1 May
Melbourne,
Dow Jones

MELBOURNE -(Dow Jones)- BHP Billiton Ltd. (BHP.AU) has approved a US$1.9 billion expansion of its Worsley alumina refinery in Western Australia in a move analysts said signals its confidence in the aluminum outlook as well as a desire to limit rival Rio Tinto Ltd.'s (RTP) dominance of the sector.

The expansion will raise capacity at the refinery to 4.6 million metric tons from 3.5 million tons by expanding mining operations, adding refinery capacity and upgrading port facilities.

BHP said construction will start immediately, and first production is expected in the first half of 2011.

"Worsley is one of the largest, lowest cost and most efficient alumina refineries in the world," said BHP Billiton Aluminium President Jon Dudas.

"This decision to invest in further production capacity underlines our confidence in the future of the alumina market."

The price tag for the expansion has risen dramatically since BHP put the project on hold in 2006, citing cost pressures in the overheated Western Australian mining sector.

At that time, BHP was talking about a US$700 million expansion to add 800,000 tons of capacity.

Part of the increase in cost is due to a reconfiguration of the project which will now add 1.1 million tons, but the unabated increases in the cost of mining projects have also clearly driven the price tag higher.

BHP has launched a hostile takeover for its rival Rio Tinto and has criticized its target for paying too much for Canadian aluminum group Alcan, which Rio Tinto acquired for US$38.1 billion last year.

Fat Prophets analyst Gavin Wendt said BHP’s commitment to the Worsley expansion shows it recognizes the positive outlook for alumina and aluminum demand and prices.

Wendt said BHP would also be keen to prevent Rio Tinto getting too far ahead of it in the aluminum business.

"They want to maintain as much market share as they can and not let Rio Tinto dominate the market space any more than they do," he said.

BHP holds 86% of the Worsley joint venture, with Japan Alumina Associates Pty. Ltd. holding another 10% and Sojitz Alumina Pty. Ltd. the remaining 4%.