TABLE OF CONTENTS

A. Scope ----------------------------------------------------------------------1
B. Background ----------------------------------------------------------------2
- Policy context
- Governing economic philosophy
C. Potential corporate investors in alumina ---------------------------------2
D. Assessment of investment factors ----------------------------------------3
- D1: World market outlook by alumina, and implications for Guyana -----3
- D2: Guyana’s comparative advantages and disadvantages----------------7
E. Conclusion----------------------------------------------------------------13
F. A relook at the alumina refinery question ------------------------------13

A. SCOPE

This policy brief is the second in the series of seven such documents. It assesses
generally the possibility of Guyana becoming an alumina producer. Accordingly it
sets out to fulfil three tasks:

i) To present the characteristics of and outlook for the world alumina

industry and the implications for Guyana.
ii) To assess Guyana’s comparative advantages and disadvantages in this
context.
iii) To recommend a broad policy approach the government should adopt
to facilitate private investments into alumina production.

First, some background on the issue.

Final Draft: July 10, 2019

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B. BACKGROUND

(i) Policy context. Bauxite is the raw material for a range of manufactured products
in the metallurgical, chemical and cement industries. Of special interest to the
Guyana government is the use of bauxite for the production of alumina, the
feedstock for aluminum smelting. This interest is in line with the policy goal stated
in the National Mineral Sector Policy Framework and Actions of “expanding
mining’s contribution to national and sub-national economic development”. Under
this policy, Strategic Goal # 11 directly addresses the issue of using ores in value-
added production: “To expand the number of businesses and economic activities
that serve the mining sector (backward linkages) and that use the outputs of mining
(forward linkages).”

The production of alumina in Guyana ceased in 1982. Soon after then, the restart
of alumina refining has attracted active consideration. Consideration has mostly
been directed at the restoration of the closed alumina operation in Linden. More
lately, however, the attention has extended to the feasibility of constructing new or
greenfield production facilities.

(ii) Governing economic philosophy. Since 1985, successive Guyana governments

have moved the country’s economy away from state-owned entities as the
dominant engine of growth to an economy driven by the private sector.
Privatization of state entities and the reversal of nationalization (through
management contracts, leases, joint ventures and outright sales) have been the most
dramatic result of this philosophical shift.

For the bauxite industry, since the early 2000s, ownership and management have
been transferred from the state over to foreign-owned companies. A national
consensus has now long emerged that the future of the industry will depend on
maintaining and attracting overseas attention and investments. In this new
dispensation, government’s main role includes that of investment seeker and
facilitator and minority shareholder.

The old alumina plant in Linden was owned and operated by government after the
nationalization of Demba operations, the local subsidiary of Alcan, in 1971. Any
establishment of alumina refining in Guyana today, however, will likely be within
the prevailing free enterprise ideal.

C. POTENTIAL INVESTORS IN ALUMINA REFINING IN GUYANA

Companies willing to invest in establishing an alumina refinery in Guyana will likely

count among:

i) foreign-owned bauxite mining companies in Guyana;

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ii) large integrated bauxite companies not currently operating in Guyana, with
their own supply chain from bauxite mining to alumina refining to
aluminum smelting;

iii) Chinese-owned companies as a subset of those mentioned in (ii) above, that

are seeking to supply their own local markets by investing overseas;

Whether these companies invest in Guyana depends mainly on two pivotal sets of
investment factors:

i) Their assessment of the world market outlook for alumina and aluminum.

ii) Their assessment of Guyana’s comparative advantages and disadvantages in

this context.

D. ASSESSMENT OF INVESTMENT FACTORS

D1: World market outlook for alumina and implications for Guyana

A range of economic, geo-political/strategic, market, and technological drivers

operate to shape the alumina industry. The interplay of these drivers determines
the market outlook for alumina; that is, its long-term demand trend (flat; down or
up; slow or rapid), and the hard limits to its potential market size.
This policy brief therefore assesses its market demand and its production, supply
and use. Under market demand, we assess separately the influences that both favor
and restrict growth in demand. Likewise, for production and supply, we examine
the influences separately that both favor and restrict increases.
In terms of setting up an alumina refinery in Guyana, the influences that favor the
growth in world demand for alumina and those that restrict growth in world
production and supply point to the POSITIVE (good for Guyana). On the other
hand, those influences likely to restrict the growth in demand for alumina and those
that favor growth in production and supply from other countries point to the
NEGATIVE (not good for Guyana).

