The client is a transport operator in Brazil that operates river barges for moving bulk cargoes.
They requested our assistance to evaluate the viability of a long term contract to carry bauxite from their client’s bauxite mine to an alumina refinery – a distance of approximately 500 kilometres.
Our client was aware of a number of issues that could impact the ongoing viability of the bauxite mine and the alumina plant. A major shareholder in the bauxite business (40% interest) was reportedly discussing the sale of this asset. A new owner of that stake could potentially affect major strategic directions of the mining operation. In particular, the bauxite mine was facing a major capital expenditure outlay in the next few years to re-locate its mining operations to a new zone. With a capital cost of $1.1 -$1.3 billion, there were questions about the commitment of each of the shareholders in this business to fund the expansion at a time when bauxite prices were weak. The assignment required that we assess the current ownership structure of the bauxite business and give our views on any changes that might be anticipated in the next couple of years. The client also wanted to understand the aluminium value chain in some detail, and the competitive position of this mine in the industry.
Our recommendation
CRU concluded that while there is a reasonably high probability that the 40% shareholder might sell its holding, the bauxite mine is a very high quality asset and will be supported by the other shareholders and any incoming shareholder.
Bauxite trade flows are likely to evolve given the changing environment (growing Pacific trade, declining Malaysian supply, weaker Atlantic outlook) meaning some Atlantic suppliers will be looking towards China in competition with Australian, Guinean and other Asian producers.
Methodology
The report reviewed the ownership issues and researched the strategic importance of the investment in this mine for each of the owners. It also provided an assessment of the global competitiveness of the bauxite operation, including how the demand for and trade in bauxite might change in the next 10 years. It also looked at the global aluminium industry, the changes that have occurred in recent years and those expected in the next 10 years, and assessed the impact of changes on the aluminium industry, and on alumina and bauxite demand. It also assessed the ownership and outlook for the alumina refinery- the buyer of bauxite. The report examined the sources of bauxite supply available to refinery and assessed the competitiveness of the refinery in a global context.
Outcome
The client was grateful for the detailed insights into the aluminium value chain and the position of this particular asset within the industry. The report provided the client’s Board with the information required to accept management’s recommendation to proceed with the contract.
