Briefing Paper for Meeting on 1 Feb 2008

Preliminary Financial Analysis of the Gordon Rd Project

Prepared by Daryl Brown, Senior Environmental Scientist, 30 Jan 2008.

Note: The IRR figures in Table 3 are currently being reviewed and may change slightly.

Executive Summary

Please read text and tables highlighted.

Introduction

Pinjarra Refinery has been predicted to be constrained by a water shortage unless additional water can be sourced. This shortfall has been created by both an increase in demand and a decrease in the supply. The demand has been generated by increased alumina production arising from the recent Pinjarra Efficiency Upgrade and also from an upgrade of the residue dust suppression system. The decrease in supply has stemmed from a drying climate with decreased rainfall levels resulting in proportionately greater decreases in surface runoff. This drying trend is predicted to continue in the future.

Pinjarra refinery is yet to realise its full water demand, as the sprinkler upgrade is not complete and the refinery has not yet produced at maximum production for a full year. However, in 2006 and 2007, the refinery suffered a minor water shortfall which was managed by purchasing water from the Water Corporation. This source of water is limited to 1500ML per annum and is unlikely to be able to meet demand into the future. Furthermore, potable water from the Water Corporation is not a secure source of water and carries a high risk of community discord (if used at 1500 ML/a)which could result in cessation (or limitation) of supply, particularly in a drought year when the water would be crucial to the refinery.

As an alternative to purchasing potable water from the Water Corporation, a feasibility study is being conducted into piping recycled water from the Gordon Rd waste water treatment plant (WWTP) in Mandurah. This option has the capacity to supply 2 GL per annum initially, increasing to 4 GL or more as the city of Mandurah expands.

In a recent meeting of utility companies looking to locate in the Gordon Rd corridor, it was realised that the cheapest, quickest, and perhaps the only feasible option to have the pipeline constructed is to lay it at the same time that Water Corporation is laying its DN1400 water main. This is scheduled to occur in the summer and early autumn of 2008/09 prior to the opening of the Perth to Bunbury highway. Water Corporation intend to close all but one lane of Gordon Rd, bury one of the 22KV lines and lay its DN1400 pipe. After this process the road will be rebuilt over the pipe, possibly to a four lane carriageway to service the increased traffic volumes coming off the Perth to Bunbury highway at the Lakes Rd interchange. Water Corp will also build a dedicated pipe bridge to cross the SerpentineRiver.

If Alcoa did not take the opportunity to lay the recycled water pipeline at the same time as the DN1400 water main, it may be forced to lay the pipe under the newly made road at a time of very high traffic volumes, then reinstate the road. It is likely that we would not be able to take the route along Manna Rd that Water Corporation intend to use and thus would be forced to continue along Gordon Rd.There are currently, 1 x 132 KV powerline, 2 x 22KV powerlines, 2 fibre optic cables and other minor utilities in the Gordon Rd corridor and a major gas main will be laid this autumn. Finding a route along Gordon Rd will be verytime consuming, very expensive and is likely to have a negative community impact.

This preliminary financial analysis has been prepared to allow management to make an initial assessment of the project. A “business as usual” approach to the project will not meet the Dec 2008 deadline of commencing construction of the pipeline from the WWTP to the east of the SerpentineRiver. If this deadline is to be met, funding for this section will need to be approved by July 2008 and the project will need to be appropriately resourced. If it is decided not to fast track the project, the feasibility study should concentrate initially on the route selection between the WWTP and the SerpentineRiver as this component of the project has the greatest potential to render the project unviable.

This analysis of the project has several components. They include:

  • Considerations relating to the supply of water
  • The predicted water balance of the Pinjarra Refinery.
  • The impact of water shortage on alumina production.
  • A preliminary financial analysis of the Gordon Rd project.
  • Alternative water supplies
  • Conclusions

Considerations with Respect to Water Supply

There are several considerations or variables in respect to water supply which are discussed below in point form.

