aluwatch

Alumina Flags More Blowouts At Alumar, Juruti

Dow Jones
July 21, 2008: 03:47 AM EST

By Alex Wilson

Of DOW JONES NEWSWIRES

MELBOURNE -(Dow Jones)- Alumina Ltd. (AWC.AU) has announced another
major cost blowout at the Alumar alumina refinery expansion and Juruti bauxite mine development in Brazil which will force it to look for new sources of funding to meet its share of increased costs.

The cost hikes are the latest in a series of overruns for the project and highlight the intense cost pressures at major mining projects across the globe as companies scramble to bring on new supply to take advantage of the commodities boom.

Alumina, which operates as part of the Alcoa World Alumina and Chemicals joint venture with partner Alcoa Inc. (AA), said AWAC's share of the cost of the expansion of the Alumar refinery is expected to rise to US$1.62 billion from US$ 1.3 billion.

There has been an even bigger blowout in the cost of the Juruti mine development, which Alumina said is now expected to increase to about US$2 billion from US$1.2 billion, with the first shipment of bauxite pushed back to the third quarter of 2009, from previous guidance of
the first half of 2009.

"We are very disappointed with the increases in estimated cost of these projects to a total AWAC share of up to US$3.7 billion," Alumina Chief Executive John Bevan said in a statement.

"However these projects represent investment in long-life strategic assets which are important for the long-term growth of AWAC."

Alumina said the appreciation of the Brazilian real, wet weather and rising material and contractor costs were behind the cost increases.

The miner is already facing a major capital spend on development projects and these latest cost increases will add about US$450 million more, forcing Alumina to look for more funds to meet its commitments.

The Melbourne-based company has US$400 million in undrawn debt facilities and Chief Financial Officer Ken Dean told Dow Jones Newswires the miner is now considering all its funding options for the extra spending.

"Most of this additional (spending), as we see it at the moment, will fall into the 2009 spend and we are looking at the options for additional funding through 2009 at the moment," he said.

Dean said despite the ongoing pressures in the industry, there was a high level of confidence in the cost estimates for Alumar and Juruti.

"The forecast that we have given is based on engineering assessments which are of a 95% confidence level, so it is pretty thorough," he said.

The Alumar expansion project will boost annual output at the refinery by 2.1 million metric tons to about 3.5 million tons while the Juruti mine is expected to have initial bauxite production of 2.6 million tons a year.

The overrun of AWAC's share of the two projects to US$3.7 billion is the latest in a steady stream of increases from the original price tag of US$1.1 billion.

Citi analysts said the project was "becoming one of the worst examples of project management in a sector not known for handing out many gold stars."

While the industry cost pressure in the mining sector are well known, JP Morgan analyst David George said this latest blowout has taken the market by surprise.

"I doubt that anyone had this amount factored in," he said.

If Alumina covers its US$450 million share of the blowout entirely with debt it will end up with a heavily geared balance sheet, so it may have to raise some equity, although tumultuous equity markets would pose a challenge, George said.

If Alcoa decides to go ahead with a planned expansion of the Wagerup refinery in Western Australia, George said Alumina's commitments could rise by as much as another US$1.4 billion.

Morgan Stanley analyst Craig Campbell said while the cost blowout was a negative, Alumina shares have fallen so sharply in recent weeks that he believes the stock is a good buy.

"The stock is trading at very low levels, so despite this negative news coming out there is a lot of value on the table," he said.

Alumina shares have tumbled about 30% since May, partly as a result of a general market malaise but also on fears that rising input costs are squeezing margins.

The stock initially fell about 2% on news of the cost blowout Monday but then caught the buoyant market mood to end up 3.3% at A$4.68 in an Australian market that rose 3.5%.

They have fallen so far that speculation has resurfaced that Alcoa could look at taking over its joint venture partner, a possibility Campbell said couldn't be ruled out but didn't look likely in the short term.

AWAC has a 54% stake in the Alumar expansion alongside partners BHP Billiton Ltd. with 36% and Rio Tinto Ltd. with 10%, while Juruti is 100% AWAC owned.

Alumina also said Monday it expects underlying earnings for the half year ended June 30 to be consistent pro-rata with previous guidance
for full-year earnings.