(i) World demand for alumina. Amid short-term geopolitical uncertainties and
price volatility, demand for alumina is projected to grow throughout the 2020s.
One estimate holds that global alumina capacity should reach 180Mt by 2024 1
from 130Mt in 2017.

1 Metallica Minerals (2016) – Bauxite primer.

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Factors favoring growth in alumina demand include:

 The projected growth in demand for aluminum (as the single largest end use
of alumina). About 94% of alumina is smelted to produce aluminum. The
remaining 6% is converted into non-metallurgical products such as abrasives
94% and refractories. The fate of the world’s alumina industries therefore is
dictated by aluminum demand and supply. Aluminum is the second most
Share of
alumina used used metal in the world after steel. The prosperity of aluminum
to make manufacturing depends on the demand for the metal by several end users.
aluminum. As shown below, the largest of these are the transport (vehicle manufacture),
construction, and the electrical sectors.

Source: Resources and Energy Quarterly December 2018. Aust gov.

Driving these end uses are factors such as increasing urbanization and
industrialization foremost in China but also in emerging economies; and the
increasing use (in relative and absolute terms) of aluminum in vehicle
manufacturing. For example: plug-in hybrid and full battery electric
vehicles use 25-27% more aluminum than the typical internal combustion
engine car today. By 2030, aluminum demand from Electric Vehicles (EVs)
will near 10 million tonnes, a ten-fold increase from 2017.2

 The projected growth of the Chinese economy, albeit at a slower rate. China
is the world’s largest consumer and producer of alumina and therefore is the
largest market driver from a demand perspective. Meeting China’s alumina
demand growth will increase alumina costs, especially if insufficient capacity
is approved in China. Insufficient capacity could encourage China to build
or buy offshore refineries. Higher alumina imports could however reduce
required bauxite imports.3

2 Electric vehicles to transform aluminium demand. https://www.crugroup.com/knowledge-and-

insights/insights/2018/electric-vehicles-to-transform-aluminium-demand/
3Wood, A. – “Bauxite and alumina fundamentals”. Presentation at 33rd International Aluminum Conference,
12-14 September 2018. https://www.aluminalimited.com/database-files/view-file/?id=14275
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Factors likely to restrict growth in alumina demand include:

 While China’s demand for aluminum is projected to grow, it is likely to

ensue at a slower rate, as its construction and transportation industries
mature and begin to plateau.

 Increased market uncertainty and reduced investor confidence following the

several alumina supply shocks in 2018, triggered mainly by the US
government imposition of trade sanctions and tariffs.

 The growing market share of aluminum recycling.

 macro risks, such as slowing economic growth; though commodity demand

has outpaced GDP growth on average since 2000.

(ii) World production and supply of alumina. World production of alumina in

85% 2017 was 130 million tonnes (Mt), and increase of 13% over 2016. Alumina capacity
Share of expanded by some 5.4Mt in 2018, after growing by 6.8 million tonne in 2017.
bauxite used China’s output of alumina stood at about 70.3Mt in 2018, nearly triple the 24.4Mt
to make in 2009.
alumina.

Factors favoring growth in alumina production and supply include:

 The world’s largest single refinery (Alnorte in Brazil) is expected in 2019 to
resume full production of 6.5 Mtpa after meeting the government’s demand
for higher environmental performance.
 The removal of US sanctions in December 2018 against UC Rusal, allowing
the company to fully participate in the alumina market.
 Increasing alumina refining capacity. SMM4 reported in October 2018 that
China has 5.43Mt of new alumina capacity under construction. Outside of
China, at least four refineries were built in the last five years and at least ten
others are likely to be commissioned or recommissioned in the near future
in countries such as Indonesia, Guinea and Jamaica.
 UAE and Saudi Arabia have emerged as recent alumina and aluminum
producers, capitalizing on their cheap access to energy sources.

