Saudi Arabian Mining Company pursues integration vision

12 June 2009

Saudi Arabian Mining Company is pushing ahead with building the kingdom’s first integrated aluminium complex despite the loss of its equity partner.

Saudi Arabian Mining Company (Maaden) was formed in 1997 with an initial focus on the development of the kingdom’s gold mines, operating five mines in the country’s Western Province.

But the company was never intended to be simply a producer of gold. It was established to spearhead the development of untapped but economically critical reserves of bauxite and phosphates, to transform Saudi Arabia into a major producer of aluminium and fertilisers. It has been a vital part of the kingdom’s long-term economic diversification strategy.

Maaden’s ‘mine to metal’ aluminium project is part of this development strategy. The company was awarded a licence in May 2001 to explore and investigate the Al-Zabirah site, in Qassim Province in the northeast, for deposits of bauxite (aluminium ore).

Preliminary studies revealed that the area between Qassim and Hail contained more than 90 million tonnes of bauxite deposits, which would justify the construction of a refinery with capacity to produce 1.4 million tonnes a year (t/y) of alumina.

Project award

In 2003, US contractor Bechtel was awarded the feasibility study on an integrated mine, refinery and smelting project. The mine would supply the raw material, which would be refined and transported as alumina via a purpose-built rail link to a planned smelter at Ras al-Zour, 90 kilometres north of Jubail in the Eastern Province.

From the awarding of the licence, Maaden has seen the scheme as an integrated project. The plan envisages production of bauxite at a rate of 3.5 million t/y to meet the alumina supply target of 1.4 million t/y and aluminium production of 650,000 t/y for a period of more than 30 years. Studies have confirmed the economic feasibility of increasing these capacities to about 4 million t/y of bauxite, 1.8 million t/y of alumina and 740,000 t/y of aluminium.

To realise its ambition to build one of the world’s largest vertically integrated metals projects, Maaden needed to bring on board a major international partner. On 30 April 2007, it signed a heads of agreement with Canada’s Alcan, under which the aluminium company holds a 49 per cent stake in the project, providing technology and operating management support, with Maaden holding the other 51 per cent.

The smelter, initially based on two AP 36 potlines, is designed to accommodate a potential expansion of four additional lines that could increase annual production to more than 2 million t/y.

An oil-fired power plant was included in the original plans for the project, which would deliver at least 1,500-1,600MW of power to the smelter, along with reverse-osmosis desalination capacity. But in January this year, Maaden altered the scope of the plant.

The plant was originally due to have a capacity of 2,400MW with the aim of selling spare power to the grid, but this has been revised down. The aim now is to build only enough capacity to cover base-load demand from the refinery and smelter.

China Harbour Engineering Company and South Korea’s Hyundai Heavy Industries (HHI) submitted bids for the lump sum turnkey engineering, procurement and construction (EPC) contract in May 2008. 

After UK/Australian mining giant Rio Tinto acquired Alcan in November 2007, it took over Alcan’s 49 per cent holding in Alumco, the project company formed with Rio Tinto to develop the aluminium smelter.

Bechtel and Canada’s SNC Lavalin were invited to bid for the EPC contract for the smelter, along with the alumina refinery contract, for which the US’ Fluor Corporation also bid. Bids were submitted in January 2008.

Maaden awarded the engineering, procurement, construction and management (EPCM) contract on the 1.4-million-t/y alumina refinery to Fluor Corporation, while Bechtel and SNC Lavalin became the joint EPC contractors on the smelter. 

The initial plan was to complete construction by December 2011, but the project has not run completely to schedule. It was planned at a time when EPC prices were at record levels, and when aluminium prices were booming on the global market.

Although the aluminium complex was estimated to be worth $7bn when valued in late 2006, rising project costs pushed it up to $8.5bn by the end of 2007.

The global financial crisis, and the consequent reduction in global demand for metals, forced a rethink. For Rio Tinto Alcan, the project as it stood appeared unsustainable.

In December 2008, Rio Tinto Alcan scaled back its participation from an equity partner in the integrated aluminium project to working with Maaden through smelter technology transfer and co-operation agreements.

“The recent global financial and economic crisis has changed Rio Tinto’s outlook for project development throughout the world and, under these circumstances, Rio Tinto Alcan has elected to not participate as an equity partner in this project,” said Dick Evans, then chief executive officer (CEO) of Rio Tinto Alcan.

