CASE STUDY: TOMAGO ALUMINIUM
EVALUATE THE FOLLOWING PROPOSAL
Tomago Aluminium, near Sydney Australia, has in a few years become one of the world’s major
producers of aluminium. Controlling interest is held by Pechiney of France, one of the world’s
largest aluminium companies. Minority equity positions are held by an Australian conglomerate
and by hydroelectric power interests (see the table below for more information about the
participants and their proportional holdings).
In early 2002, Tomago Aluminium’s participants were in the process of deciding whether to
proceed with another major project, upgrading the smelter to AP22 technology. For this essay,
please join with them in their considerations about further investment in aluminium production
in Australia. Act as their contact in the European banking industry, and comment on the
possibilities for arranging a structured syndication to finance the proposed upgrade (for example,
a project financing). You can gain further background from the attached executive summary
from a May 2000 report by the Aluminium Council of Australia.
Tomago Aluminium was the first large scale AP18 plant to be constructed in the world. The
smelter continues to lead internationally, and would be the first AP18 plant to upgrade to the
newly developed AP22 technology.
Work on the upgrade would commence in March 2002 with construction expected to be
completed by the end of 2003. The transition to big anodes would take place in 2004. At the peak
of the project, approximately 50 people would be working on the management team and around
300 personnel would be involved with construction.
Completion of the!project would see production capacity increase from 460,000 tonnes per
annum to 530,000 tonnes per annum and the operating amperage increase from 180kA to 225kA.
In order to play your role as financier, you would need to do the following (do all four parts):
a) Identify the major members of the community of interest that shares benefits from the
proposed upgrade.
b) Then you would need to describe the essential characteristics of a structured financial
arrangement that could provide for cost sharing among the members of the community of
interest.
c) Describe the various risk-reduction steps that would enhance the financial package.
d) Finally, focus on the potential for including a new electric power production activity as
part of the package, since electricity is a major input into the refining process for
aluminium.
As an aid, please consider the following excerpt from the attached executive summary:
The industry provides a number of indirect and less tangible benefits to the
Australian economy. Its extensive forward and backward linkages make it an
integral component of Australia’s industrial base. As a major consumer of gas and
electricity, the industry has provided a base load demand that has enabled a
number of major gas and power projects to proceed, benefiting other industrial
users and households by allowing new lower cost energy sources to enter the
market. The industry has also encouraged the development of downstream
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CASE STUDY: TOMAGO ALUMINIUM
processing activity, particularly in the production of speciality aluminas with a
range of industrial applications.
Participants in Tomago Aluminium
Holding
Pechiney Pacific Pty Ltd
36.05%
(A subsidiary of one of the world's largest aluminium companies, Pechiney of
France)
Cathjoh Holdings Pty Ltd
15.50%
(A wholly owned subsidiary of Pechiney Pacific Pty Ltd)
Gove Aluminium Finance Ltd
36.05%
(A subsidiary of CSR, one of Australia's most diversified companies)
Hydro Aluminium Australia Pty Limited
6.20%
(part of Hydro Aluminium, a business area of Norsk Hydro ASA)
Hydro Aluminum Tomago, Inc.
6.20%
(also part of Hydro Aluminium, a business area of Norsk Hydro ASA)
History of Tomago Aluminium
The site of Tomago Aluminium is rich in industrial history with a coal mine occupying the site in
the early 19th century and then the Courtaulds Textile Factory before it closed in 1976.
Five years later (1981) construction of Tomago Aluminium began with aluminium production
starting on schedule in September 1983, and the first potline in full production in January 1984.
The second potline started in May 1984 and reached full operation in October 1984.
The cost of completing the original smelter, including the start-up of aluminium production, was
approximately $680 million.
The Third Potline
Following a public inquiry and formal NSW Government approval on 11 January 1991,
Tomago's participants decided on January 14th 1991 to proceed with an expansion of the smelter
to construct a third potline and additional facilities to increase the plant's production by 140,000
tonnes per year.
On announcing the approval for the expansion, the then NSW Minister for State Development,
John Hannaford, described this project as "the biggest single industrial project to be undertaken
in NSW in a decade", with the original smelter construction marking the previous milestone.
Major construction commenced in April 1991, and the Potline 3 start up was completed during
the first half of 1993.
Tomago's expansion created approximately 900 new jobs in the region (including an additional
150 positions in the smelter), and significantly increased activity through the Port of Newcastle
with delivery of raw materials and the export of finished products.
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CASE STUDY: TOMAGO ALUMINIUM
Stage 2 of the expansion project, to extend Potlines 1 and 2, was approved by the company
owners in November 1996, the project commenced mid 1997, and was completed in December
1998.
BACKGROUND ON GLOBAL ALUMINIUM PRODUCTION
The raw material for producing aluminium is bauxite, which occurs in a belt that circles the
globe along the Equator and within the tropical regions (there are major sources in Jamaica,
Brazil, Africa, India, and Australia). The refining process is very capital intensive and uses
substantial amounts of electricity. Hence, in the industry’s formative years during the twentieth
century, refining plants tended to be located far from the raw material sources (see the map
below). Since it takes more than four kilograms of bauxite ore to produce a single kilogram of
aluminium, this arrangement places a heavy burden on the transportation infrastructure. As the
industry rationalizes, the trend will be for aluminium refining to be located nearer to the sources
of raw material.
