Improvement categories Commercial improvements
• Bauxite • Alumina
Operational improvements
• Reduced raw material consumption • Reduced demurrage
• Improved efficiency
Fix cost improvements
• Manning • Economies of scale 0 200 400 600 800 1,000 Expected 2015 2012-2014
Improvements in NOK billion
We are well along towards reaching targeted improvements for our Bauxite & Alumina operations of NOK 1 billion and 20 percent manning reduction including contractor
employees by the end of 2015. During the coming year we will continue to focus on increased production, higher productivity, lower operating costs, and lower manning as well as procurement activities and commercial operations. Implementation of our Bauxite & Alumina Business System (BABS) ensures best practices and operating efficiencies across our portfolio.
Deliver significant savings and improvements on operating costs
Important HSE initiatives for the coming year include best practice sharing, improved training, increased risk awareness and focus on process safety, and safeguarding the
environment. Key actions for CSR include strengthening the dialog with all major stakeholders.
Reinforce safe and sustainable business practices
We will continue to optimize our global bauxite and alumina positions including sourcing arrangements aimed at reducing logistical costs and improving margins. We also intend to continue increasing our share of alumina sales volumes at index pricing as old legacy LME indexed contracts gradually expire.
Improve the commercial value of our attractive product portfolio
Hydro has attractive positions enabling the potential expansion of low-cost alumina refining. These include the CAP joint venture for a potential new alumina refinery and possible expansion of the Paragominas mine. Further development of this project is mainly dependent on ongoing developments in the balance between industry production capacity and market demand.
Expand our bauxite and alumina capacity
• Reduction in total recordable injuries per million hours worked by 20 percent to 2.8 for own employees and by 30 percent to 3.5 for contractors
• Accelerate operational improvements
• Deliver "from B to A" contribution of 600 MNOK • No reportable environmental incidents
• Full implementation of grievance mechanisms for Hydro's activities in Pará, Brazil
• Complete the implementation of the CSR stakeholder engagement and action plan as well as further development of social projects
2014 targets
• Reduction in total recordable injuries per million hours for own employees down 23 percent to 2.3 for own employees and 42 percent to 2.8 for contractor employees.
• Improved annual production levels in Alunorte by 0.6 million mt and in Paragominas by 1.9 million mt
2014 results
Strategy and targets
compared to 2013
• Delivered "from B to A" contribution of 700 MNOK on an annual basis
• Achieved no reportable environmental incident
• Grievance mechanism for Hydro's activities in Pará, Brazil implemented. Efforts ongoing to increase awareness of new mechanism among key stakeholders
• CSR stakeholder engagement plan implemented and further developed as part of continuous improvement strategy
• Enhancement to major social projects to increase positive impacts and results from the programs
• Reduction in total recordable injuries per million hours from 2.3 in 2014 to 2.0 in 2015
• Increase annual production levels in Alunorte to 6.2 million mt and in Paragominas 9.9 million mt
• Deliver "from B to A" contribution of at least 300 MNOK • No reportable environmental incidents
• Enhance system for monitoring and evaluation of social project portfolio
• Develop social indicators for Brazilian operations
2015 targets
We are strongly committed to safety and to eliminating high- risk incidents in our operations. Going forward, we intend to capitalize on our strong position in bauxite and alumina in a resource constrained world. This will increase our
attractiveness as a partner in new ventures and our ability to exploit other opportunities which may arise. Reducing our impact on the local environment is also an important objective going forward, including closing the gap between clearing for mining operations and reforestation.
Ambitions going forward
Bauxite from Paragominas is mined in open pits and sorted and crushed into sizes suitable for transportation as slurry through the world's longest pipeline approximately 240 kilometers to Alunorte for refining into alumina. Bauxite from MRN is transported by vessel. Alumina processing begins by removing the water from the bauxite slurry, then mixing the bauxite with caustic soda at high temperature and pressure. The resulting mixture is pumped into a digester, where a chemical reaction dissolves the alumina. This process produces a sodium aluminate solution, which is transferred into tanks to separate impurities through settling and filtration. The cooled sodium aluminate solution is then pumped into precipitators to grow alumina crystals, which are transferred to thickening tanks and further to fluid bed calciners to remove water, producing pure alumina.
Operations
Cost and revenue drivers
The main cost drivers for bauxite are labor, maintenance/ consumables and energy, representing around 71 percent of the cash cost of mining activities. Labor, the largest cost factor, accounting for about 25 percent, is influenced by Brazilian wage levels and productivity developments. Maintenance/consumables are influenced by inflation and efficiency in operations.
For alumina refining, bauxite, energy and caustic soda represent nearly 85 percent of cash costs. Bauxite purchases from Paragominas, and under long-term contracts from MRN, are based on prices partly linked to the LME and to alumina market prices.
Alumina is primarily sold under medium and long-term contracts at prices referenced to the LME. Realized alumina prices, the key revenue driver, currently represent around 15 percent of LME reference prices for Hydro's combined internal and external sales portfolio. Hydro has limited volumes available for sale on the spot market before 2016. However, we intend to increase our share of alumina sales volumes at index pricing as old, legacy contracts expire.
