MONTREAL - Challenging market conditions have forced Alcan Inc. (TSX:AL) to raise its cost estimate for upgrading its Gove alumina refinery in northern Australia for the second time in four months - increasing the bill to US$2.3 billion.
The major aluminum firm had initially pegged the cost to expand Gove at $1.5 billion, but that estimate was increased to about $1.9 billion last September. In addition to increasing the project's cost, Alcan has delayed its startup date until the second quarter of this year, from the first quarter.
In another development Monday, B.C. Hydro moved to protect its right to appeal a decision by the provincial utilities commission that rejected a long-term energy purchase agreement between Alcan and the utility.
The B.C. Utilities Commission said the Alcan-B.C. Hydro deal was not in the public interest and that B.C. Hydro shouldn't have agreed to pricing provisions in it. The regulator has not yet released its reasons, but B.C. Hydro said late Monday it has sought leave to appeal the commission's order.
As for the Gove refinery, Alcan said the increased cost for the project reflects "progress in Q4 2006, additional tie-in requirements and weather-related delays."
"Despite extremely tight market conditions in Australia for labour and materials, the project will deliver positive results by significantly improving Alcan's cost position and capacity in alumina," Jacynthe Cote, CEO of Alcan's bauxite and alumina division, said in a release.
"In addition to extremely challenging Australian market conditions, cost impacts include additional tie-in integration work that was determined necessary as the expansion neared completion, the appreciation of the Australian dollar and severe weather conditions that resulted in late delivery of several large pre-assembled modules."
The Australian dollar has been gaining value sharply, relative to the American greenback. Alcan said the project is about 95 per cent complete, with estimated capital spending of US$400 million for 2007.
The refurbishments will increase the refinery's capacity to 3.8 million tonnes a year from 1.8 million tonnes in 2006.
The new timeline will see expanded production ramp-up starting progressively during the second quarter of 2007.
The changes are expected to reduce cash costs at Gove by about US$30 per tonne.
The delay is a disappointment, said several analysts, but should have little financial impact on the aluminum giant.
"Relative to the size of the company, I think it's unfortunate but I don't think it's that critical," said Ian Howat of National Bank Financial.
He said these kinds of delays are happening to many companies in the hot Australian labour market. There are too few workers spread out among many large-scale projects.
Lawrence Smith of Blackmont Capital said the significant cost overrun will lead some to question whether the controls are in place to manage a large-scale project.
"The answer is probably no," he said in an interview. "We're in a fairly unique time period here."
Last September, Alcan warned of a 20 to 25 per cent boost to the project's cost because of a tight construction market and a worldwide commodities boom.
It had claimed to have offset the cost increase with "more innovative strategies."
Most plant components were fabricated and pre-assembled in low-cost countries and shipped to Gove for installation.
Alcan's shares lost 89 cents to close at C$56.21, a drop of more than 1.5 per cent, in trading Monday on the Toronto Stock Exchange.
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