On 1 March 2009, Maaden signed two major deals for its aluminium project, sealing a co-operation agreement with Rio Tinto Alcan and a technology transfer agreement with Rio Tinto subsidiary Aluminium Pechiney.

Maaden will acquire Pechiney’s AP37/39 smelter technology and complete the project feasibility study. Under the terms of the co-operation agreement, Rio Tinto Alcan will provide various types of support to Maaden including technical services, secondment of key personnel, research and development assistance, management services, aluminium offtake support, and procurement and supply of alumina and other raw materials

Technology transfer

Rio Tinto Alcan’s decision pull out of providing equity for the project has had a decisive impact on the delivery schedule. Abdullah Issa al-Dabbagh, CEO of Maaden, has earmarked a production start-up in 2014-15, against the original 2012 start date.  

Maaden will need to find a new technology partner after Rio Tinto Alcan changed its participation, which will add a delay of at least six months. However, Al-Dabbagh says the company will press ahead with a plan to build an aluminium smelter, with project costs having fallen to $8bn from $10bn, even without a partner.

Bechtel is now working on a new cost assessment of the phase-one smelter project and plans to divide the scheme into two smaller phases, bundling the power plant and aluminium smelter at Ras al-Zour first, with the smelter expected to begin operating with alumina bought on the open market. The bauxite mine and refinery will be built in a second phase. This has the advantage of easing the financing of the scheme, though it does add complexity and risk to the project.

Maaden could finance phase one of the scheme by April 2010, following the launch of the project finance package in the third quarter of 2009. Phase-two financing would be sought in the final quarter of 2010.

The Maaden project financing has been on banks’ radars for a long time, but much will depend on the terms, conditions and pricing. The key issue for the banks will be how much debt Maaden will seek to raise. The large scale and integrated nature of the development should not deter lenders.

“Saudi [Arabia] is one of the only countries in the region that has its own bauxite, so the idea of the project itself is clearly sound,” says one leading Western project financier specialising in natural resources. “You capture the whole of the value chain, and nowhere else can do that.”

The rumours that Maaden is seeking a new partner, which could provide equity support, may ease the financing strain. A new partner would also be expected to bring in its own banks, opening up more sources of liquidity.

Maaden is splitting the project into two smaller phases to help it secure financing, with the power plant and smelter at Ras al-Zour in the first phase.

Maaden’s view is that the long-term prospects for aluminium production are good. A nascent aluminium industry is already in place in Saudi Arabia: the kingdom boasts aluminium rolling facilities, producing diverse products such as signage, foil and rolled products for building and construction.

In addition, the aluminium extrusion industry is well established, with 18 presses. The complex at Ras al-Zour, located close to the industrial centre of Jubail, should encourage users to establish new facilities close to the smelter.

The kingdom’s access to cheap feedstock makes it an ideal location for aluminium production. Though the feedstock will be oil rather than gas, Maaden has a competitive position compared with producers outside the Gulf, with cheap electricity enabling it to keep down costs.

In the near term, Maaden is committed to buying its alumina on the open market, where it will not enjoy a comparative price advantage. However, even this does not present a significant obstacle to its competitiveness. Given the overcapacity in the market, alumina prices are low and Maaden is likely to be able to strike a good deal.

However, Maaden is now without a major foreign equity partner, though its relationship with Rio Tinto Alcan continues at a different level, with the provision of staff training and smelting technology.

“The key elements are there - the technology and training,” says Massimo Rossi, senior analyst at UK consultant CRU Group.

Market timing

There is little doubt that Maaden’s ambitions to leverage the kingdom’s minerals resource will eventually yield results. But analysts say the key question is when to hit the market. “Maaden can bring additional capacity on stream but it will try to time the project to start production when consumption is there,” says Rossi.

Much will rest on whether Maaden opts to bring in another equity partner. Al-Dabbagh told a Riyadh conference on 19 May that it was holding talks with aluminium producers in the Middle East, although it is unclear if the talks addressed the possibility of them taking an equity stake in the project.

The Gulf’s growing band of aluminium producers meet regularly to share market knowledge and chief executive officers from companies in Bahrain, Qatar, Oman and the UAE are all watching closely for progress on the next phase of Maaden’s bid to build Saudi Arabia’s first integrated aluminium complex. But the delays incurred by the Rio Tinto episode mean they may be watching for a while longer than initially expected. 

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