4 SMM = Shanghai Metals Market.

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Factors likely to restrict growth in alumina production and supply include:

 Increased market uncertainty and reduced investor confidence following the
several alumina supply shocks in 2018, triggered mainly by the US
government imposition of trade sanctions and tariffs.
 Continued US sanctions on aluminum.
 Streamlining of alumina production in China. Chinese authorities raised
concerns about potential excess capacity across the alumina industry at the
end of 2018, citing numerous projects in the pipeline. The National
Development and Reform Commission and the Ministry of Industry and
Information Technology jointly issued the Notice of Promoting Orderly
Development of Alumina Industry on December 28, in a bid to control
excessive expansion and lower the risks of overcapacity.5
 A new world economic recession.
 China’s ability to enter the alumina market as an exporter in the event of
supply shortfalls. China is the world's largest producer of both alumina and
aluminum. Historically a net importer of alumina, China has flipped to net
exporter in 2018 to take advantage of high international price caused by
supply shocks in the alumina market. China’s ability and willingness to
rebalance the global alumina market may make planning new capacity
outside China problematic.
 supply shortage of domestic bauxite in China as output has been hit by
environmental inspections. To compensate, China’s bauxite imports are up.
But internal logistics costs for imports remain high, as reported by SMM in
October 2018.6

Implications for Guyana

Generally, as noted above, in terms of setting up an alumina refinery in Guyana,
the influences that favor the growth in world demand for alumina and those likely
to restrict growth in worldwide production and supply point to the POSITIVE. On
the other hand, those influences likely to restrict the growth in demand for alumina
and those that favor growth in production and supply point to the NEGATIVE.
On balance, the world outlook for alumina does not favor Guyana as an investment
destination for a refinery. In this assessment, China sits in the centre, both as a
producer and importer of alumina. As a producer, and as its own bauxite resources
dwindle, China is increasingly investing in alumina capacity outside its borders in
countries with massive bauxite reserves and geographic proximity. Countries much

5 http://www.refwin.com/news/NewsDetail?id=5085&type=2
6 SMM = Shanghai Metals Market.
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closer to China than Guyana is (such as Australia, Guinea, and Indonesia) are well-
poised to meet any growth in Chinese demand for alumina.
In addition, building a new plant from scratch (greenfield development) is not the
only option companies have to expand alumina refining capacity. Companies can
also increase utilization of existing facilities, reopen closed plants, or expand the
facilities of existing plants. UC Rusal in 2018, for example, reopened its operations
at Guinea’s Friguia Alumina Refinery (500,000 – 600,000 tpa), which was shut
down in 2012. In Jamaica, China-headquartered JISCO has reopened, modernized
and expanded the 48-year-old Alpart alumina facility and plans to expand
production from 1.65Mtpa to 5Mtpa.

D2: Guyana’s comparative advantages and disadvantages

Even if investors were to explore the options in Guyana for erecting an alumina
refinery, the additional question arises: what in this regard are the comparative
advantages and disadvantages the country holds? We look at several below.
(i) Feasibility of resuscitating the old Linden alumina plant: Alumina production
in Guyana started in 1961 as part of the operations of the Demerara Bauxite
Company (DEMBA), a private entity owned by Alcan. Construction of the 300,000
tpa production complex started in 1956 and costed $65 million. The complex
included a 15 MW power plant, an export facility of the Demerara river and a
railway to bring ore to the plant. At the time, the plant was considered as the largest
single construction project ever done in British Guiana, dwarfing all others in cost,
in the amount of materials it absorbed and in the quantity and quality of work that
have been expended in its erection.

By 1966, around 70% of the alumina plant feed consisted of dried concentrates
from the tailings recovery plant, with the balance being made up of laterite and
lump bauxite. Annual production in the 1960s ranged between 230,000 and
300,000 tonnes. Production was plagued by work stoppages and quality and
processing issues.

