If the first half is any indication, 2014 promises to be a very good year for Rio Tinto PLC (NYSE:RIO), which is good news for Kitimat, where Rio Tinto Alcan's multibillion-dollar modernization of a 60-year-old smelter has suffered delays and budget overruns.
When approved in 2011, the smelter modernization project was budgeted at $3.3 billion. It has since ballooned to $4.8 billion.
Fortunately, Rio Tinto Alcan's U.K.-based parent company had a very good first half, posting a 21% increase in earnings (US$5.1 billion), and on August 7, its board of directors approved an additional $1.5 billion to cover the Kitimat smelter project's increased costs.
The overrun was caused largely by increased labour costs – a result of competition for skilled workers from a nascent liquefied natural gas (LNG) industry – according to Rio Tinto Alcan corporate affairs manager Colleen Nyce.
“We didn't envision that we would be competing with the LNG companies,” she said. “What we were doing was, for every 100 people that we hired, we lost 20.”
A global recession also prompted the London-headquartered company to slow the project down, which added costs.
The Kitimat smelter will be 60 years old next month. The modernization project will replace it with a cleaner, more efficient smelter.
The new smelter is about 70% complete and expected to start producing aluminum in the first half of 2015.
Roughly 3,000 workers are employed on the project. When it is fully commissioned, the smelter will produce nearly 50% more aluminum per year than it does now.
“We have aluminum smelters all over the globe, and it will be the jewel of our smelter fleet,” said Rio Tinto Alcan spokesman Bryan Tucker. “It will be one of the most efficient, productive, environmentally friendly smelters in the world.”
The smelter's current permanent workforce is 1,200. The new smelter will require about 200 fewer workers. Nyce said that most of the positions will be phased out through retirement attrition.
Rio Tinto Alcan is Kitimat's largest employer, paying $160 million in wages and benefits in 2013. The average salary at the smelter is $120,000.
It is also Kitimat's largest taxpayer. The company paid $16.1 million in property taxes last year. It is also a significant employer for the Haisla First Nation, which has a 30-year legacy agreement with the company. In the construction phase of the modernization project, the company has employed 120 Haisla members.
Aluminum is made from alumina, which is produced from bauxite, using an electrolytic process that requires huge amounts of power. Canada has no bauxite mines but is a significant smelting nation, thanks to its abundance of hydroelectric power. Rio Tinto has its own dam and power plant.
