Performance

Primary metal operations

At 31 December 2008, Rio Tinto Alcan had full ownership or participation in 24 smelters with a total annual capacity of nearly 4.2 million tonnes, the vast majority of which are located in OECD countries.

Smelting facilities

As with any commodity business, the position on industry cost of production rankings is important in determining relative profitability. Rio Tinto enjoys a strong position, as around two thirds of the capacity of its aluminium production network is located in the first quartile of the industry cash cost curve, with another 20 per cent located in the second quartile. Only seven per cent and six per cent of Rio Tinto Alcan's current smelting capacity lies in the third and fourth quartiles of the industry cash cost curve respectively. Certain smelters operating outside the first two quartiles of the cost curve will be closed during 2009, including the smelting operations at Anglesey Aluminium Metal joint venture in Wales due to the uncertainty of power supply and renewal arrangements and the Beauharnois smelter in Quebec, which was commissioned in 1943 and uses Söderberg technology.

Rio Tinto Alcan believes that its favourable position on the cost curve will prove increasingly valuable during the current economic situation as pricing and the industry's average cash costs fluctuate, influenced by factors such as energy costs, currency revaluations and possible greenhouse gas emission costs. The group is a low cost aluminium producer as a result of the following factors:

Ownership and progressive implementation of industry leading, proprietary Aluminium Pechiney (AP) series pre-bake cell technology, one of the most efficient aluminium smelting technologies in the world from an energy and operating cost perspective.
A modern smelter fleet, with over 70 per cent of overall smelting capacity being less than 30 years old, a significantly greater proportion than the industry average.
Ownership of around half of its smelters' electricity generation needs, compared to an industry average of approximately 30 per cent.
Continued industry leadership and operational expertise, demonstrated by safety improvements and an ability to extract on average 1.1 per cent per annum production capacity improvement.

The largest concentration of smelting assets is located in Canada, where Rio Tinto Alcan has ownership interests in nine smelters, seven of which are wholly owned. Eight of the smelters are located in Quebec and one in British Columbia. Total annual production capacity in Canada is 1.8 million tonnes as of 31 December 2008. All of this capacity is powered by clean, renewable hydroelectricity, the majority of which is owned by Rio Tinto Alcan.

In Australasia, Rio Tinto Alcan has ownership interests in four smelters, three in Australia and one in New Zealand. The Bell Bay smelter in Australia is wholly owned, while interests in the other three facilities range from 52 to 79 per cent. The total annual attributable production capacity in this region is 1.07 million tonnes as at 31 December 2008.

In Oman, the new Sohar smelter (Rio Tinto Alcan 20 per cent), started metal production in June 2008. It is on track to reach full production in the first quarter of 2009 at an initial capacity of 360,000 tonnes per annum. The smelter uses the most up to date AP36 technology and is expected to be positioned in the first quartile of the industry cost curve.

Rio Tinto Alcan has a substantial presence in Europe with ownership interests in seven smelters, primarily in France and the United Kingdom. Their total annual production capacity at 31 December 2008 was one million tonnes.

Rio Tinto Alcan owns a single smelter in the US as well as an interest in a smelter in Cameroon. Together, these two smelters represent a total annual production capacity of 245,000 tonnes. Rio Tinto completed the sale of its 50 per cent interest in the prebake Line 3 of the Ningxia smelter in China in January 2009.

Power facilities

Aluminium smelters are long term investments, with electricity costs typically representing around one quarter of industry average smelting cash costs. Secure, long life and competitively priced electricity supply is of vital importance.

As of 31 December 2008, Rio Tinto Alcan owns electricity generating capacity of 5,310 megawatts, compared to 5,076 megawatts at the end of 2007. This is sufficient to meet approximately half of electricity needs, a proportion far above the industry average, while long term power purchase contracts account for an additional 46 per cent. Furthermore, 74 per cent of electricity supply is derived from hydroelectric and nuclear power.

