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Scramble for gas to keep Rio Tinto’s alumina plant running

The Gove refinery in Australia runs on diesel, which Rio Tinto has said is too expensive given the heavy losses it incurs owing to a weak alumina market.

Last-ditch efforts are underway to persuade Rio Tinto to maintain production at its Gove alumina refinery in Australia after talks with potential gas suppliers to reduce costs ended without a resolution.

Rio Tinto subsidiary Pacific Aluminium has said if it can’t run the 2.5 million tonnes-per-year refinery on natural gas it will suspend production, putting up to 1,400 jobs at risk, many from within the indigenous communities of far north Australia, one of the country’s most economically depressed regions.

The company set a Jan. 31 deadline to find the gas.

The fate of the refinery represents the first hardline decision facing Rio Tinto’s new chief executive, Sam Walsh, as under-performing units in the company come under tougher scrutiny following $14 billion in writedowns last month.

The refinery runs on diesel, which Rio Tinto has said is too expensive given the heavy losses it incurs owing to a weak alumina market.

Vowing to “knock on every door”, Northern Territory Chief Minister Terry Mills plans to travel to Europe this week “in an urgent bid to secure gas for Gove” after failing to broker a deal with three suppliers in Australia.

Australia has been increasing production of natural gas for decades, but most is pre-sold to overseas utilities in Asia.

Mills was counting on a commitment from Santos and GDF Suez, partners in the Bonaparte liquefied natural gas project off Australia, to make gas available from two of their fields, Petrel and Tern.

“We had a good discussion with the chief minister today but made it clear, as we have previously, that gas from Petrel and Tern is critical to the Bonaparte LNG project and is not available for Gove,” a spokesman for the two companies said.

A third potential supplier, Italy’s Eni also was unable to offer any assurances, according to an Eni spokesman.

“An aggregated gas supply must be found for the Northern Territory and I remain determined to see this occur,” Mills said.

Rio Tinto has joined rival BHP Billiton in moving to sever unprofitable businesses as Australia’s decade-long mining boom comes to an end and commodities prices cool.

Rio has been more specific than BHP, targeting $3 billion per year of sustainable cost reductions post 2014, JP Morgan mining analyst Lyndon Fagan said in a client report.

BHP is expected to report on Feb. 20 fiscal first-half underlying earnings plummeted 42 percent to $5.7 billion

Rio is tipped to show a 40 percent fall in 2012 underlying profits to around $9 billion when it reports on Feb 14.

Gove is the worst performer within the Pacific Aluminium division, set up by Rio Tinto in 2011 to prepare 13 smelters and alumina operations in Australia, the United States and Europe for closure, sale or spinoff into a separate entity.

By some estimates, the refinery loses $30 million a month.

Rio Tinto on Jan 18 said it would write down between $10 billion and $11 billion for its aluminium business. At the same time it replaced its long-running chief executive, Tom Albanese, with Walsh.

 

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