Rainfall

  • Predicted rainfall, annual distribution and rainfall intensity have a large impact on the amount of surface water that is able to be captured for use at the refinery.
  • Rainfall at Pinjarra has declined in the order of 13% since 1975 with proportionally greater decreases in runoff. Rainfall is predicted to decline further. For further information, refer to Appendix 1 “Predicted Rainfall for South West Western Australia and Its Implications for Water Supply to Alcoa’s Refineries.
  • The rainfall scenarios that have been used in this analysis to predict the future water balance are:
  • 1975 to 2005 average annual rainfall (831mm) – current Department of Water (DoW) standard for planning
  • 1975 to 2005 less 8% (765mm) – DoW proposed standard for predicting 2010 to 2020 rainfall
  • 1975 to 2005 less 11% (740mm) – DoW proposed standard for predicting 2020 to 2030 rainfall
  • 1975 to 2005 less 13% (723mm) – modified IOCI worst case by 2030
  • Note that the predicted worst case scenario is better than the average rainfall that has been received for the last 7 years (701mm)

Demand for water

  • There is increasing demand for all grades of water in south west WA.
  • According to Roman Harasymow of the Water Corporation, demand for potable water is increasing at a rate of 5GL per annum. This is being driven solely by increase in population, not water use per capita. Therefore, Desal 2 which will have a capacity of 50 GL/a will only provide for 10 years growth if population growth continues at a similar rate.
  • Local councils such as the City of Mandurah are looking to use waste water for irrigating public open space. City of Mandurah want to “quarantine” some water from the GRWWTP for their use.
  • A large industrial estate is planned for Nambeelup which will create demand for lower grades of water.

Price

  • Roman Harasymow expects that the price of scheme water to residential customers will increase by 50% over the next 5 years. This figure is likely to be higher for non-residential consumers.
  • Provisions in the National Water Initiative will see increases in the cost of water taken under groundwater and surface-water licences.

Community interest in water issues

  • Recent water shortages and the subsequent need to conserve water has increased community interest in water conservation as illustrated by recent articles in the West Australian and Weekend Courier.
  • Conflicting demands over waterare likely to increase. A current example is the Logue Brook Dam dispute.

Regulatory requirements

  • Approval of alternative water management plan for the PEU. Putting forward the consumption of large quantities of scheme water as an alternative is highly unlikely to be approved by the DEC.
  • Pinjarra refinery is now required to submit a Water Efficiency Management Plan (WEMP) that will set out how the refinery will reduce its consumption of scheme water. Alcoa must report on progress against this plan annually.

Water Balance for Pinjarra Refinery

Overview

A simple model has been developed to predict the water balance at Pinjarra Refinery for the rainfall scenarios previously discussed. The model attempts to predict the shortfall in water supply that the refinery would experience if over the next 30 years, it received:

  • Exactly the same rainfall as was received between the years of 1975 to 2005less 8%
  • 1975 to 2005 rainfall less 11%
  • 1975 to 2005 rainfall less 13%
  • 1975 to 2005 rainfall less 13% but with the rainfall figure for the year 2000 replaced with that of 2006 to give two very dry years in a row.

The other variables that were included in the modelling were the drought provision of the Cattamarra bore water licence and the purchase of potable water from the Water Corporation to give a total 10 scenarios as listed in the table below.

Table 1. Scenarios used in the water balance model for Pinjarra Refinery

Scenarios
1 / Base less 8% + drought provision + Water Corporation 1500ML
2 / Base less 11% + drought provision + Water Corporation 1500ML
3 / Base less 13% + drought provision + Water Corporation 1500ML
4 / Base less 8% + drought provision
5 / Base less 11% + drought provision
6 / Base less 13% + drought provision
7 / Base less 8%
8 / Base less 11%
9 / Base less 13%
10 / Base less 13% + 2 sequential drought years + 1 GL additional sprinkler usage

Scenario 1 for example would assess the likely water shortage if the rainfall was 1975 to 2005 less 8% plus the refinery invokes the drought clause of the groundwater licence and we continuously purchase the maximum quantity of potable water from the Water Corporation.

The model can be used to predict how much water the refinery will need to access in excess of that obtained from bores, surface water runoff and the waste water treatment plants for the refinery and Pinjarra township. This extra water may come from the Gordon Rd WWTP or from any other source such as purchasing potable water from the Water Corporation.

Assumptions Made for the Water Balance Model

Bore Water Use and the Drought Provision. It has been assumed that the full 2500 ML will be drawn every year from the Cattamarra aquifer and that 200ML is drawn from the superficial aquifer. The drought provision of an additional 1500ML is utilised in every year that rainfall levels drop below the average, but not for more than two years in succession. This results in the provision being utilised for 13 years out of 30. The rationale for this is that it would be difficult to justify the drought clause when rainfall was above average. It is considered to be an optimistic assumption.

