August 21, 2006

Alcan to invest $2 billion to upgrade Kitimat smelter, reducing emissions, energy use

Alcan has announced plans to invest approximately $2 billion to modernize its primary aluminum smelter in Kitimat, British Columbia.

"The planned modernization of Kitimat would leverage two of Alcan's great competitive advantages - clean, self-generated power and the world's leading AP smelting technology," said Cynthia Carroll, president and CEO of Alcan's primary metal group.

The modernization of the Kitimat smelter would increase its production by more than 60%, from its current 245,000 tonnes per year (tpy) to approximately 400,000 tpy, making Kitimat not only one of Alcan's largest wholly-owned smelters, but also one of the three largest in North America. Moreover, the project will increase Alcan's global production by over 4% from its current capacity of 3.5 million tonnes per year.

The modernized smelter will use the latest evolution of Alcan's leading AP aluminum smelting technology, making Kitimat one of the most cost-efficient and environmentally friendly smelters in the world. In addition to increased productivity, the benefits of this technology include a significant reduction in greenhouse gas (GHG) emissions, by an expected 70%, as well as substantial reductions in fluoride emissions.

Alcan's Aluminum Pechiney (AP) 18 and 30 cell technologies are considered a benchmark in reduction cell technology, operating at amperage ranging from 180 to 360 kiloamperes (kA). They offer a high level of potline production (in excess 2.7 tonnes per pot per day) and a higher number of pots per potline, together with the lowest energy consumption and GHG emissions.

"AP technology is the most advanced, efficient and environmentally-friendly technology available, providing Alcan with an ability to achieve the lowest full economic cost. Modernization would make Kitimat a world-class aluminum production facility for the next 35 years and beyond," said Marco Palmieri, president of Alcan's primary metal group for Asia, Pacific and Africa.

The modernized facility will also be much more energy-efficient, allowing Alcan to enter into a mutually beneficial amendment and extension of a power purchase agreement with BC Hydro. Dating back to 1950, the Long-Term Electricity Purchase Agreement (LTEPA) has allowed Alcan to divert water out of the Nechako watershed to generate hydroelectric power at the Kemano generating station. Alcan relies on Kemano to supply the Kitimat smelter which, under current operating conditions, uses approximately 75% of all Kemano power.

Alcan and BC Hydro have agreed to amend and extend the LTEPA so that BC Hydro will have access to power in excess of Alcan's smelter needs. Under this commercial agreement, 30 megawatts (MW) of firm power will be available for purchase by BC Hydro while the smelter modernization is under way, resulting in a total of 170 MW to be delivered from 2007 to 2009 and 80 to 120 MW of power to be delivered between 2010 and 2014, all at competitive prices.

This will help BC Hydro fill an immediate gap between electricity supply and demand, reducing its reliance on imports. Meeting this immediate need is particularly important, as much of the new electricity supply from contracts awarded under the utility's recent open call for power projects is not expected to come online until 2010.

In return for supplying an additional 30 MW of firm energy from 2007 to 2009 and partially reinstating power it had recalled for the period 2010 to 2014, Alcan will receive two lump sum payments: $45 million, payable at closing in 2007, and $66 million, payable in 2011.

The terms and conditions of the reinstated agreement are subject to approval by the BC Utilities Commission.

Once the modernization is completed, the smelter will use more electricity, more efficiently, than ever before in its history. Virtually all the firm energy from Kemano will be committed to the upgraded Kitimat smelter, with "smelter first" provisions to ensure fewer production curtailments. Surplus power will be sold to BC Hydro to supply electricity to Kitimat business, residences, and other communities. As of December 31, 2006, Alcan will no longer sell any surplus power to Powerex, a BC Hydro subsidiary.

In 1997, the province negotiated a replacement electricity supply agreement with Alcan, which could have required the province to provide electricity at prices less than the cost of production, if Alcan built a new smelter that required more power than is produced at Kemano. The planned Kitimat modernization will not require this extra power, sparing BC taxpayers a potential expense which was estimated in the hundreds of millions of dollars.

The first of the new capacity is expected to come on-stream in 2009, with final metal on-line by the end of 2011.

The implementation of the modernization project is subject to the final approval of Alcan's board of directors and to certain conditions including environmental permits and the successful conclusion of agreements with BC Hydro and the CAW union.

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