Ballooning bauxite

PORTFOLIO POINT: Bauxite is being dug out of a 30-year hole thanks to increased offshore demand, an some Australian companies are leveraging the opportunity.

Aluminium has been a lousy investment for 30 years and shows no sign of improving thanks to chronic over-supply. But, in a surprise twist, the same cannot be said for its primary ore, bauxite, which is enjoying a rising price and fresh professional investor interest.

Two big names investing heavily in bauxite, a near-surface red gravel found in thick beds across Australia and in several tropical countries, are Alliance Life, an investment fund run by Duncan Saville, and Taurus Funds Management, which features former Australian rugby union captain Nick Farr-Jones on its management committee.

Together, Alliance and Taurus, have taken a 65.3% stake in Alliance Mining Commodities (AMC), a bauxite explorer working towards a stock exchange listing in the next six-to-12 months.

When AMC lists it will join a small, and largely ignored band of other pure-bauxite explorers which have attracted minimal investor or media attention for years, but which also have some big names behind them. The listed bauxite stocks include:

• Australian Bauxite (ABZ), which is exploring a series of bauxite deposits in New South Wales, Queensland and Tasmania, and is chaired by former Australian Treasurer, John Dawkins.
• Bauxite Resources (BAU), which has its assets alongside those of Alcoa and BHP Billiton in WA, and is chaired by a former head of that state’s environmental protection agency, Barry Carbon.
• Cape Alumina (CBX), which has its bauxite assets near the vast Weipa deposits of Rio Tinto on Queensland’s Cape York, with its Pisolite Hills project recently awarded “significant project” status by that state’s government, and
• Aziana (AZK), which has outlined bauxite deposits on the Indian Ocean island of Madagascar, and is led by prominent Perth mine developer, Peter Cook.

The problem for all of the bauxite explorers is that they are seen, quite rightly, as being tied to the deeply troubled aluminium industry.

But just because bauxite is used almost solely to produce aluminium (after it is converted into a feedstock called alumina) does not mean it is linked to the same pricing problems of aluminium, a metal selling today for US$1909 a tonne, less than the US$2200 a tonne it fetched in 1980.

The different economic forces driving aluminium and bauxite can be traced to the nick-name sometimes applied to aluminium: “congealed electricity”.

What that means is that the major consideration in choosing the location of an aluminium smelter is an abundant supply (and low price) of electricity, not the location of the bauxite ore, or alumina refinery.

Over the past few years a disconnection has developed, with the world’s biggest aluminium producers churning out metal into an intensely competitive environment because of factors associated with electricity supply agreements – either price or a commitment with a government agency to buy electricity.

China is the biggest victim of this decoupling, producing ever-greater amounts of aluminium as it becomes increasingly reliant on bauxite imports from Indonesia and Australia.

The structure of the relationship between Indonesia and China is changing, with Indonesia demanding that exports of unprocessed ore (of all types) be reduced and that companies in those businesses invest in on-site processing.

Saudi Arabia is another example of curious aluminium economics, having recently completed the building of the giant Ras Al Khair integrated alumina and aluminium project in a joint venture with Alcoa.

The US$10.8 billion project is said to be the world’s biggest and lowest-cost aluminium producer, but it is located in a country which will import most of the bauxite and alumina it requires while benefiting significantly from cheap power.

Changes are starting to occur in the market for bauxite that indicate it is breaking the nexus with the metal it ultimately becomes.

The imposition of an export tax by the government of Indonesia in May has pushed up the global bauxite price even as the aluminium price was falling.

Australian Bauxite, in its September quarter report filed at the ASX on Wednesday, said that average prices for Indonesian bauxite rose by 20% in August to US$48.68 a tonne.

“This is the highest average monthly price since 2008 when Indonesian bauxite prices peaked at US$68.50 a tonne and the Australian bauxite price peaked at almost US$75 a tonne,” Australian Bauxite said in its quarterly.

As with all bulk materials (iron ore, coal and manganese to name three others) it is virtually impossible to make direct price comparisons because of different grades and differing levels of impurities such as silica.

What the changes underway in the market mean is that an opportunity is developing for the local pure-play bauxite explorers, with newcomers such as AMC moving quickly to join the game.

The major appeal of AMC, the company being backed by Farr-Jones and Saville, who has wide-ranging interests and a history close to famous New Zealand investor Sir Ron Brierley, is that it has its foot on a massive bauxite deposit in the west African country of Guinea.

Never an easy place to do business, as Rio Tinto is discovering with its troubled Simandou iron ore project, Guinea ranks as the world’s major source of bauxite, with all of the world’s top aluminium producers having interests there thanks to its status as home to an estimated 50% of the world’s highest-grade (and lowest impurity) bauxite.

Over the past five years, AMC has invested more than US$26 million, outlining a possible 1.5 billion tonnes of bauxite in a deposit called Koumbia that is surrounded by tenements held by Alcoa, Rio Tinto, BHP Billiton, and UC Rusal, the giant Russian aluminium maker.

AMC’s plan is to keep its operation as simple as possible, mining and railing bauxite to a port on Guinea’s Atlantic coast, with all production exported to the increasingly hungry (and electricity focussed) alumina and aluminium producers in China, Europe and the Middle East.

General manager, Bob Adam, estimates that Koumbia ore will be produced at a cash cost of about US$11 a tonne, and sell for between US$35/t and US$40/t – which could turn out to be conservative estimates given the prices reported this week by Australian Bauxite.

Developing Koumbia will cost around US$1 billion, with first ore expected to reach the market in 2016. Start-up production will be around four million tonnes a year, rising to 10 million tonnes annually.

Exploration at Koumbia has slowed because so much material has already been outlined after a 2000 hole drilling program and because enough high-grade material has been outlined for many decades of production.

AMC’s float details are not expected until the New Year, when it is possible that Saville’s Alliance Life and Taurus will sell down their existing interests. These stand at 47.8% and 17.5% respectively, with Acorn Capital the third-biggest shareholder with a stake of 14.3%.