Surface Water Capture. Surface water capture has been calculated using a correlation between historical figures for rainfall and surface water capture as defined by the equation:

y=8x-2500

where

y = surface water capture in ML, and

x = annual rainfall in mm.

This approach may prove to overestimate the amount of water we will capture. Using this method, reductions in surface water capture will be 1.6 times any reduction in rainfall from the 1975 to 2005 base. IOCI are estimating that the reduction will be in the order of 2.5 to 3 times.

Fresh Water Requirements. Fresh water requirements were also determined through a correlation with rainfall as defined by the equation:

y = -0.0027x2 - 3.1496x + 12239

where

x = annual rainfall in mm

y = water requirement in ML

This equation takes into account runoff from the refinery and residue areas and waste water sources from Pinjarra township and the refinery itself.

Other Assumptions. Other assumptions that were made in the development of the water balance model are as follows:

  • Production is set at 11600 T/d for 2009/10, increasing by 100 tonnes each year up to a maximum of 12100 in2014/15.
  • The model assumes that any supplementary water (purchased or otherwise does not need to be stored in the winter. That is, it assumes that it is supplied year round and not from capturing surface water. If the supplementary water is from surface capture, this reduces the refinery’s ability to carry water forward into dry years.Therefore, the model will underestimate the quantity of water required from this type of water source.
  • Residue sprinklers use 1400 ML/annum.
  • Fresh water storages are approximately 9500 GL (12 GL less minimum level of 2.5GL). This may change slightly with the construction of the new WSR.
  • There is no account for increases in evaporation that may be associated with rising ambient temperatures.
  • There is no account for changes in the annual distribution of rainfall. The prediction of less rainfall in winter relative to the rest of the year will reduce runoff.
  • The model is based roughly on a beginning of June to end of May year. That is, rainfall arrives at the beginning of the year and storages are at their lowest at the end of the year.

Model Outputs

An example of the output of the model for Scenario 3 is shown in Figure 1. The model shows that under this rainfall scenario, the refinery has a shortfall of water in 16 out of 30 years even though it is buying potable water continuously from the Water Corp at the rate of 1500ML/year and has invoked the drought clause in 13 out of 30 years. The average annual water shortfall is 382 ML/year.

The average annual water deficit for each of the scenarios is shown in Table 2. This table also gives the additional flow capacity that is required in order not to suffer any water deficit. This roughly equates to the flow capacity required in the driest year.

Figure 1. Output of the model for Scenario 3.

Inputs / Outputs
Rainfall Scenario (1, 0.92, 0.89 or 0.87) / 0.89 / Average Annual Potable Water Purchased / 1500
Base Cattamarra extraction / 2500 / Average Annual Water Deficit / 382
Purchased Water / 1500 / Average Annual Lost Tonnage / 32425
Max Water Storage / 9500
Drought Provision / 1500 / Average Annual Rainfall / 740
Additional Sprinkler Water above 1400ML / 0

Table 2. Estimated Average Annual Water Shortfall and Additional Flow Capacity Required for Pinjarra Refinery

Scenario / Average Annual Water Shortfall (ML) / Additional Flow Capacity Required (ML/annum)
1 / Base less 8% + drought provision + Water Corporation 1500ML / 69 / 300
2 / Base less 11% + drought provision + Water Corporation 1500ML / 382 / 700
3 / Base less 13% + drought provision + Water Corporation 1500ML / 634 / 900
4 / Base less 8% + drought provision / 1501 / 1800
5 / Base less 11% + drought provision / 1882 / 2200
6 / Base less 13% + drought provision / 2134 / 2400
7 / Base less 8% / 2131 / 2900
8 / Base less 11% / 2511 / 3300
9 / Base less 13% / 2763 / 3500
10 / Base less 13% + 2 sequential drought years + additional sprinkler usage / 3898 / 6000

Impacts on Production and Internal Rate of Return of Gordon RdProject

From the calculated water shortfall it is possible to estimate the impact on production and ultimately the internal rate of return (IRR) of the Gordon Rd Project. Impact on production was calculated using the following relationship.

