1. The Government of Ghana has propositioned the Chinese for $2 billion to set up an integrated bauxite to alumina value chain in Ghana.
2. Let us assume that if they get this money they shall invest $1.4 billion through Sinohydro, a Chinese contractor, to develop rail, refining and related infrastructure, thereby adding about 2.5 million tonnes of gibbsitic bauxite production and refining capacity. Let’s assume they shall keep $600 million as working capital.
3. 2.5 Million tons of bauxite = 900,000 tonnes of alumina. Note: a 900,000 ton alumina refinery could cost $800 million on its own, leaving $600 million for investment into the actual mining operations and transport infrastructure (rail lines, rolling stock and/or access roads and mega-trucks etc.)
4. Production cost of alumina in the hypothesized value chain = $320 million.
5. Realised price of alumina (three-year historic average) – $550. Realised revenues for two years: $1B. Cost breakdown: $640m (production), $110m (GSA), Loan Servicing (at 8% nominal) x 2yrs ($320m). Net margin: -$70m.
6. These ballpark calculations strongly suggest that below an alumina price of $600, the integrated project has a high risk of unprofitability. For most of 2017, the price of alumina on the world market hovered under $350 before a massive surge to $700. It broke the $800 a few months ago but the stable trend has been in the mid $400s. This analysis is therefore considerably optimistic.
7. Creative ideas are seriously needed to improve the viability of the project.
One Response
Another prophetic piece.the Sri Lanka example is worth reflecting on in light if this observation. https://www.google.com/url?sa=t&source=web&rct=j&url=https://www.nytimes.com/2017/12/12/world/asia/sri-lanka-china-port.amp.html&ved=2ahUKEwig_vWys7HcAhUCTd8KHbVwDtEQFjAAegQIAxAB&usg=AOvVaw1MZDesDT37vkDkj-VdNa87&cf=1