Alumina to close Suralco mine: What does this mean for investors?

In the first week of January 2017, Alumina, one of Australia’s major mining companies, announced it is to permanently shut down the Suralco mine and refinery in Suriname.

This closure also comes off the back of an extended period of similar closings, which has now led to many wondering what the future may hold for share prices and the company itself.

Here, we take a closer look at this situation, examine Alumina in more detail and consider what this could all mean for investors in this industry.

A joint venture

Alumina is a public company whose singular line of business is as a 40 per cent shareholder with American metals and manufacturing company Alcoa; their joint venture being Alcoa World Alumina and Chemicals – or AWAC.

This dual company works in mining bauxite, extracting aluminium oxide and smelting aluminium, with operations all over the world, including two bauxite mines and three refineries in Western Australia.

The plant they are to close is a refinery located in the South American country of Suriname, with one of Alcoa’s chief executive officers Roy Harvey stating how they are ‘working in partnership with the government [of Suriname] to reach the best possible solution that would enable Suriname to maintain its bauxite industry’, with a desire to ‘streamline and strengthen’ the portfolio – according to this Business Wire article.

Costs of closing the mine

This closure isn’t coming cheap though, as this piece on Yahoo Finance suggests. The costs of closing this mine will see AWAC ‘incur costs of $181 million over five years, of which $29 million will be incurring in 2017’ with Alumina’s share totalling around ‘$12 million’.

These expenses will be on top of some already quite notable costs from 2016 because of a restructuring, which the same article claims to be ‘$108 million in the fourth quarter [of 2016]’, the share for Alumina being ‘$43 million’.

Previous Closures

As aforementioned, these high numbers were also due in part to previous closures that saw ‘more than three million tonnes of refinery capacity’ being halted globally in the past two years. The companies have attributed this to a ‘prolonged downturn in prices’.

The future

On the subject of downturns, we have since seen an immediate drop in Alumina share prices with The Australian reporting that ‘shares fell three cents or 1.6 per cent, to $1.82’ after news of this closure first broke.

When combined with the above mentioned expenses, many are now also predicting that these share prices will keep falling, along with confidence in this industry.

Looking further afield, it will also be interesting to see how Australia’s metal markets fluctuate.

Light at the End?

There is hope though that once the dust has settled and the closure costs are accounted for, there will be renewed interest in AWAC. This could also be after the joint venture focusses efforts on ‘upstream mining and smelting’ with what it anticipates will be more ‘streamlined’ operations.