The first 2100 ML of water shortfall will cost 82T Al2O3 per ML

Subsequent losses will be at 200T Al2O3 per ML

Production loss figures and other variables were then applied to a standard financial analysis for projects to give the IRR for the Gordon Rd Project. These rates of return are shown in Table 3 for each of the scenarios previously discussed. The table also gives the lost tonnages and the additional flow capacity required for there to be no lost production. The other variables included in the analysis were:

  • Capital $32 million, comprising of
  • Pipeline $15 million (30km x $500,000)
  • Borefield $5 million
  • Disinfection $2 million
  • EPCM 15%
  • Contingency 25%
  • Operating Costs $200,000pa
  • Recycled Water Cost $0.25/KL
  • Potable Water Cost $2.40/KL

The cost per kilolitre of water delivered to the water storage reservoir is shown in Table 4.

Table 4. Calculation of cost per KL for 2 to 4 GL per annum.

Costs ($) / 2 GL / 3 GL / 4 GL
Capital Cost / 32000000 / 32000000 / 32000000
Depreciation p.a. / 1280000 / 1280000 / 1280000
Operating p.a. / 200000 / 300000 / 400000
Water cost @ 25c/kl / 500000 / 750000 / 1000000
Total Cost / 1980000 / 2330000 / 2680000
Cost per KL / 0.99 / 0.78 / 0.67

Table 3. Internal Rate of Return for the Gordon Rd Project

Scenario / Lost Tonnes per Annum / IRR for Gordon Rd / Additional Flow Capacity Required (ML/annum)
1 / Base less 8% + drought provision + Water Corporation 1500ML / 5,651 / 9.4 / 300
2 / Base less 11% + drought provision + Water Corporation 1500ML / 32,425 / 21.1 / 700
3 / Base less 13% + drought provision + Water Corporation 1500ML / 53,747 / 29.5 / 900
4 / Base less 8% + drought provision / 134,348 / 50.9 / 1800
5 / Base less 11% + drought provision / 179,822 / 64.5 / 2200
6 / Base less 13% + drought provision / 215,697 / 74.3 / 2400
7 / Base less 8% / 242,715 / 81.3 / 2900
8 / Base less 11% / 298,980 / 95.1 / 3300
9 / Base less 13% / 338,357 / 104.2 / 3500
10 / Base less 13% + 2 sequential drought years + 1 GL additional sprinkler usage / 540,795 / 144.7 / 6000

Alternative Water Supply Options

Alternative solutions to the Gordon Rd project include:

  • Fin fan coolers
  • An Alcoa funded expansion of the Binningup desalination plant
  • Purchasing potable water from the Water Corporation
  • Capturing winter runoff from agricultural drains
  • Applying for a increase in the licensed take from the Cattamarra aquifer

A brief description of each alternative with advantages, disadvantages and estimated cost per kilolitre is given below. A summary of the options including Gordon Rd are given in Table 5.

Fin Fan Coolers

Replace the cooling towers with fin fan coolers. This is estimated to reduce water consumption by approximately 2 GL per annum. The cost per kilolitre of water saved is unknown?

Advantages include:

  • Reduces the refinery’s dependency on external water sources.

Disadvantages include:

  • High capital cost
  • High energy consumption
  • Noise
  • Unproven technology?

Desalination

Water Corporation has indicated that they may be amenable to an expansion of the Binningup desalination plant in order to provide water for Alcoa. The water would be transported to Pinjarra Refinery via the Water Corporation’s integrated system The cost of Desal 2 water supplied to Perth will be in the order of $2.20/KL. Alcoa would also need to fund works to increase the supply capacity to the refinery at an estimated cost of $1 to $2 million.

Advantages include:

  • Reliable source of water
  • High quality water

Disadvantages include:

  • High cost per KL
  • Energy intensive
  • The public may perceive that Alcoa is consuming large quantities of “public” water even though the Desal plant will be funded by Alcoa.

Purchasing Potable Water

Purchase potable water from the Water Corporation in order to meet the refinery’s demands. The cost of potable water in 5 years time is expected to be greater than $2.20/KL. Alcoa would also need to fund works to increase the supply capacity to the refinery at an estimated cost of $1 to $2 million.

Advantages include:

  • High quality source of water
  • Immediately availabe

Disadvantages include:

  • High cost per KL
  • High risk of community discord particularly in times of drought which may result in limitation or cessation of supply.
  • Not in alignment with Alcoa’s goals of reducing consumption of high quality water sources.

Agricultural Drains

Capturing winter runoff from agricultural drains in the area surrounding the refinery. This option has not been investigated and as such there is no estimate of the availability or cost of the water.