Alumina Brazil Expansion On Track, Costs Up

The US$1.4 billion expansion of the Alumar refinery in Brazil remains on schedule but is facing cost pressures, Alumina Ltd. (AWC.AU) said Wednesday.

Alumina chief executive John Marlay said currency fluctuations and a tight labor market are putting pressure on the cost of the project.

"The most obvious impact is the fact that the Brazilian Real has quite strongly appreciated against the US dollar," he told Dow Jones Newswires in an interview.

Marlay said the Real has appreciated between 10% and 15% since the project was launched and this is having an impact along with the tight labor market in Brazil's flourishing economy.

"This project is no different to most other major resources projects around the world in that there is competition for skilled labor and as a consequence construction costs are higher," he said.

Project cost and time overruns have become a recurring theme in the mining industry and are helping to keep prices at historically high levels.

Late last month Brazil's Companhia Vale do Rio Doce flagged a 40% budget rise to around US$3 billion at its Goro nickel project in New Caledonia and extended its start date to late 2008.

A week later BHP Billiton (BHP) said costs at its Ravensthorpe project in Western Australia had blown out by US$860 million to US$2.2 billion

The expansion will boost the alumina refinery's output by two million metric tons a year and is a joint venture between Alumina and partner Alcoa Inc. (AA), BHP Billiton Ltd. and Alcan Inc. (AL).

Analysts released reports Wednesday forecasting a budget blow out of between 15% and 30% at Alumar after being told at a BHP briefing this week that there are risks to the project's schedule and budget.

Marlay said despite the pressures the project remains on track for mechanical completion in the third quarter of 2008.

On market outlook, Marlay said aluminum looks set to be in deficit by about 300,000 tons this year, moving into balance or a small surplus in 2007 and 2008.

He expects the alumina market to be in surplus by between 1.5 million tons and three million tons in 2007 depending on supply curtailment.

China is boosting both its alumina production and consumption and Marlay said most of the country's forecast 12 million tons of consumption growth in coming years will be met by its increasing domestic output.

Marlay said there is no update to the company's profit forecast of between A$565 million and A$585 million but that all its expansion projects are on schedule and the business is "going well".