Speculation mounts on potential buyers for Sebree smelter

A number of second-tier aluminum producers are said to be circling as Rio Tinto Alcan gears up to put its Sebree, Ky., smelter on the auction block as part of a larger 13-facility divestment plan.

A number of second-tier aluminum producers are said to be circling as Rio Tinto Alcan gears up to put its Sebree, Ky., smelter on the auction block as part of a larger 13-facility divestment plan.

Rio Tinto announced Monday that it was looking to sell mines, smelters, alumina refineries and power stations in the United States, Europe, Australia and New Zealand to cut costs and improve its financial performance (AMM, Oct. 18).

Although no public bids have yet to materialize for the assets, analysts in the sector speculate that a mid-sized producer—such as Noranda Aluminum Holding Corp., Century Aluminum Co. or Ormet Corp.—would be the most likely bidder for Rio Tinto’s Sebree smelter. Global trading firm Glencore International Inc. also is a possibility, as would be a private equity firm, sources said.

Spokesmen for Noranda, Century and Glencore declined to comment, while Ormet did not return calls for comment.

Noranda would be a natural frontrunner for Rio Tinto’s Sebree smelter since it has excess supply of bauxite and alumina, according to aluminum market analysts.

"Currently, Noranda produces about twice as much bauxite and alumina as it uses to make primary aluminum in New Madrid, Mo. They would balance their portfolio by adding more primary aluminum production," Brett Levy, metals and mining analyst at Jefferies & Co., told AMM.

Although the high-cost Sebree facility could deter some bidders, a buyer with an oversupply of bauxite and alumina like Noranda could see Sebree as a reasonable investment, Levy said. "If you have captive bauxite and alumina, it might be a good fit."

The Franklin, Tenn.-based company also is strong enough financially to purchase Sebree, Levy added. "Noranda has enough cash, bank line availability and covenant flexibility to bid for Sebree if the price is right."

Although the company did not confirm interest in the asset Tuesday, Noranda management has said in the past that they were interested in making acquisitions to complement Noranda’s upstream and downstream businesses, and a U.S. smelter could be in their plans (AMM, June 23).

Several analysts also pointed to Glencore International or a private equity firm as potential suitors for the Sebree smelter, which they might look to buy alongside the European operations.

"The buyer of high-cost assets in the world is historically Glencore," an analyst said. "I would say Glencore would want Sebree and Lynemouth (England), and maybe even the French alumina assets if they’re survivable businesses."

Ormet’s top executive, Mike Tanchuk, told AMM in the summer that it was in the market for existing legacy assets (AMM, June 7). He declined to name specific projects on his radar at that time, but said the company was looking at existing smelters that "don’t fit the portfolio of a major" producer.

But while Ormet could be eyeing Sebree, some analysts said its cash position could limit its ability to make a play. "Ormet may be interested if they could raise the financing, but I think that will be tough," a second analyst said.

A number of second-tier aluminum producers are said to be circling as Rio Tinto Alcan gears up to put its Sebree, Ky., smelter on the auction block as part of a larger 13-facility divestment plan.

A third analyst agreed. "Ormet can’t write a check for several billion dollars," he said.

Although Century Aluminum has been thrown in the mix of possible Sebree suitors, many analysts agree that Century is not as likely to purchase a U.S.-based smelter as it is said to be moving away from its North American focus and expanding in Iceland. Century expects to reach a power agreement by yearend for its greenfield smelter in Helguvik, Iceland, and start construction in early 2012 (AMM, Aug. 8).

"Century has been clear. It wants to migrate its asset base towards Iceland," Levy said.

"I don’t think Century is a candidate," the second analyst said. "I think they want to lower their cost structure, and Sebree doesn’t fit that bill."

Noranda, Ormet and Glencore also have been cited as possible suitors for Century’s Ravenswood, W.Va., smelter, which also is rumored to be on the auction block (AMM, June 23).

Outside of the U.S. market, speculation also is swirling as to the future of Rio Tinto’s Australian and New Zealand assets, which the company has transferred into a new subsidiary called Pacific Aluminium to be managed separately until the facilities are sold.

Some say that a private equity firm or a Chinese producer are logical suitors for Pacific Aluminium, although if Rio Tinto fails to find a buyer it could spin it off as a separate company, similar to when Alcan spun off Novelis Inc. in 2005, analysts said.

Sources familiar with the assets said were not surprised that Rio Tinto had put smelters in Bell Bay, Boyne and Tomago, Australia, up for sale, but at least one source said he was surprised it threw its Gove bauxite and alumina refinery into the deal, noting that it may have been included to tempt Chinese producers.

Without Gove in the mix, Chinese suitors might be less interested in throwing their hats into the ring for the Pacific assets, the second analyst said. "Chinese producers would be less inclined to buy smelters. They already have plenty of high-cost smelters; they don’t need more. But what they do need is access to low-cost alumina."

But Chinese buyers aren’t the only possibility for the Pacific assets. Other analysts said a private equity firm may be most likely to purchase Pacific Aluminium. "I think it will be bought by a private equity firm and IPOed years later," the third analyst said.

This is not the first time Rio Tinto has announced plans to divest assets since purchasing Alcan for $38.1 billion in 2007. The Alcan composites unit was sold to Schweiter Technologies AG in 2009 (AMM, Dec. 2, 2009), and earlier this year Rio sold its engineering products division to Apollo Global Management, giving the private equity firm a 51-percent stake in the new holding company for the downstream aluminum operations (AMM, Jan. 5). Rio Tinto kept a 39-percent stake while France’s Fonds Strategique d’Investissement holds 10 percent of the business, since renamed Constellium.