LONDON — Rio Tinto Plc has reduced costs at its aluminum operations by $802 million since 2012, its top executive said.
The aluminum division’s first-half earnings before interest, taxes, depreciation and amortization (Ebitda) rose 26.1 percent year on year to nearly $1.1 billion and underlying earnings climbed 74.3 percent year on year to $373 million thanks to the cost reductions, as well as high value-added premiums for the light metal.
"We’re substantially better than our Western World competitors in terms of Ebitda margin. That gives us a fairly unique position," chief executive officer Sam Walsh said during a conference call on the company’s first-half earnings results. "Over the past year, the performance of the aluminum group has broken away from competitors, with the business now achieving sector-leading margins."
The transformation of the division continues to progress despite generally lower aluminum prices on the London Metal Exchange, the London-based company’s chief financial officer Chris Lynch said.
"Our aluminum business had an average Ebitda margin of 20 percent in the first half. These assets are low cost and any price improvement will flow through to the bottom line," he said. "A 10-percent (increase) leads to a $440-million earnings impact. We’re now starting to see some improvement as a modest supply deficit opens up outside China."
The division still has some distance to go before it is fully streamlined, Walsh added, nioting that there might be some "tough decisions" ahead, especially in alumina.
"Is aluminum where I would like it to be? The answer is no. We’ve still got a journey ahead of us and we’re refocusing the business," he said. "Alumina continues to be tough: we’re continuing to focus on improving our costs on (that) side of the business."
There were also cost increases associated with the modernization of the Kitimat, British Columbia, smelter of Montreal-based subsidiary Rio Tinto Alcan Inc.. These were mainly linked to labor costs, according to Walsh. The project’s capital expenditures now stand at $4.8 billion, up $1.5 billion from February and double the indication given in 2008.
"In relation to Kitimat, there (have) been a number of factors to work through. The most important ... has been labor, and the escalation of labor costs," Walsh said. "There is a significant turnover of staff, which means that we were continually working on training and education and bringing new people on."
The project is likely to stick to the new budget of $4.8 billion, he added, and the company is targeting start-up in June 2015. Rio Tinto previously aimed for start-up by the end of 2014, but encountered issues that forced it to put the project "on ice" for a period
Kitimat has been the main focus of David Joyce, global head of projects across the company, since his responsibilities were expanded earlier this year, Walsh said.
"There’s been a lot of good action after a disappointing overrun, but importantly we’ve taken the steps we need to take to get the project back on track," he said. "Once that project is up and operating, operating cost will be in the first decile—that’s going to be a very attractive project going forward."
The overrun at the smelter has been absorbed by cost savings elsewhere, Lynch added.