MONTREAL – Rio Tinto will pump another US$1.5 billion into the aluminum smelter upgrade at Kitimat, B.C., increasing the total project cost to US$4.8 billion, as the mining giant says it remains confident about long-term fundamentals about metal demand.
The London-based company announced Thursday that its board has approved a further $1.5 billion expenditure to complete the modernization. That’s on top of $400 million that was previously allocated but unspent.
Rio Tinto Alcan’s former CEO Jacynthe Cote had said that difficulty in finding the right workers pushed the project off schedule and over budget.
There are about 1,100 employees at Kitimat and nearly 3,000 people working on the smelter upgrade, which is expected to start metal production in the first half of 2015.
Engineering, procurement and construction is 70 per cent complete but construction is only half finished, spokesman Bryan Tucker said Thursday.
The company announced in 2011 that it would upgrade the aging Kitimat smelter, boosting its aluminum production capacity by more than 48 per cent to about 420,000 tonnes per year.
Rio Tinto (NYSE:RIO), which reports financial results every six months, also said its net income increased 156 per cent to US$4.4 billion for the first half of 2014.
Underlying earnings increased 21 per cent to $5.1 billion or $2.77 per share for the six months ended June 30. That compared to US$4.2 billion or US$2.29 per share a year earlier.
Revenues were $24.3 billion, down from $24.5 billion in the first half of 2013.
The company reduced operating costs by $3.2 billion, exceeding its $3 billion target six months ahead of schedule, while producing record volumes, said chief executive Sam Walsh.
The number of employees decreased by 2,200, including 750 positions from divested assets. The company won’t say how many of those job cuts were in Canada.
“We are confident Rio Tinto’s low cost, diversified portfolio will continue to generate strong and sustainable cash flows over the coming years,” he said in a news release.
Overall capital expenditures decreased 48 per cent to $3.58 billion as the company reduced its net debt to $16.1 billion. Full-year spending is expected to be around $9 billion, or $2 billion below its previous guidance.
The company took an $843 million impairment charge in the period, including $800 million related to Kitimat, plus an undisclosed amount from last November’s closure of its smelter in Shawinigan, Que. The aluminium division has taken about US$30 billion worth of writedowns following the untimely acquisition of Montreal-based Alcan for US$38.1 billion in 2007.
Peter Mallin-Jones of Canaccord Genuity said the substantially lower capital expenditures will result in free cash that can be used to reduce debt more quickly.
“As this falls ,we see increasing flexibility for management to consider a faster increase in the dividend, or alternatively a return of cash to shareholders via a buyback,” he wrote in a report.
Rio Tinto said it shipped record iron ore volumes and set production records for iron ore and thermal coal and had a strong operational performance in copper.
Underlying iron ore earnings rose 10 per cent to $4.68 billion. Iron Ore Company of Canada production was down five per cent on unusually cold weather. Sales were constrained by frozen material, decreasing pellet sales by 10 per cent and concentrate by 20 per cent.
Aluminum profits were up 74 per cent to $373 million despite a nine per cent drop in London Metal Exchange prices to an average of US$1,753 per tonne. Pre-tax operating income (EBITDA) was nearly US$1.1 billion, up 26 per cent from $870 million a year earlier.
The feasibility study on expansion at the Diavik diamond mine in the Northwest Territories, co-owned with Dominion Diamond Corp. (TSX:DDC), is expected to be completed this year with production starting late in 2018, if the project is approved.
Rio Tinto expects global GDP growth in 2014 will exceed three per cent, which will support commodity demand. It forecasts Chinese crude steel production will increase 20 per cent to reach one billion tonnes towards 2030 on growing urbanization.
“Volatility in global financial markets is currently low…but geopolitical uncertainties, notably in Ukraine, the Middle East and the South China Seas, and economic risks could give rise to short-term fluctuations in our markets.”
Rio said the rebound in second-quarter U.S. growth from winter weather disruptions indicates that “the backbone of the recovery seems intact” as unemployment continues to fall.
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