• Paragominas, one of the world's largest bauxite mines with a current resource life of several decades
• Significant bauxite resources beyond current reserves • High quality Gibbsite bauxite delivering refining benefits
in the form of lower investment and operating costs • Unique integrated pipeline generating increasing
economies with higher production and potential expansions. Low environmental impact
• Alunorte, the world's largest alumina refinery, and one of the most cost effective on an integrated cash cost basis • High quality, low variability alumina
• Favorable long alumina position with shorter contract durations resulting in increasing volumes available for the spot market
• Substantial expansion opportunities for bauxite mining and alumina refining
Competitive strengths
Paragominas is located in the Brazilian state of Pará. The mine has a nominal production capacity amounting to 9.9 million metric tons, 12-percent moisture bauxite on an annual basis, which represents about 4 percent of global capacity. Operations include a mining fleet of about 170 vehicles and 1355 employees. We have effective ownership of 100 percent of Paragominas.3)
Bauxite mining
Operations at Paragominas commenced in the first quarter of 2007, and began supplying raw material to the Alunorte
0 2 4 6 8 10 Target 2014 2013 2012 2011 2010 2009 2008 2007
Bauxite production
Million mtalumina refinery at the same time. An expansion - Paragominas II - was completed in the second quarter of 2008. The potential for further expansion is estimated to be 5 million mt per year and up to 15 million mt in total. The site is connected to a 244-kilometer slurry pipeline with an annual capacity of 15 million mt. It is the only bauxite slurry pipeline in the world, and has significant integration advantages combined with a very low environmental impact.
0 1 2 3 4 5 6 7 Tar get 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
Alumina production
Million mt Million mt Alunorte equityAlumina position
0 1 2 3 4 5 6 7 8 2022 2021 2020 2019 2018 2017 2016 2015 2014 2013 Sourcing contractsSmelter demand incl. share in JV’s
Paragominas supplies all of its production to Alunorte. In 2014, Paragominas provided about 65 percent of Alunorte's bauxite requirements. The remainder was sourced from MRN, in which Hydro has a 5 percent ownership interest and off-take agreements with Vale for a further 40 percent of the volume produced by MRN.4)
Hydro's major alumina asset is its 92 percent interest in Alunorte. Following the completion of a third expansion in 2008, the Alunorte refinery has an annual capacity of approximately 6.3 million mt of alumina. Alunorte is competitive due to the high quality of its alumina, advantages
Alumina refining
in scale and technology, relatively low energy consumption and labor costs. The plant has several cost advantages, including an efficient energy mix of heavy fuel oil and coal, competitive caustic soda consumption due to high quality bauxite and a potential for lower transport costs through higher pipeline throughput.
CAP, a potential new alumina refinery to be located in Barcarena, close to Alunorte, has been under evaluation for development in a joint venture between Hydro and Dubai Aluminium Company Limited (Hydro's share, 81 percent). The refinery is expected to have an initial annual capacity of 1.9 mt, with the potential for expansions up to 7.4 million mt over four phases. Further investments in this project is mainly dependent on ongoing developments in the balance between industry production capacity and market demand.
Hydro is working to develop improved beneficiation and refinery processes to enhance efficiency in the use of raw materials including increased utilization of marginal bauxite ore. This is expected to reduce operating costs and enhance output of bauxite extraction operations thereby reducing the area affected per ton of bauxite extracted.
Technology and innovation
Mining at Paragominas is currently based on traditional technology and equipment. Going forward, productivity, and therefore operating cost improvements, can be achieved through the introduction of continuous mining technology, including long-distance conveyor systems.
We are continuously working to reduce our energy usage and costs through process improvements, heat recovery and alternative energy sources. Improved energy efficiency also reduces our CO2 emissions.
We use state of the art dry stacking technology for disposing of bauxite residue, also known as red mud, a by-product of Operations
alumina refining. In 2014 Hydro began the conversion to an even more advanced pressure filtration technology that will reduce moisture content resulting in lower deposited volumes and reducing our environmental impact in the long term. We also participate in international collaboration projects investigating possibilities to use bauxite residue as a resource. Additions to cement and other construction materials are promising areas that will be pursued further.
Land use and reforestation – Paragominas
Hectares Reforested area 0 1,000 2,000 3,000 4,000 5,000 6,000 2014 2013 2012 2011 2010 2009 2008 2007 2006
Temporary infrastructure Permanent infrastructure Area cleared for future mining processes Reforestation gap
Permanent infrastructure includes areas related to administrative buildings, industrial facilities, the pipeline to Alunorte and permanent roads. Temporary infrastructure includes areas dedicated for tailing ponds.
Alunorte is collaborating with our aluminium smelting operations to evaluate the effects of alumina quality on smelter performance and identify opportunities for process and cost improvements.
