Rio May Spend $2 Billion on Indonesian Nickel Project (Update2)

Rio Tinto Group, the world's third- largest mining company, may invest $2 billion, double an earlier estimate, developing its first nickel project in Indonesia to meet rising demand driven by steelmakers in China.

"We're still negotiating with senior levels of government in Indonesia,'' said Ian Head, a Melbourne-based spokesman for Rio. ``When it's concluded, Rio can then start a feasibility study and the costs of the project would be up to $2 billion."

Nickel producers are developing projects in Asia as prices surged to a record this month on concern shrinking supplies won't match demand. BHP Billiton Ltd., the world's largest mining company, may invest as much as $1.5 billion on a nickel project in the Philippines, a government official said today.

``BHP and Rio have said they're willing to go to riskier countries to tap resources there, and the nickel prices may be quite good for a while,'' said Peter Chilton, who helps manage the equivalent of $800 million at Constellation Capital Management in Sydney. ``Both Indonesia and the Philippines are certainly prospective in resources. Rio definitely wants to be in nickel.''

Shares of London-based Rio rose 30 cents, or 0.4 percent, to A$77.60 on the Australian Stock Exchange at the 4:10 p.m. Sydney time close. Shares of Melbourne-based BHP rose 16 cents, or 0.6 percent, to A$28.94.

2012 Start

The proposed BHP project in Davao Oriental province in the Philippines may start production in 2012, Reyes said today after meeting company executives in Manila. Officials from BHP at the meeting declined comment, as did BHP's Melbourne-based spokeswoman Samantha Evans.

Rio's proposed Indonesian venture, which includes a smelter, will produce the metal in refined form, not as concentrate, Simon Sembiring, director general of minerals at the energy ministry, said today in Jakarta. The project is sited at Asampala, straddling Southeast and Central Sulawesi provinces in the east of the Indonesian archipelago.

The investment is ``larger than initial estimate of over $1 billion as we need a big investment to refine the laterite ore, which has low content of nickel,'' said Budi Irianto, manager of external affairs at Rio's Indonesian unit. He said negotiations will continue next week over the payment of royalties.

Nickel futures have risen by 35 percent in the past six months, while stockpiles tracked by the London Metal Exchange have halved since the year began. Nickel is used to make stainless steel, sales of which are rising, especially in China, the world's fastest-growing major economy.

Sign Contract

On June 19, when Tom Albanese, Rio's then head of exploration, met Indonesian officials while negotiating for the contract, he said the project may produce as much as 46,000 metric tons of nickel a year, and cost $1 billion. Albanese will take over as Rio's chief executive officer in May.

Energy Minister Purnomo yesterday said that Rio Tinto and the government will next month sign a contract of between 20 and 25 years that sets out the operational conditions for the miner, as well as taxes, royalties and provisions for sale of ownership to local groups.

Rio will pay royalties similar to the amount that PT International Nickel Indonesia, referring to the country's largest nickel miner, and a unit of Brazil's Cia. Vale do Rio Doce, Sembiring said today.

According to data from the ministry, International Nickel Indonesia pays $0.015 per kilogram of nickel content in ore that contains less than 2.5 percent of the metal. For ore containing more than 2.5 percent, the royalty rises to $0.03 per kilogram.

The contract will ensure Rio Tinto will comply with taxes and regulations stipulated by central and local governments at the time the contract is signed, Sembiring said. The contract will not be subject to change should tax-related regulations change in the future, he added.

To contact the reporter on this story: Claire Leow in Jakarta at cleow@bloomberg.net ; Leony Aurora in Jakarta at laurora@bloomberg.net