SYDNEY/HONG KONG, July 1 -- Aluminum Corp of China (601600.SS: Quote) (2600.HK: Quote) has terminated a $2.5 billion agreement to develop a bauxite and alumina operation in Australia, opening the door for Rio Tinto (RIO.AX: Quote) (RIO.L: Quote), Xstrata (XTA.L: Quote), Alcoa (AAN.N: Quote) and other miners to resubmit proposals.
Rio Tinto, the world's biggest aluminium producer, is seen as having the most to gain by securing Chalco's leaseholds on the vast Aurukun bauxite deposits in Queensland state, which neighbour its own Weipa bauxite mines that feed two alumina refineries undergoing expansion work.
"Rio is the obvious choice to move into Chalco's space given its dominance of this sector in Australia," said Grant Craighead, a mining analyst for Stock Resource in Sydney.
"This could also take into consideration future needs for bauxite and alumina by its major shareholder Chinalco," Craighead said.
Chalco is the listed unit of Aluminum Corp of China (Chinalco) [ALUMI.UL], which holds 9 percent of Rio's stock.
In what promised to be Chalco's first investment in Australia, it was awarded a permit to mine bauxite at Aurukun as long as it also built a refinery to turn the bauxite into alumina.
That was something Chalco became increasingly reluctant to do as cost estimates rose and commodities demand waned, finally terminating the agreement by letting a June 30 deadline to submit a feasibility study to the government lapse.
"Both parties recognise that global conditions in the aluminium industry have deteriorated significantly since the original development agreement was signed in March 2007," Queensland's minister for infrastructure and planning, Stirling Hinchliffe, said.
Questions over the estimated $2.5 billion price tag on the project given its relatively low grades, increases in input costs such as steel and fuel, as well as a strong Australian dollar had done little to deter initial interest from sector heavyweights.
Chalco was forced to out-manoeuvre Rio, BHP, Alcoa (AA.N: Quote), Mitsubishi Corp (8058.T: Quote), Xstrata and UC Rusal (0486.HK: Quote) (RUAL.PA: Quote) for rights to Aurukun.
The Queensland government in 2003 stripped the then-Pechiney aluminium group of the lease, which it had held since 1975, in hopes of fast-tracking Aurukun's development.
Chalco and Queensland Premier Anna Bligh both have agreed to continue discussions on the exploration of Aurukun bauxite resources and other means of investment, but did not provide any detail on the forms these might take.
Expansion work at Rio's Yarwun alumina refinery will be completed in the second half of 2012 under a revised schedule, lifting production capacity to 3.4 million tonnes a year from 1.4 million now. There is room for another 2 million-tonnes-a-year increase, requiring even more bauxite.
It takes roughly four tonnes of bauxite to produce the two tonnes of alumina to make a tonne of aluminium.
Analysts have suggested Rio's board would await the outcome of debate over Australia's proposed 40 percent profits tax on mining companies before committing to further expansion work at Yarwun.
A compromise proposal on the tax may come as early as Friday after closed-door meeting this week, in which Rio took part.