In 1971, the Guyana government nationalized DEMBA and renamed it the Guyana
Bauxite Company (GUYBAU). Alumina production continued for a further eleven
years until the plant was closed in 1982. Foreshadowing the closure of the plant,
then Vice-President of Economic Planning and Finance, Desmond Hoyte, stated in
his 1982 budget speech:
“Because of the recession in the world market, the demand for aluminum has
contracted sharply. The automobile industry, one of the largest users, is in a state
of depression…The aluminum industry is said to be now experiencing the worst
recession in its history. As a direct result, the demand for alumina shrunk
severely…Even when the other problems of the Guymine operations are solved and
production levels are restored, the marketing of the product stream will not be as
easy as it used to be.”
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The plant was not mothballed and has lost much of its main components and
systems, including the steam power plant and the Demerara Transhipment Station.

In the aftermath of its closure, opinion on possibly restarting production has been
unfavorable. One early feasibility study by Norsk Hydro7 concluded that substantial
investment would be required to rehab the plant and a minimum capacity of
600,000 tpa (twice the existing capacity) would be needed for economic viability.

Accordingly, any new production of alumina in Guyana will have to be a greenfield

development (starting from scratch).

(ii) Current production of MAZ in Guyana: Metal-grade bauxite is mainly mined

from BCGI (Rusal) operations in Berbice. Guyana’s output of metal-grade bauxite
(MAZ) from 2013 to 2017 averaged 1Mt. In the same time span, MAZ accounted
for 72 to 88% of total national production. In the last 20 years, the highest
production of MAZ in Guyana occurred in 2000 at 2,443,404 tonnes.

Output of metal-grade bauxite: 2009-2018

1,800,000
1,600,000
1,400,000
1,200,000
Dry tonnes

1,000,000
800,000
600,000
400,000
200,000
0
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Year

Two favorable factors are noted.

 BCGI (Rusal) reports a 61% capacity utilization in its mining operations in

Berbice.8 To provide adequate feedstock for a IMt capacity alumina refinery
will require annual mine output somewhere between the 2-3 Mt mark. The
existence of spare capacity in the company’s operations can allow it to ramp

7Norsk Hydro is a Norwegian aluminum and renewable energy company, headquartered in Oslo. It is one of
the largest aluminum companies worldwide. It has operations in some 50 countries around the world and is
active on all continents.
8 UC RUSAL Annual report, 2017.
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up production to over 2 million tonnes without massive capital expenditure,

should it consider setting up a refinery.

 Guyana’s metal-grade bauxite has a high alumina content and is currently

used as feedstock for UC RUSAL’s refineries in Ireland and Ukraine. It is still
regarded as a sweetener for lower-grade ores from Guinea and other
countries.

Unfavorable factors include:

 The other bauxite producers in Guyana presently focus on refractory-grade

bauxite both as a result of resource limitations and corporate strategy. They
therefore may not be seen as guaranteed sources of additional MAZ supplies
for a refinery owned by another company.
 The low iron content of MAZ bauxite in Guyana will require investments in
sourcing high-Fe bauxite or other ore.
 Rusal reports that its metal-grade reserves carry a high reactive silica content
of 7%, adding that each additional % increases alumina refining cost by
US$8 per Mt. Generally, the preferred silica content should be in the 4-5%
range.
 RUSAL estimates its Berbice bauxite deposits to contain a total 84.7 million
tonnes, of which measured reserves amount to 1.3%, indicated resources
46.5%, and inferred resources 52.2%.9 With these numbers, for the Berbice
deposits to serve as feedstock for a local alumina refinery would require
significant financial investments in the expansion of ore volume and upgrade
of resources to measured reserves.

(iii) Quantity and quality of available local bauxite reserves: the question arises:
what are the metal-grade bauxite resources available outside of those already
licenced?

To achieve economies of scale, alumina plants are sized for large output. They
therefore require extensive bauxite reserves of good quality and high mining rates
to sustain multi-decade production.

Depending on grade, it takes 2.0 to 3.5 tonnes of bauxite to produce one tonne of
alumina. An alumina refinery, therefore, aiming to produce 1 million tonnes
annually would require a mining operation that can produce 2 to 3 million tonnes
of bauxite annually.

