Alcoa Treks Into Jungle to Cut Costs

This steamy, isolated outpost, with its dusty streets and sun-baked buildings, may hold the key to recovery for Alcoa, the world's biggest aluminum maker.

The company has been battered by one of the fastest, steepest downturns in the mining and metals industry, and Alcoa Chief Executive Klaus Kleinfeld's recovery plan has been to whip out the corporate checkbook and build or buy nearly $4 billion of new operations, as well as slash other company costs.

Here, deep in the Amazon jungle, the company is spending $1.5 billion to create a new, low-cost bauxite mine. The aluminum maker hopes that by spending now it will be able to become a lower-cost producer once the economy finally stabilizes.

The issue of when, where and how much company cash to spend is a puzzle for top metal and mining executives during the best of economic times. But adopting either a save or spend strategy is critical for a company like Alcoa in this tough economic environment, because for years it has lost ground to more nimble and efficient competitors Rio Tinto, UC Rusal and to small upstarts.

Mr. Kleinfeld has generally followed a different strategy than most of his competitors. They mostly tried cash hoarding and cost cutting when metal prices and demand were at their nadir beginning about 18 months ago.

Alcoa cut costs, including nearly $3 billion in operations, shutting down plants, shedding 60,000 employees through layoffs and the sale of noncore assets. But it used those saving to reposition itself as a lower cost producer.

Right now, Alcoa is still ramping up its $1.5 billion bauxite mine here in the Amazon. The mine juts out of the ground like a huge white spaceship nestled in a green thicket, Its cheap bauxite will be fed into an expanded complex that makes alumnina in S?o Luís, and the alumina will then be shipped from Brazilian ports to Alcoa aluminum plants world-wide.

Six months ago, the aluminum maker said it would also invest $2.2 billion to become a partner in a new mining complex in Saudi Arabia. When completed, the aluminum project will become the largest such complex in Saudi Arabia, Mr. Kleinfeld says. The first batch of metal from there is expected to be ready for sale in 2013.

The location here is so remote that villagers, who travel 12 hours by boat to get to Santarém, the closest city, have lived for centuries by farming, fishing and harvesting nuts from the towering Brazilian nut trees. To develop Alcoa's bauxite mine, jungles had to be cleared, roads built, and farmers and fishermen trained.

But in 2008, "We thought hard if we should curtail" the project, Mr. Kleinfeld says. Amid a 60% drop in aluminum prices and bloated inventories, Alcoa's investors were pressuring the company to either grow or put itself on the block.

On Jan. 13, 2009, Mr. Kleinfeld called his top 20 officers to the board room for a three-day meeting behind locked doors.

The executives began running numbers with worst- and best-case scenarios, agreeing to close down plants and lay off workers and choosing which assets to sell. "People were standing up and walking around just to get rid of the stress," Mr. Kleinfeld recalls.

The executives also decided "that Brazil was an important piece of the puzzle," the CEO says.

The Amazon offered a low-cost source of bauxite, a key ingredient in the production of alumina and ultimately aluminum. It was also relatively close to the company's S?o Luís bauxite-processing plant.

Moreover, Brazil's government was stable, its economy was growing, and its electricity was fairly cheap and reliable. And its vast coastline facilitated shipping metals and minerals to North America, Europe and China.

When Alcoa first broached mining bauxite here, some locals resisted, saying it would ruin their land and way of life.

To build the mine, the company needed to clear nearly 3.8 square miles of forest, which looked from above like a lush green blanket. The area is also home to more than 300 species of birds and more than 50 types of snakes, as well as wild passion-fruit flowers and tall white faveiras, whose petals spread out like Fourth of July sparklers.

Activist groups tried to challenge Alcoa's permits to build in federally protected zones and threatened to set fire to Alcoa's operations.

But the current Brazilian government has generally tried to walk a fine line between protecting the nation's environment and indigenous cultures and attracting development.

Officials say that Alcoa consulted it throughout the process, and that the government approved company measures to restore vegetation, including replanting 20 trees for each one felled.

Indeed, President Luiz Inácio Lula da Silva, who wanted the project to be an example of how the country can become a manufacturing and mining powerhouse, attended the official opening of the mine.

But it still isn't clear whether Alcoa's expensive strategy will put it ahead.

Both UC Rusal and Rio Tinto are changing their strategies from trying to save cash to ramping up production at their lowest-cost production facilities.

That means that Alcoa, despite its new Brazilian mine and its new Saudi Arabian joint venture, is still a higher-cost producer than its biggest rivals.