Alcoa Gets Bauxite Plan Deadline

The Western Australian government has given mining giants Rio Tinto Group and Alcoa Inc. (AA - Analyst Report) a deadline of two years to come up with a development plan for their Mitchell Plateau bauxite project. The deadline extends till December 31, 2012.

Bauxite is a heterogeneous naturally occurring material from which alumina and aluminium metals are produced. Australia is the world's largest producer of bauxite. More than 85% of the bauxite mined globally is converted to alumina for the production of aluminium metal. An additional 10% goes to non-metal uses in various forms of specialty alumina while the remainder is used for non-metallurgical bauxite applications.

The Mitchell Plateau bauxite deposit contains 350 million tonnes grading 44% alumina but the quality varies greatly across the project area.

Despite the latest deadline extension, it is believed that neither Rio (65%) nor Alcoa (35%) expects the project to be feasible in its present form, despite a recovering aluminium price.

The London Metal Exchange price for three-month primary aluminium was $US2432 a tonne on January 2011, having recovered from a global financial crisis low of $US1288/t two years ago.

The miners' agreement with the government is subject to the Alumina Refinery (Mitchell Plateau) Agreement Act in 1971, which grants the right to develop the bauxite reserves as long as they build an alumina refinery in the region.

In January, Alcoa posted better-than-expected year-over-year results for the fourth quarter of 2010 with net earnings and revenues exceeding the Zacks Consensus Estimate. The company continues to benefit from its cost saving efforts.We believe the cost cuts will make Alcoa more competitive when markets fully recover.

The annual global consumption of aluminum products, both upstream and downstream, is expected to double over the next 15 years. This consumption boom will be driven primarily by growth in China, India, Russia and Brazil, whose demographics are accelerating development. However, Alcoa is facing declining aluminum prices, higher input costs and significant restructuring charges, which could pressure margins in the near to medium-term.

Also, Alcoa faces stiff competition from Aluminum Corporation Of China Limited (ACH - Analyst Report), privately held Rio Tinto Alcan Inc. and RUSAL.