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Alcoa accelerates drive to grow 3rd-party bauxite sales

Alcoa Corp. is stepping up the pace and increasing its capital injection in a bid to substantially increase its third-party sales of bauxite.

"We continue to see great opportunities in the merchant bauxite market and with modest capital expenditures we can increase our third-party sales volumes dramatically," CEO Roy Harvey said during a Jan. 24 conference call following the release of the company's fourth-quarter and full-year 2016 earnings.

The U.S.-based company has upped its "return-seeking capital" to US$150 million from US$100 million to support its goal of growing its bauxite business.

In late 2016, Alcoa World Alumina and Chemicals secured its first major third-party contract to supply about 400,000 bone dry tonnes of bauxite from its Huntly mine in Western Australia.

The Western Australian government also granted Alcoa approval to export up to 2.5 million tonnes per annum of bauxite for five years to third-party customers.

The company signed two other deals to supply bauxite from its two Brazil-based operations, the Juruti mine and the 18.2%-owned Mineracao Rio do Norte property.

The three contracts will see Alcoa export about 2.2 million tonnes of bauxite to China in 2017.

Executive Vice President and CFO William Oplinger said Alcoa's bauxite margins were about 35%, but there was potential for further growth.

"We think that we can grow both Juruti and Western Australia significantly over the coming years," he said during the conference call.

"We previously were guiding to US$100 million of return-seeking capital, we're now at U$150 million because we are investing in our bauxite business due to the margins and our view of the future of bauxite."

Alcoa expects the bauxite market to be in relative balance this year as the Chinese continue to stockpile the commodity while seeking new sources of high-quality material.

"[China's] desire to hold bauxite is driven by major sources of uncertainty in the market, including potential changes to the Indonesian and Malaysian bauxite export policies and the speed with which Chinese investment in Guinea can begin production," Harvey said.

"We continue to see this market as very constructive and ongoing discussions with current and potential customers give us confidence that we can continue to grow this high return business."

Despite the ban on the export of certain raw commodities being implemented in Indonesia, Harvey believes the country will still be an important supplier to China.

"We think that they will likely be part of the future supply equation going into China, but at the same time we also get back to the fact that the third-party bauxite market, which is primarily China, is going to grow significantly, around the order of 8% accumulative average growth rate over the decade starting in 2016," the executive noted.

"So [Indonesia] will have an important impact, but I don't think it pushes us away from our evaluation of the market that there are real opportunities sitting in bauxite."