Construction of the new smelter will commence immediately and commissioning is scheduled for late 2003
Stewart Bailey
BHP Billiton on Thursday announced its first major project as a merged entity giving the go-ahead for the construction of its $1-billion Mozal II project, aimed at doubling its aluminium smelting capacity in Mozambique to 500 000 tons a year.
The company is to forge ahead with the project after the unprecedented success of its first Mozal smelter in Mozambique, which was commissioned last year. The plant was built ahead of schedule and $130-million within its $1,3-billion budget.
Mozal’s second phase was always going to go ahead, particularly in light of the aluminium smelter cutbacks in North America amid the region’s power crisis. Spiralling energy prices are crippling aluminium producers, which count power as their highest input cost.
The groundwork for Thursday’s announcement was laid about three years ago, when Billiton thrashed out power supply pricing and tax regimes to ensure the attractiveness of Mozal II, even before it turned the first sod on the first smelter.
The shareholding structures for the project’s second phase will mirror that of the first Mozal plant, as will the design of the pot lines for phase two.
Billiton is the lead shareholder at Mozal with a 47% stake, Mitsubishi is next with 25%, South Africa’s Industrial Development Corporation with 24% and the Mozambican government holds 4% in the form of preference shares. The financing structure consists of 40% equity ($400-million) and 60% debt ($600-million).
Senior debt will be mainly in the form of export credit from South Africa ($250-million) and France ($150-million). A further $125-million will be provided by the Mozal I international funding agencies, with two new lenders, JBIC from Japan ($75-million) and EDC from Canada ($25-million).
The peak-funding requirement, including interest during construction, is projected to be $1-billion.
A Johannesburg mining analyst says Mozal II was widely anticipated to be the first item on BHP-Billiton’s agenda after the conclusion of the merger, although he says the shareholding structures were uncertain.
Construction is to commence immediately and commissioning is scheduled for late 2003, with full production expected after six months.
SNC-Lavalin-EMS, the joint venture design and project management team that handled the original smelter, as well as Billiton’s Hillside smelter in South Africa, are being touted as the likely candidates for managing the construction of the new plant.
By and large, concerns over the geographic risk usually attached to projects in emerging African countries appear to be absent, especially since the enlarged group has far less exposure to the continent than a solitary Billiton had. Even the usually risk-averse Mitsubishi has been gagging to increase its participation in the project, which its United Kingdom managing director Masaki Miyaji last year called “an amazing success”.
Analysts have also applauded the timing of the new project, which comes in the midst of the North American power crisis.
Although aluminium prices are under the kosh at the moment, as demands for aluminium rear their heads during the current United States economic slowdown, market watchers are confident that the off-take scenario will recover well before the new plant comes on line at the end of next year.
The supply-side squeeze could also intensify by that time if predictions that many of the mothballed North American smelters will remain closed come to pass.
“They could stay shut for good. I think it is highly unlikely that they will get power at pre-crisis levels at any stage in the future,” says one commodities analyst.
Fidelis Madavo, a commodities analyst at Johannesburg brokerage Investec Securities, says the current supply-side squeeze will ultimately be reflected in the aluminium price, all the more so when demand is resuscitated.
He says Mozal’s main edge comes in the form of its cheap and abundant power, which will be supplied through the South African power utility Eskom which is among the top three cheapest electricity utilities in the world and its Mozambican counterpart EDM.