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The stars are aligned and point to a resolution at Kitimat

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Kitimat is a sparsely populated town on the rugged coast of northern British Columbia that's about 1,000 miles from nowhere, yet the name is familiar to anyone who has ever followed the Canadian metals industry or has courageously tried to chart supply trends for the aluminum market.

Kitimat has one big claim to fame an aluminum smelter that's been at the center of controversy for what seems like an eternity.

The Rio Tinto Alcan-owned smelter has sparked a lot of debate over the years in part because the project also encompasses water rights that allow the company to make oodles of cash by selling surplus power from hydroelectric generation facilities. The smelter is in serious need of an upgrade and its aluminum output could be substantially increased, but court cases and political wrangling seem to be continually getting in the way.

The saga of Kitimat has had many twists and turns and there could be more coming, but it appears we'll soon know whether the 54-year-old smelter will get the green light for an expansion that should finally put a lot of uncertainty to rest.

Alcan purchased the 900-megawatt hydropower facilities, which go by the name of Kemano, under a 1950 deal with the British Columbia provincial government. The town of Kitimat believes the government gave Alcan the water rights to produce aluminum, not to resell surplus power at a profit. Alcan sells surplus electricity to British Columbia Hydro and Power Authority (BC Hydro) for several times the cost of production.

During the past decade, it has boosted power sales from Kemano while cutting back aluminum production and shaving employment levels, driving a wedge between the company and Kitimat's political leaders. The latest expansion and modernization at Kitimat, announced two years ago, would mean about 500 job cuts.

In late March, the Supreme Court of British Columbia rejected the town of Kitimat's bid to stop Alcan from selling the power, saying the company is within its legal rights to do so under the 1950 contract. The court also noted that the pact didn't define the smelter's production levels.

Legally, Alcan could shut down the smelter and simply sell all of Kemano's power output. The province's utilities commission recently gave Alcan the right to sell up to 380 megawatts to BC Hydro at appealing prices.

But Rio Tinto Alcan chief executive officer Dick Evans wants to stay in the aluminum business in British Columbia, with the commodity's healthy gains this year providing an encouraging backdrop. Expansions at Kitimat, as well as at Alcan's Alma smelter in Quebec, have been given new urgency after Alcan's gigantic 720,000-tonne-a-year Coega smelter in South Africa was delayed indefinitely due to chronic power supply issues in that country.

Rio Tinto Alcan has budgeted $2.5 billion to modernize and expand Kitimat's capacity by 45 percent. The plan includes replacing the existing 277,000-tonne-a-year smelter with a much more technologically advanced 400,000-tonne smelter.

It's now up to Tom Albanese, Rio Tinto's chief executive officer, and his board to make a final decision on Kitimat, which is expected before year-end. In March, Albanese made it clear that Kitimat could play an important role in the company's future. In an interview with the Vancouver Sun, Albanese said he's bullish on global aluminum prices because of economic growth in China. He maintained that Kitimat's access to low-cost electricity means that it is an exceptionally strong candidate for renewal.

Nevertheless, it would seem Kitimat might not be among Albanese's biggest concerns. BHP Minerals' takeover overtures, for instance, surely must be consuming more of his thoughts.

The British Columbia government, meanwhile, promises not to get in Alcan's way. Followers of the saga know that's pretty crucial. In 1995, then-premier Mike Harcourt of the New Democratic Party infamously halted construction midway through an expansion at Kemano because of concerns it would hurt fish stocks. The company at that point had already spent $500 million on the work.

The current provincial Liberal government, which has made green initiatives a priority and sided with Alcan in the recent court cases, is pledging its full support. Without a big investment, after all, the smelter will soon reach the end of its operating lifespan and the town of Kitimat likely would fade into the sunset. An expanded smelter also would yield a 40-percent reduction in greenhouse gas emissions, allowing the province to proudly keep wearing its "green" label.

Colin Hansen, British Columbia's Minister of Economic Development, said in an interview with AMM that Alcan has reassured the province it wants to stay in the aluminum production business. "The idea of Alcan to exclusively become an electricity generator is something that is not being considered," Hansen said.

The estimated 500 job cuts in a community of 9,000 people is significant, he said, but "the way we look at it is not whether you have 1,500 jobs at the plant or 1,000, it's a question of whether you have 1,000 or none."

So Kitimat might finally have a smelter worthy of the 21st Century—if, that is, Albanese stays bullish on a commodity that's always been the town's lifeblood.


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