9 RUSAL Annual Report, 2017. All volumes are reported as dry weight (without moisture).
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Furthermore, given the high investment cost of establishing a 1M tpa alumina

refinery, and the resulting long time needed to recoup investment, the deposit
would have to last well over 30 years. This arithmetic leads to a minimum deposit
size (or a cluster of several smaller deposits) of over 100 million tonnes of high-
quality bauxite. For a sense of scale, Rio Tinto, one of the world's largest metals and
mining corporations, commissioned in March 2019 a new bauxite mine in
Queensland, Australia (the Amrun mine) that will last for the next 50 years with a
planned capacity of 22.8 million tonnes a year at full production.

Where in Guyana do we have comparable potential?10 The USGS estimates that

Guyana has a bauxite resources totaling 850Mt. Much of this is likely located in the
underexplored Pakaraimas and in the southern and northern portions of the coastal
bauxite belt. All of this potential will require large investments in development in
terms of exploration/evaluation and infrastructure.

Two other important considerations should be noted. One is the presence of

massive amounts high-iron deposits in Guyana. As high-iron feedstock increases the
efficiency of alumina refining, the local availability of such deposits for blending
with MAZ is a bonus. Secondly, that bauxite classified as RASC (based on iron
content) could also be used for alumina manufacture.

(iv) Quality of geological database: Closely linked to the issue of the country’s
natural mineral (bauxite) endowment is the matter of the quality and availability of
the information on it. The USGS estimates that Guyana has a bauxite resources
totaling 850 million tonnes. Much of the country bauxite deposits, however, have
not been adequately explored or assessed (see policy brief #3). As a result, several
unfavorable implications arise from this information deficit:

 Potential investments in alumina refining in Guyana will have to include

the costs and risks associated with the exploration for and evaluation of
bauxite deposits.
 The consequent long lead time from successful exploration through mine
development to alumina refinery construction11. This process can last over
10 years.
 The inability of the country to engage in effective investment promotion
efforts.

10 Policy Brief # 3 examines this question in more detail.

11 An alumina refinery takes five years to build.
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(v) Location of international alumina markets: Guyana is located far from the
major consumers of alumina, in particular China and India. Bosai reportedly cited
Bauxite high freight costs as one of the reasons it decided not to build an alumina plant in
freight costs Guyana.12 If we use bauxite freight rates as a proxy for alumina freight rates, then
to CHINA per the reported numbers are as follows:
metric tonne
From  Bauxite freight rates from Guyana to China are US$42 a metric tonne. This
GUYANA compares unfavorably against freight rates to China from Brazil (US$36),
US$42 West Africa (US$25), and Australia (US$10).13
From  Chinese producers have a freight cost advantage over Guyanese producers
BRAZIL
of $10-15/tonne into the USA, $15-20/tonne in Europe. Freight to Japanese
US$36 and South Korean ports is significantly more difficult in terms of the cost
From and availability of shipping. Chinese producers have a freight advantage
WEST AFRICA currently of at least $40/tonne into main Japanese ports. This assumes
US$25 individual holds can be chartered from Guyana.14
From
AUSTRALIA (vi) Inadequacy of transportation infrastructure. As measured by poorly-
US$10 developed or nonexistent port facilities, paved interior highways and long-distance
railways.

(vii) Energy infrastructure: Production of alumina and aluminum are energy

intensive processes using approximately 2.5MWh per tonne of alumina and 15.75
MWh per tonne of aluminum.15 In 2017, energy represented approximately 23%
of the cash cost of production for alumina and 24% for aluminum.16

In recent years, the availability and rising cost of energy have been a driver for a
shift in the geographical location of alumina/aluminum facilities. Energy rich
regions such as the Middle East witnessed an increase in investment in aluminum
production facilities.17 The preferred energy sources are Liquified Natural Gas
(LNG) and hydroelectricity.

The current unavailability of a cheap and reliable energy source in Guyana is a

deterrent to the development of large energy intensive industries. This puts Guyana
at a comparative disadvantage.

