining a long-term 57 per cent Ebitda margin or aluminium price of $3,842 a tonne is not realistic, says NCB Capital. 

Several international banks have raised concerns about the lack of a completion guarantee on the scheme and also the lack of an offtake agreement for the sale of output from the plant. But local banks have less of an issue with its agreement as they have a closer relationship with Maaden. As a result, the majority of the debt financing for the project is expected to come from Saudi banks.

With a successful financing package looming and strong government backing, the Maaden venture is now on course to become the Gulf’s first integrated aluminium project.