Rio’s future at Gove refinery uncertain

At the beginning of October, I said the likelihood of Rio Tinto (ASX: RIO) scaling back its Gove alumina refinery in Arnhem Land was increasing. Today, The Australian reports that the mining giant has officially stepped away from talks with governments to secure its future.

A decision to step away from talks will likely result in a scale back of refinery operations and focus will turn to exporting bauxite from the operations’ port and ship-loading facilities.

The decision to wind back operations at the project will have massive repercussions for the local economy, which relies heavily on the project to inject around $300 million annually. Rio Tinto is the largest private employer in the Northern Territory and Nhulunbuy, a mining town of around 4,500 people, will be the worst affected by the winding down of the facility.

The project, which has been running at a loss, was inherited as part of Rio’s disastrous Alcan acquisition, which cost the company $38 billion in 2007 when aluminium was priced at nearly US$3,000 per tonne.

Since then the price of aluminium has fallen to around US$1850 per tonne and Rio has been desperate to divest, sell and cut non-core assets (including its Alcan business). This has resulted in many job losses and project delays throughout the world but the pullback of its Gove facilities will hit home hard for Australians.

In recent months both federal and state governments have approached Rio to discuss possible solutions to rising costs and the facilities lack of reliable energy supply. After offering huge amounts of gas on a $600 million pipeline, Rio now believes there isn’t anything the government “can offer”, reports The Australian.

NT Chief Minister Adam Giles was at the centre of tensions between Rio and the government after he scrapped plans introduced by his predecessor to supply the facility with 300 petajoules of gas because it was too risky for the NT economy. After dismissing Rio’s concerns about rising energy costs and a possible closure, it might have proven too little too late for the government to allay the miners concerns.

Foolish takeaway

Rio’s recent decision to review its operations comes as the company’s leader, Sam Walsh, embarks on a strict cost-cutting drive to save US$5 billion. Already we’ve seen numerous non-core assets go under the hammer or close and chances are, the Gove refinery’s fate was already set.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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