12Economist and former MP Lance Carberry, in a letter dated 16 February, 2011, titled “The Bosai alumina
refinery feasibility study” wrote: ”… since BOSAI promised to build a 500,000 tonne per year Aluminum
Smelter, there would be no need to ship alumina once the smelter becomes a reality.” One can contend,
however, that freight cost would still be an issue in shipping aluminum overseas, as there is no local market
for the metal.
13 BCGI Prospectus, 2019.
14FBX (2011). NI 43-101 Technical Report Bankable Feasibility Study Update of the Bonasika Project,
Guyana.
15 Sustainability Update 2017. https://www.aluminalimited.com/energy/
16 Ibid
17 Ibid
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GUYANA’S POSITION
Energy sources Favorable Unfavorable
Existing hydroelectric facilities
Hydroelectric potential
Natural gas facilities
Natural gas potential
Other energy sources (geothermal, coal, nuclear)
Potential of other energy sources

(viii) Environment and land use considerations: Disposal of the residue from
alumina manufacturing significantly implicates the need for environmental
management and land use planning. The production of alumina in Bayer refineries
requires substantial land mass for lagoon storage of processing waste and residue.
The large Red Mud pond in Linden is testimony to this. One estimate concludes that
for each tonne of alumina produced, 0.9-1.5 tonnes of solid residue is generated,
depending on the initial bauxite-ore grade and the alumina’s extraction efficiency.
One other source puts the waste produced for each tonne of alumina as high as 2.0
to 2.5 tonnes.

The country has well-developed land use and environmental management

frameworks that can help to foster investor confidence.

Implications for Guyana and policy approach

On this scorecard, the comparative disadvantages outweigh the advantages both in
terms of their numbers and relative potential financial costs. The government will
have to implement policies to create or reinforce comparative advantages that can
hopefully outweigh the disadvantages over which it has no control, such as
Guyana’s geographic location. This will require a total investment-climate approach
that focuses not only on fiscal incentives, but also on the development of
transportation infrastructure (roads, rails and ports), cheap and reliable local sources
of energy, country-wide bauxite exploration and evaluation, and investment
promotion.
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E. CONCLUSION

There is no stated and evident interest shown by the three foreign-owned bauxite
companies in Guyana in setting up an alumina refinery
here. Bosai Minerals Group Inc. is reported to be planning An alumina refinery
or building alumina plants elsewhere. UC Rusal has is unlikely to be
signaled its own disinterest in using Guyana’s MAZ as the established in
main feedstock for an alumina plant here because of its Guyana in the
high silica content. foreseeable future.

There is also no projected shortfall in existing and planned

alumina refining capacity worldwide.
Given also the superior comparative advantages of several other countries, an
alumina refinery is unlikely to be established in Guyana in the foreseeable future.

F. A RELOOK AT THE ALUMINA REFINERY QUESTION

The call for establishing an alumina refinery in Linden is, one suspects, based on the
fact that alumina was once produced there and the bauxite resources are available
in the vicinity. But if discussed within a national and regional development strategy,
alumina refining does not bring any special advantages over other possible
economic activities. While employment of several hundred persons and other
economic benefits could be expected, alumina refining does bring several serious
downsides. It has a huge environmental and health hazard footprint, especially as
regards tailings disposal and its use of caustic soda. Its large power requirements can
amount to an opportunity cost, especially if it sources electricity from a
hydropower-driven national grid with little excess capacity. Such power could be
directed to other development initiatives. Moreover, the massive investment costs
to set up a refinery will require very generous government fiscal incentives
(including tax holidays), which will mean little or no government revenues for an
extended period.
A refinery, even if established, will not be the economic salvation for Linden and
the wider region. Economic development there could probably be more effectively
realized through the encouragement of a range of small to medium-sized businesses
detached from bauxite mining. In addition, the opportunities exist now for the
bauxite communities to benefit more from corporate social responsibility efforts of
the current mining companies, and from direct revenue sharing of bauxite tax and
royalty proceeds between the regional and central governments.