Email This Post - Print This Post Print This Post

By John Helmer, Moscow

Yesterday’s report on the Guinean President’s ultimatum to Rusal to use or lose the giant Dian-Dian bauxite deposit has drawn fresh sources with additional information, confirming the deterioration in Rusal’s hold on its concession agreement.

According to Vladislav Soloviev, Oleg Deripaska’s first deputy at Rusal headquarters in Moscow, his company is currently in talks with the Government of Guinea on terms for developing Dian-Dian. “We are ready to start to develop the deposit, but we need to solve the problems with infrastructure and agree on railroad use with the government,” Soloviev is reported as saying.

Responding from Conakry, the Guinean capital, industry and government sources say that Rusal has submitted a Dian-Dian project proposal, but that it has been rejected.

According to the Guinean government, no comprehensive feasibility study from Rusal on Dian-Dian has been submitted yet, and no agreement on the project plan. According to initial calculations by the government, the capital cost of the bauxite mine ought to be about $250 million. Required by Rusal’s 20-year concession agreement, signed in 2006 with the government in Conakry, a new alumina refinery should be built to process at least part of bauxite dug out of the mine; the capital cost of the refinery is estimated by the Guinean government at about $1.5 billion. To transport the bauxite and alumina to market, the government’s terms for Rusal are similar to those required for Rio Tinto and other mine developers in Guinea – they should build a freight-standard railroad – estimated at $200 million – and a new port loading terminal; that last bill should cost about $100 million. Total government projection for Rusal’s Dian-Dian project capex – more than $2 billion.

Rusal’s detailed references to the Dian-Dian project plans in its Hong Kong Stock Exchange listing prospectus of January 2010 revealed two project cost estimates – one for the bauxite mine, and another for the alumina refinery. “Dian-Dian is a greenfield project to be constructed in Guinea. The studies to date have identified Measured and Indicated Mineral Resources compliant with the JORC Code of 472.1 Mt with 47.7% Al2O3 and 1.5% silica. The expected volume of bauxite mined, subject to confirmation by additional studies is 13.1 Mtpa (for alumina production) and 10 Mtpa (for export). A feasibility study has been prepared by international consultants. The capital expenditure of the mining aspects of the project has been estimated at US$425 m, which would include the development of the mine and mine related infrastructure.”

The prospectus also acknowledges the Dian-Dian alumina refinery is a much more expensive proposition. This, said Rusal, “is a greenfield alumina refinery project which is planned for construction in Guinea, West Africa. A detailed feasibility study has been completed for a 5.1 Mtpa alumina refinery including a power plant, railway, port and other associated infrastructure. First alumina is currently scheduled for 2015. The CAPEX for this project, including development of the bauxite mine, is estimated at US$5,566 million, of which US$42 million had been spent as of 30 June 2009.”

Subtracting the mine capex from the grand total of $5,566 million indicates that the alumina project should cost about $5 billion. The prospectus data tables also suggest that counting measured, indicated and inferred bauxite in the ground, Dian-Dian holds 689 million tonnes; that is 38% of Rusal’s total bauxite reserves and resources worldwide. Enough at the annual extraction rate of 23 million tonnes for a mine life of 30 years.

Counting 5.1 million tonnes of projected annual alumina output from Dian-Dian, that represents 65% more than the 7.8 million tonnes of alumina the company turned out last year from refineries in Russia, Ukraine and elsewhere.

But Rusal has no current intention of producing any alumina at Dian-Dian, and no intention for the foreseeable future of producing the prospectus target of 23 million tonnes of bauxite per year. The sources in Conakry say that in the recent negotiations Rusal proposed only to develop the bauxite mine at an initial production rate of 300,000 tonnes, exporting it all, and falling far short of the required 13-million tonne feed rate required for the refinery. So, no bauxite, no refinery.

The Rusal proposal also requested permission from the government to use the current railroad owned by Compagnie des Bauxites de Guinee (CBG), and the port loading complex also owned by CBG at Kamsar. CBG is half owned by the government, half by a partnership of Alcoa of the US and Rio Tinto of the UK.

By restricting the project this way, the Guineans believe Rusal is hoping to spend no more than $250 million on the Dian-Dian mine, and keep most of the bauxite in the ground. “In other words,” one of the sources added, confirming the calculations and the details of Rusal’s Dian-Dian proposal, “instead of building the large refinery they are contractually obligated to build, they want to waste these mega reserves by exporting 300,000 tonnes per annum, and grow to 5 million tonnes over a few years.”

Another source says: “This is a waste of a major bauxite resource that could feed multiple refineries while exporting as much bauxite as CBG, thus transforming the country’s revenue profile. They are telling Guinea they will operate Dian-Dian at less than 10% of capacity so no one else can have it. They were laughed out of the room.”

What is laughable about the steal can be seen, London and Washington sources say, in the difference between the revenue generated from export of raw bauxite and that of exported alumina. London traders say that at present bauxite is being shipped from West African ports at about $35 per tonne fob, and delivered to China at $50 to $55 per tonne cfr. A report from CRU, the London metals consultancy, says the global average cost of producing bauxite was just under $16 per tonne last year; in Guinea, cost of production is less. But according to Rusal’s report for 2010, its selling price for alumina during the year reached “US$367 per tonne as more third party alumina sales were tracking spot market prices as global producers tried to de-link the alumina price from aluminium. UC RUSAL expects strong growth in alumina prices to continue in 2011 and alumina spot market price to reach a level of US$450 per tonne in 2011 based on strong Chinese and other regions’ demands.”

The Guineans say they insist that Rusal stick to their agreement and build the alumina refinery, as was agreed in 2006. If not, they say there are rival aluminium companies who will do so, and also agree to share with the Guinean treasury the tenfold gain in revenue from alumina exports. Deripaska, according to a Washington-based source, “is well known to have made his career at taking, not sharing.”

Leave a Reply