What does Rio Tinto Limited’s bauxite expansion mean for shareholders?

Credit: Alrosa

Tucked away in Rio Tinto Limited‘s (ASX: RIO) most recent half-yearly report was the paragraph:

Feasibility studies are progressing as planned for the South of Embley bauxite project, a 22.8 Mt/a (Mt/a = Million tonnes per annum), tier one investment opportunity in Cape York, Queensland, with mining costs expected to be in the first quartile. Required regulatory permits are in place and the project is expected to be presented to the board for final approval by the end of 2015” (emphasis added).

Readers may have seen articles in Fairfax media and on popular brokerage websites referencing the potential expansion opportunity, which looks extremely attractive for Rio.

‘First quartile’ costs means that the project is expected to be in the cheapest 25% of all bauxite produced globally, in line with a number of other low-cost Rio assets. Rio shareholders can expect to benefit in two ways, both from higher third-party bauxite sales, as well as ongoing low cost material for the company’s Gove alumina* smelter.

*Bauxite is the main ingredient in alumina, which is the main ingredient in aluminium

The news has potential fallout for a number of other companies however, mostly junior start-ups like Bauxite Resources Limited (ASX: BAU) and Metro Mining Ltd (ASX: MMI), both of which have sizeable bauxite tenements.

One major uncertainty however, is whether the Rio expansion is targeting high-temperature (poorer quality) or low temperature ‘Gibbsitic’ (good quality) bauxite. I have not yet been able to verify which is the case, but adjacent projects such as ‘Metro Mining’ Bauxite Hills contain low-temperature bauxite.

A low-temperature bauxite expansion of that magnitude would put significant pressure on both Metro Mining and Australian Bauxite Ltd (ASX: ABX), which recently commenced exporting gibbsitic bauxite from its Tasmanian mine.

There is significant uncertainty over a number of factors, such as how long the Rio project will take to develop, and whether its bauxite will compete directly with other Australian bauxite producers or whether it is intended primarily for the Gove Alumina refineries. It’s also possible, given the contractual nature of the bauxite market, that first movers can lock in a better deal.

Whatever the case may be, this is a development that is good news for Rio Tinto, and bears closer watching by bauxite shareholders.

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Motley Fool contributor Sean O'Neill owns shares of Australian Bauxite Ltd.. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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