Rio Tinto to keep Gove alumina refinery running

THE underperforming Gove alumina refinery - and 1500 jobs at Nhulunbuy in the Northern Territory - are saved, but a tussle remains over who will pay for it.

Rio Tinto confirmed on Wednesday that it would keep Gove, operated by its Pacific Aluminium subsidiary, up and running after the NT government said gas would be supplied from Italian major Eni's offshore fields in the Bonaparte Basin for the next 10 years, via a new 600-kilometre pipeline to Nhulunbuy. The gas will help the loss-making refinery move from expensive fuel oil to gas - an option apparently rejected by former operator Alcan in 2003.

It is understood Pacific Aluminium will buy gas directly from Eni on commercial terms without a direct government subsidy, at a price to be negotiated.

The deal is only possible because in 2005 NT signed a 25-year contract with Eni, at about half the market price, in the vicinity of $6 a gigajoule, and is prepared to make some of that gas available to Gove, by bringing forward production plans and shortening the territory's period of gas price certainty. There will be no immediate increase in gas prices for territory consumers, however.

NT Chief Minister Terry Mills put the cost of the deal at $1.2 billion. Eni and the APA Group will spend $500 million on a new offshore well and new compression equipment.

Another $500 million will be needed to build a pipeline from Katherine to Nhulunbuy, perhaps owned by APA, and part-funded by the Export Finance and Insurance Corporation.

The Commonwealth is being asked to underwrite the pipeline, but it is not clear whether this will be through guarantee or direct funding.

The total cost will be recovered from gas sales to Pacific Aluminium, which will spend $200 million to convert its generators to gas.

Deutsche Bank's head of resources, Paul Young, said the Gove refinery had long been the ''problem child'' of the Pacific Aluminium portfolio as it had never achieved its nameplate capacity, due to design flaws. But the deal on Gove - which supplies alumina to Rio's smelters at Bell Bay, Tiwai, and Tomago - would improve Rio's chances of selling Pacific Aluminium, which Deutsche valued at $US3.5 billion.

Mr Young said, however, that the decision to keep Gove operating was less than optimal and would cost shareholders half a billion dollars, even factoring in closure costs, compared with the option of exporting 100 per cent of the bauxite to China.