The majority of power facilities are located in proximity to the Canadian aluminium smelters. Six separate wholly owned power stations located on the Péribonka and Saguenay rivers in Quebec comprise a generation capacity of 2,919 megawatts. In 2008, a major refurbishment programme was completed at these power stations. The water management system with its associated dams, reservoirs and catchment areas, covers an area of 73,800 square kilometres. The wholly owned Kemano power station in British Columbia has a capacity of 896 megawatts and primarily supplies electricity to the wholly owned Kitimat smelter. These energy assets are the result of construction efforts that took place over a period of 50 years, making such facilities extremely difficult and costly to replicate today.

In Europe, Rio Tinto Alcan has three wholly owned power stations in the UK, totalling 500 megawatts of capacity, and one in Norway with a total of 26 megawatts. Of this European generating capacity, 420 megawatts is coal fired while the remainder is based on hydropower.

In Australia, the group has a 42.1 per cent share of the Gladstone Power Station with a capacity of 708 megawatts to supply the Boyne Island smelter.

Technology

In addition to its power capabilities, Rio Tinto Alcan exercises undisputed industry leadership with regard to research and technology. The strategy is to create value by maximising the value of existing assets, supporting operational excellence and growth through technology, and addressing key issues for aluminium smelting such as energy consumption, environmental impact and logistics. During 2008, the group consolidated its resources to create a new global technology organisation in Asia, Europe and North America.

Rio Tinto Alcan actively continues to seek to lower unit energy consumption while reducing and eventually eliminating emissions, including greenhouse gases.

Rio Tinto Alcan continues to develop AP50 smelting technology and is currently undertaking the potential development of an AP50 plant in the Saguenay region of Quebec. In March 2008, a start was made on developing the next generation of AP technology. AP-Xe is expected to provide high performance technology required for future greenfield and brownfield expansions. This technology is designed to be retrofitted to previous AP series cells. While most savings are expected from greenfield applications, significant savings could also be achieved in retrofitted cells. AP-Xe is an example of Rio Tinto Alcan's focus on step changes in energy consumption, environmental impact, and full economic cost so as to maintain and extend its position as industry technology leader.

Advanced technology is sold to third parties. In addition to being a viable business, this reinforces Rio Tinto Alcan's position as a partner of choice for joint ventures given its combination of technological ability and management skills. To further advance the creation of value, Rio Tinto Alcan is pursuing initiatives to reduce capital requirements of new aluminium smelters. This aspect of the business may prove increasingly valuable in accessing future growth options, as trends in the supply side of the industry are moving away from the developed world due to diminishing availability of competitively priced, secure power.

Technological leadership has furthered sustainable development initiatives with the commissioning of a wholly owned facility in Saguenay, Quebec, to treat the spent potlining that results from the aluminium smelting process.

Other businesses

The Primary Metal business recognises the opportunities available to it as an industry leader, and participates in a number of businesses related to aluminium smelting, such as the production and sale of cathode blocks, anodes, aluminium fluoride and calcined coke, as well as the provision of engineering services, sale of smelting equipment, and electricity sales where generation is surplus to production needs. These operations are present worldwide, with particular emphasis in North America and Europe.

2008 operating performance

In 2008, Rio Tinto Alcan produced 4.06 million tonnes of primary aluminium, maintaining a similar level to 2007 production volumes of 4.08 million tonnes (on a 12 month comparable basis including former Alcan and Rio Tinto operations combined).

Smelters continued to produce close to capacity during 2008, with the exception of the Anglesey Aluminium (UK) joint venture and the New Zealand Aluminium Smelters Limited (NZAS) joint venture. Anglesey Aluminium operated at levels of approximately 80 per cent due to technical issues, and NZAS at about 87 per cent due to power availability constraints at the beginning of the year and a transformer failure in the fourth quarter of 2008. The Lannemezan smelter in France, with an annual capacity of 50,000 tonnes, was permanently shut down in March 2008.