Rio Said to Cancel $2.6 Billion Africa Aluminum Plant

Oct. 15 (Bloomberg) -- Rio Tinto Group, the third-largest mining company, scrapped a project to build an aluminum smelter in South Africa because of the country’s power shortages and rising electric bills, two people familiar with the plan said. Rio sent a termination letter to Eskom Holdings Ltd., South Africa’s state-run utility, ending the project, said the people, who declined to be identified because the decision hasn’t been made public. The two companies, and South Africa’s Department of Trade and Industry, said in a joint statement e-mailed today that they were abandoning a power agreement for the smelter. Rio acquired the $2.6 billion, 588,000 metric-ton-a-year Coega project on the east coast after the London-based company bought Canadian aluminum producer Alcan Inc. in 2007. Rio said a year ago that Coega’s development was on hold until at least 2015 because of political uncertainty and a lack of electricity. “It’s a blow for South Africa,” Reg Rumney, director of the Centre for Economics Journalism in Africa, said by phone today from Grahamstown, in Eastern Cape Province. “South Africa’s foreign direct investment flows haven’t really been strong,” said Rumney, who was formerly an analyst at Johannesburg-based investment research firm Business Map. Eskom, which supplies about 95 percent of South Africa’s power, says it will triple prices to help curb a shortfall in funding a 385 billion-rand ($53 billion) expansion project. The utility sells power to BHP Billiton Ltd.’s aluminum smelters under long-term contracts linked to prices of the metal. Not in Great Shape “Eskom isn’t in great shape to subsidize anybody right now because we’ve just made a 3 billion rand loss,” Chairman Bobby Godsell said in a speech last week, when asked if Eskom could afford to support a new aluminum smelter. There isn’t enough power for the project to proceed, Rio’s aluminum unit Rio Tinto Alcan Inc. said in today’s statement. About $130 million has been invested by the companies and South Africa’s state-owned Industrial Development Corp., with building originally due to begin in September 2008, the statement said. Rio, which estimated the cost of the South African plant on Jan. 16, is eliminating 14,000 jobs and slashing spending by $5 billion after the world recession curbed demand for metals. Aluminum prices in London fell 36 percent last year and traded at $1,913 a metric ton by 6:08 p.m. local time. While Rio may still build a smelter in South Africa, it agreed with the government and Eskom to “stop the clock and have further discussions,” Rio spokeswoman Jean Chawapiwa-Pawa said by mobile phone today. There’s no date for talks, she said. Rio fell 52 pence, or 1.7 percent, to 2,946 pence by the close of trading in London, giving the company a market value of 67 billion pounds ($109 billion). To contact the reporters on this story: Carli Lourens in Johannesburg at clourens@bloomberg.net