Rio Tinto contemplating an exit from NT

Aluminium prices are still struggling and with rising energy costs, it's proving to be a tough decision.

Owen Raszkiewicz

Owen Raszkiewicz is a Motley Fool Contributor. Owen has been a Contributor since 2013, having also spent time as a Fool writer/analyst. He also worked as an Investment Analyst at Zenith Investment Partners, Australia's top research house specialising in managed funds. Owen has appeared on Channel 10's The Project and was invited on the BBC. He holds a Masters of Applied Finance, Masters of Financial Planning, Bachelor of Technology, Advanced Diploma of Financial Services and Diploma of Mortgage Broking Management. In addition, Owen has passed Level 1 of the Chartered Financial Analyst (CFA) Program. He has taken the Banking + Finance Oath (BFO). When he is not writing, Owen is Managing Director of Rask Finance, an Australian financial education company. You can email him: [email protected].

Published October 1, 2013 2:40 pm AEST

According to The Australian Financial Review, Rio Tinto's (ASX: RIO) decision to shut down its Gove alumina refinery in the Northern Territory is proving to be tougher than expected.

Amid weak aluminium prices, the company is determining the feasibility of the project in the near future. The problems faced by the refineries' operator, Pacific Aluminium, include short supply of energy, uncertainty surrounding the aluminium price and the integration of Rio's entire aluminium assets after a failed separation.

Since purchasing Canadian aluminium producer Alcan in 2007, the company's aluminium assets have resulted in massive write-downs for the company. Prices of the commodity however don't seem to be improving anytime soon.

Source: Indexmundi.com

NT Chief Minister Adam Giles scrapped plans introduced by his predecessor to supply the facility with 300 petajoules of gas because it was too risky for the NT economy. Federal Industry Minister Ian Macfarlane says he plans to keep the facility open for another 20 years by increasing the volume of gas available to 400 petajoules. However the government understands the decision rests solely with Rio.

Rio must now carefully consider the costs of closing and restarting the smelter against a decision to keep it running. The added uncertainty surrounding the aluminium price and government support doesn't help the situation and the 1,400 who work at the facility are growing increasingly frustrated by the company's inability to make a decision. As the largest employer in the Northern Territory, the local economy needs the $300 million the facility injects into the region.

Foolish takeaway

In recent years, BHP (ASX: BHP), Fortescue (ASX: FMG), Newcrest (ASX: NCM) and Rio have been struggling with poor commodity prices and a rise in operating costs. This has resulted in a lot of projects being sold or delayed. With an aluminium price around US$1,800 per tonne and without a guarantee of reliable energy supply, it will be unlikely the project will remain feasible in the near future.

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

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