Rio Tinto's $1 billion-bauxite expansion plan awaits appoval

Rio Tinto is poised to approve its long-stalled $1 billion (£661 million pounds) South of Embley bauxite expansion project as early as this week, said a review report published today.

The Anglo-Australian miner expects the return on the project in Weipa in Australia's Queensland state to be comparable to its lucrative Pilbara iron ore operations – that is, greater than 20 percent, it said. The project has been plagued by delayed approvals and environmental opposition.

Rio Tinto is expected to announce as early as this week that it will pursue the project, according to the report. South of Embley is critical to extending the life of Rio Tinto's bauxite mining business in the region.

What does the expansion mean for shareholders?

The project is expected to be in the cheapest 25% of all bauxite produced globally, in line with a number of other low-cost Rio assets. Rio shareholders can expect to benefit in two ways, both from higher third-party bauxite sales, as well as ongoing low cost material for the company’s Gove aluminium smelter.

The news has potential fallout for a number of other companies however, mostly junior start-ups like Bauxite Resources Limited and Metro Mining Ltd, both of which have sizeable bauxite tenements.

One major uncertainty however, is whether the Rio expansion is targeting high-temperature (poorer quality) or low temperature ‘Gibbsitic’ (good quality) bauxite. It is to be noted that adjacent projects such as ‘Metro Mining’ Bauxite Hills contain low-temperature bauxite.

A low-temperature bauxite expansion of that magnitude would put significant pressure on both Metro Mining and Australian Bauxite Ltd, which recently commenced exporting gibbsitic bauxite from its Tasmanian mine.

There is significant uncertainty over a number of factors, such as how long the Rio project will take to develop, and whether its bauxite will compete directly with other Australian bauxite producers or whether it is intended primarily for the Gove Alumina refineries. It’s also possible, given the contractual nature of the bauxite market, that first movers can lock in a better deal.

Whatever the case may be, this is a development that is good news for Rio Tinto, and bears closer watching by bauxite shareholders.