Rio’s Tomago smelter wins A$1.76B government lifeline

Australia and New South Wales have committed A$2.5 billion (US$1.76 billion) to keep Rio Tinto’s (ASX, NYSE, LSE: RIO) majority-owned Tomago aluminium smelter open beyond 2028 after high electricity costs pushed the country’s largest smelter to the brink of closure.

The 10-year electricity contract will start after Tomago’s current supply deal with AGL Energy (ASX: AGL) expires Dec. 31, 2028 and runs through 2038, with all power coming from renewable sources from 2033. The Hunter region plant, about 160 km north of Sydney by road, can produce up to 590,000 tonnes a year, nearly 40% of Australia’s aluminium.

“The idea that we would sit back and watch this facility just disappear is not in Australia’s national interest,” Prime Minister Anthony Albanese said Thursday at a news conference at Tomago.

Tomago produced 574,000 tonnes of aluminium last year, about 97% of its 590,000-tonne annual capacity, according to CRU data cited by BMO Capital Markets in a Thursday note.

The intervention takes government backing for Australia’s two largest aluminium smelters to A$4.5 billion this year. Canberra and Queensland committed A$2 billion in March to keep Rio’s Boyne plant operating through at least 2040, preserving both major smelters in a domestic chain that stretches from bauxite mining and alumina refining to primary aluminium.

Power crunch

Tomago started consulting employees on a possible shutdown last October after a three-year search for commercially viable power beyond 2028 failed to yield results. Electricity accounts for more than 40% of operating costs, and the smelter said bids for both coal-fired and renewable supply from 2029 would leave it unviable.

Tomago is to invest A$1.1 billion through 2038, with about A$1 billion going to plant upgrades, major maintenance, longer equipment life and productivity improvements. Another A$100 million will fund lower-emission technology and equipment allowing the smelter to curb power use when the New South Wales grid is under strain. New South Wales has capped its support at A$1.23 billion over 10 years starting in 2029, roughly half the government package.

Canberra will receive payments back when aluminium prices are high.

Tomago is New South Wales’ biggest electricity user. Rio says it draws about 950 MW continuously, equal to 12% of state demand. The governments said the deal would underpin nearly 3 GW of new renewable generation and backup capacity.

Rio stakes

Rio Tinto owns 51.55% of Tomago, Gove Aluminium Finance holds 36.05% and Norsk Hydro (OSE: NHY) owns 12.4%. The plant directly employs about 1,000 people, uses another 200 full-time-equivalent contractors and supports an estimated 5,000 indirect jobs.

From 2033, Rio expects renewable electricity to cut Tomago’s direct and electricity-related operating emissions by 7.1 million tonnes of carbon dioxide a year. The smelter will continue reducing its power draw during periods of grid stress, helping New South Wales absorb more renewable generation.