MONTREAL (CP) - The state-of-the-art smelter that Alcan Inc. (TSX:AL) will build in Quebec's Saguenay-Lac-St-Jean region will allow the aluminum giant to test new technology that will eventually produce more metal at a lower cost, say analysts.
Alcan announced this week that it will invest about $2 billion in the region over the next decade, starting with a $600 million test smelter after getting financial aid and reaching an agreement with the Quebec government on low-cost hydroelectricity.
Construction will begin in 2008 and provide hundreds of jobs in a struggling region.
The test smelter will be the platform to develop smelting technology called AP50 and its future generations.
Tests show the technology produces more metal but needs more electricity in the primary smelting process. However, Quebec has the available power for the project. Alcan has said the technology also cuts overall costs and greenhouse gas emissions.
Analyst Victor Lazarovici of BMO Nesbitt Burns in New York said a single pot line with AP50 technology is capable of producing 500,000 tonnes of aluminum a year while the current technology can produce about half that total.
"It's an evolutionary process," Lazarovici said in an interview.
"They (Alcan) have the best technology in the industry now and this just takes it to the next step so it will reduce costs and reduce both operating and capital costs over time if adopted.
He noted that if the new technology were already proved, a test smelter wouldn't be necessary in Saguenay, about 250 kilometres north of Quebec City.
"They have to scale it up from a lab scale to a commercial scale and prove that it can deliver the kind of performance that they expect before they can accept that it's viable."
The test smelter will come on stream in 2010 and is expected to produce about 60,000 tonnes of aluminum yearly. By 2015, it's expected to produce 450,000 tonnes of metal a year.
Lazarovici said Pechiney, a French metals company bought by Alcan more than two years ago, had already been working on the AP50 technology for about a decade and the Quebec pilot smelter project is a continuation of that.
He also said it's too simplistic to believe that this is "the next wave of smelter construction" because it's a large plant that can't be built in all regions of the world because of the hydroelectricity requirements.
Current smelter technology can use as much power as a small city in one year, he said.
It's also too simplistic to say this smelter will satisfy China's growing demand for aluminum because initially it will only produce a small amount, he added.
Quebec has the necessary hydroelectricity for the project and not many other regions in the world have the same amount of power, Lazarovici said.
It's also technology that Alcan could sell, said analyst Ian Howat.
"If they prove this to work over the next 10 or 15 years, people will build new aluminum facilities and use their technology and they are showing a willingness to sell their technology, so they can make money from that," said Howat of National Bank Financial (TSX:NB).
Howat also said he believes Alcan doesn't want to build a large-capacity mill with the new technology right away. Alcan will want to see how the technology is going to work and will treat the pilot smelter as a research and development project, which brings tax advantages, he said.
He also agreed the technology that Alcan will use was developed by Pechiney.
When Alcan CEO Dick Evans made the announcement Thursday, he said the AP50 pilot project underlines the company's position as the "world leader and partner-of-choice for aluminum smelting technologies."
The project will create 740 jobs and as many as 1,500 jobs related to construction.
The Quebec government will also provide research and development tax incentives and loans, and has ma
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