Hydro's bauxite mining at Paragominas involves removing vegetation and a layer of topsoil and overburden to extract bauxite deposits eight to ten meters below the surface. As a result, mining operations disturb relatively large land areas. Hydro’s Paragominas mine is located in an area that is normally recognized as the deforestation belt around the central Amazon region. The municipality of Paragominas has experienced a reduction of forest cover of more than 30 percent over a period of almost 20 years. Although much of this occurred before the establishment of the Paragominas mine and the area had been exposed to selective logging and clear cutting before commencement of operations in 2007, reforestation and wildlife management at Paragominas are core elements of our sustainability strategy. In 2013, we established a biodiversity strategy for Paragominas. Our most important reforestation ambition is to achieve a balance of 1:1 in terms of rehabilitation and clearing for mining operations and to close the existing reforestation gap by 2020. In 2014, we disturbed 308 hectares of land and rehabilitated 524 hectares.
Environment
The main environmental issues relating to alumina refining include waste disposal and greenhouse gas emissions. Waste production includes significant amounts of mineral rejects (tailings) from the bauxite extraction process and bauxite residue or red-mud from the alumina refining process. Tailings are stored in ponds where the particles settle. Separated water is clarified and reused in the process. When full, the areas affected will be reforested. Disposal of bauxite residue is challenging due to relatively large volumes and the alkaline nature of the liquid component of the residue. The residue is washed with water to lower the alkalinity and recover caustic soda for reuse. In total, 6.1 million mt (35 percent humidity) was disposed in 2014, up 12 percent from 2013 due to similar increase of hydrate production.
Emissions for Hydro’s Alunorte refinery relate mainly to steam generation which relies on coal and heavy fuel oil. The plant emits about 3.8 million mt of CO2 per year.
Bauxite & Alumina had 3,471 permanent employees in its consolidated activities at the end of 2014, and 113 temporary employees. We prioritize a safe working environment as a fundamental right of all employees. We believe this, together with an engaged workforce, improves efficiency and results in lower operating costs. Employee development is also an important factor. Our internal performance and feedback processes, My Way and Hydro Monitor, are important tools to enhance our people and organization performance and development. In 2014, 95 percent of the employees in Bauxite & Alumina participated in Hydro Monitor in which 84 percent indicated that they participated in My Way or another performance appraisal dialogue tool.
People
Our Bauxite & Alumina Production System (BAPS) has been used as the basis for implementing a standardized production system in our operations. The system is based on Primary Metals AMPS system and promotes employee empowerment and development and facilitates the sharing of best practices throughout the organization. Implementation of BABS is an important initiative underlying the From B to A program improvement program. See Primary Metal later in this section for more information about AMPS.
Bauxite & Alumina's operations are located in the state of Pará, in northern Brazil, one of the least developed regions in the country. As one of the largest industrial companies in the state, Hydro is working to improve transparency and stakeholder dialogue with the local community. The bauxite pipeline from Paragominas to Alunorte crosses areas
inhabited by traditional Quilombola groups in the Jambuacu Territory in Brazil. Hydro has established contact with representatives of the group and invested additional resources to improve and follow up dialog with the group.
Society
In 2014 we implemented a new grievance mechanism for Hydro's activities in Brazil. The mechanism is serving as a pilot for a corporate-wide solution. In Barcarena, the location of the Alunorte alumina refinery and Hydro’s Albras smelter, an inter-sectoral forum has been established to improve communications with the local community. Please see Viability Performance section later in this report for further information.
Within Bauxite & Alumina’s supply chain, the most important risks include corruption, fraud and inappropriate working conditions. In 2014, we developed a new
procurement strategy for our Bauxite & Alumina business based on four key metrics including cost, quality,
sustainability and competence. Our sustainability metric is comprised of several elements including promoting local content, mitigating social risk in the supply chain and screening all suppliers as part of a qualification process. Our goal is to complete the qualification of all suppliers by 2020.
In addition to our equity interests in Paragominas and MRN, we have volume off-take agreements for Vale's 40 percent interest in MRN, which amounted to 7.5 million tons in 2014. In addition to Alunorte, we buy alumina from a number of external sources. The main external source is Hydro's contract with Rio Tinto for the supply of 900,000 mt of alumina annually until 2030. We have other short and medium-term purchase contracts based on LME reference pricing formulas and, increasingly, based on index pricing.
Commercial operations
We also enter into contracts to buy and sell alumina in order to optimize our physical alumina portfolio on a short and medium-term basis.
See section later in this report Financial review, Bauxite & Alumina for external volumes of bauxite and alumina purchased and external volumes of alumina sold.
Primary aluminium is derived from bauxite, which is refined into alumina. Aluminium smelting is a capital-intensive, technology-driven industry. Geographically, China is the largest consumer and producer of aluminium and has a significant impact on market fundamentals. In 2014, China represented 49 percent of world-wide aluminium
consumption and 52 percent of corresponding production. India and the Middle East are also growing in importance in the production of aluminium.