Today Australia is the world’s single largest producer of bauxite, and in the past quarter century
has added substantial capacity for producing aluminium near the source of raw material.
Locations of Aluminium Refineries
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ALUMINIUM AND THE AUSTRALIAN ECONOMY
iv
Executive summary
The Australian aluminium industry has emerged over the past few
decades to become a large, integrated industry of major importance to the
Australian economy and to international aluminium markets. In 1998-99,
Australia produced 36 percent of world bauxite and almost 30 percent of
world alumina, making it the world’s largest producer of bauxite and
alumina. Australia is the world’s fifth largest producer of aluminium,
accounting for 7 percent of world production of primary aluminium, and
its third largest exporter, accounting for 10 percent of world exports.
In the past five years, growth in the Australian industry has been among
the most rapid of the major world suppliers, with the industry benefiting
as a competitive supplier to the fastest growing markets in Asia. This
growth has been based on the international competitiveness of Australian
producers. Australia is amongst the world’s lowest cost producers of
bauxite, alumina and aluminium.
The contribution of the industry to the Australian economy is substantial.
Key direct economic contributions to the Australian economy include:
n
Direct employment of 16, 212 workers;
n
Wages and salaries paid of $857 million;
n
Turnover valued at $9.1 billion in 1997-98;
n
Exports valued at just over $6.3 billion in 1998-99;
n
Value added or gross product of $3.1 billion in 1997-98.
The aluminium industry ranks among Australia’s leading manufacturing
industries in terms of turnover and value added. The industry accounts for
about 0.54 percent of Australian gross domestic product (GDP) and about
4.5 percent of manufacturing gross product. The industry is of
comparable importance to the economy as the iron and steel, meat and
meat products and the petroleum refining industries. The industry has
developed without government protection.
The industry currently accounts for 1.5 percent of total manufacturing
employment. Its contribution to employment in regional Australia is more
pronounced. While the industry is not a major employer compared to
more labour intensive manufacturing processes, it provides highly
productive work. The value added per employee in the industry is around
$191,000, almost three times that for the manufacturing industry as a
whole. Alumina and aluminium production are therefore very high value
adding activities.
The aluminium industry is among the most highly capital intensive in
Australia. The capacity of the industry has expanded significantly in
ALUMINIUM AND THE AUSTRALIAN ECONOMY
v
recent years with a number of large-scale investment projects. Since
1990, the industry has spent in excess of $6 billion in expansions to
capacity, and modifications to improve operational and environmental
performance.
In 1998-99, the total value of exports by the aluminium industry was
$6,259 million, or 7 percent of total Australian merchandise export
earnings1. This placed the aluminium industry as Australia’s second
largest export industry, behind only the coal industry.
The completion of new projects and expansions currently in prospect
would involve an expansion of total alumina refining capacity from 14.2
million tonnes a year to 18.2 million tonnes per year. This would involve
additional exports worth around $1,052 million, valued at today’s average
export prices. Major expansions of aluminium smelting capacity are also
being considered. The Australian Aluminium Council has forecast that,
with a favourable investment climate, the industry will increase its
alumina and aluminium production capacity by at least 30 percent over
the next decade.
The industry provides a number of indirect and less tangible benefits to
the Australian economy. Its extensive forward and backward linkages
make it an integral component of Australia’s industrial base. As a major
consumer of gas and electricity, the industry has provided a base load
demand that has enabled a number of major gas and power projects to
proceed, benefiting other industrial users and households by allowing
new lower cost energy sources to enter the market. The industry has also
encouraged the development of downstream processing activity,
particularly in the production of speciality aluminas with a range of
industrial applications.
1 This includes exports of bauxite, alumina, aluminium and semi fabricated products.
ALUMINIUM AND THE AUSTRALIAN ECONOMY
3
Figure 2: The structure of the Australian aluminium industry 1998-99
Bauxite Mining
Bauxite exports
valued at $152
million
1,786 jobs
Darling Ranges WA
Weipa Qld
Gove NT
Production of 46 million tonnes valued at $983 million
Bauxite used in Australian
refineries 40 mt
Alumina Refining
Alumina exports
of 11,059 kt
valued at $2,910
million
Gove NT (1.8 mt)
QAL Qld (3.5 mt)
Worsley WA (1.8 mt) Wagerup WA (2.2 mt)
Pinjarra WA (3.2 mt)
Kwinana WA (1.9 mt)
Production of 14.2 million tonnes valued at around $3,738 million
5,650 jobs
Fuel oil,
natural gas,
caustic soda
Alumina used in Australian
smelters 3.1 mt
Primary Aluminium Smelting
Aluminium exports
of 1,368 kt valued
at $2,847 million
Kurri Kurri NSW (150 kt) Pt Henry Vic (180 kt)
Tomago NSW (440 kt) Bell Bay Tas (137 kt)
Portland Vic (345 kt)
Boyne Is Qld (492 kt
Production of 1,686 kt valued at around $3,509 million
5,462 jobs
Electricity,
petroleum coke
Primary aluminium sold in
Australia 322 kt
semi fabricated
aluminium exports
valued at $350 million
Aluminium Product Fabrication
semi fabricated aluminium products
3,314 jobs
Secondary
aluminium, 63 kt
recycled
Aluminium Final Products
Building products, electrical appliances, vehicles, packaging, aircraft, ships, paints, utensils, foil, cables etc