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Market Factors Affecting Smelter Operations by Golden Northwest Aluminum BPA's Straw Proposal, March 1(?), 2005

The following is an excerpt from a document submitted by Golden Northwest Aluminum regarding BPA's Straw Proposal which considers paying aluminum companies $40 million per year to offset their electric power costs.

Primary aluminum is a commodity, so aluminum smelters do not directly compete with each other. Instead, aluminum smelters sell into the same commodity market ant compete by trying to keep their total operating costs below the market price for primary aluminum, typically represented by the price for financial transactions as quoted by the London Metals Exchange ("LME"). Aluminum production costs are driven primarily by alumina ore, power and other conversion costs (labor, anode carbon, cathode blocks, electrolytic bath, operating efficencies, etc.).

Primary aluminum for physical delivery to end use customers commands a premium of 2 to 6 cents per pound (reflecting transportation and finance costs) above the LME price. Alloyed aluminum cast house products also earn a premium above the price of primary aluminum on the LME. In addition to the typical premium for delivery of physical metal, standard extrusion billet typically commands a gross margin of 6 to 10 cents/pound more than primary aluminum. The Goldendale Smelter and the Dalles Smelter can cat most of their production in the form of extrusion billet and earn a significant additional net profit on each pound of billet produced.

Alumina ore, carbon, and electrolytes for bath are themselves commodities and, other than differences in transportation costs, smelters generally face the same actual or opportunity cost for these inputs. Because alumina ore is a commodity and the amount of alumina required per unit of aluminum is fixed as a matter of physics, the competitiveness of different primary aluminum smelters is determined by two factors: power rates and other conversion costs. IN general, the Goldendale Smelter and the Dalles Smelter are competitive in labor, anode carbon, cathode, operating efficiencies and other conversion costs. Indeed, both Smelters are among the best in the United States and better than average on a worldwide basis in terms of conversion costs, excluding electric power costs.

The Golden Northwest Aluminum Smelters

Golden Northwest Aluminum, Inc. (GNA) owns through subsidiaries, two primary aluminum smelters and associated equipment in the Region. Theses smelters convert alumina ore into aluminum metal in an electrochemical process. Both smelters are direct service industrial facilities within the meaning of the Regional Act, so BPA is authorized by law to sell power for use at the smelters.

The Goldendale smelter in Klickitat County Washington is locate on 7,000 acres with all the buildings, equipment, utilities, infrastructure and other fixed assets needed to produce over 168,000 metric tons of aluminum per year with a gross electric consumption of about 327 aMW. It contains three cell lines with a total 526 of vertical stud Soderberg reduction cells. It is the newest smelter in the Region, generally is recognized as the most efficient Soderberg smelter in the world, and has operating efficiencies that can compete with newer pre-bake smelters. Between 1990 and 1999, Goldendale operated at an average of 117,000 amps consuming 6.85 kilowatt-hours of electricity and 0.49 pounds of carbon per pound of primary aluminum produced.

The Dalles Smelter is located on 490 acres in The Dalles, Oregon and has all of the buildings, equipment, utilities and infrastructure and other fixed assets needed to produce 82,000 metric tons of aluminum per year with a gross electric consumption of about 169 aMW. It has 300 vertical stud Soderberg reduction cells arranged in two cell lines. Between 1990 and 1999 The Dalles operated at 108,000 amps, consuming 7.2 kilowatt-hours of electricity and 0.50 pounds of carbon per pound of primary aluminum produced. While The Dalles is not as efficient as Goldendale, its efficiencies compare favorably with many smelters.

Each smelter is self sufficient with its own carbon paste plant, cast house, maintenance, utility and other facilities to support the smelter operations.

In recent years, GNA has invested substantial sums at its two smelters to improve their efficiency, productive capacity and value of the products produced. The cast house at Goldendale was commissioned in 1971, it was expanded in 1983 and was expanded and modernized in 1999, with new state-of-the-art equipment to produce world-class billet for the automotive and other premium markets. The cast house at The Dalles has been expanded, and is now capable of casting the entire output of the smelter into value-added extrusion billet. The capability of both smelters to cast almost all of their production in extrusion billet and other value-added products significantly improves their economic viability.

Since 2000, the Goldendale Smelter has developed and demonstrated new technology and operating procedures that allow it to increase amperage and metal production by 20 % while maintaining its high level of electric and carbon consumption efficiency. The same technology and practices can be implemented at The Dalles smelter to increase amperage and production by 12% and improve energy efficiency to about 7.0 kWh per pound.

Excluding alumina (footnote 3), electricity is the single largest costs of producing aluminum, and it is the cost that varies most significantly among smelters. The average price for power to the world's aluminum industry is generally believed to be a little below $20 per MWhr. Current prevailing power prices in the Northwest place this region in the highest 10% of electricity prices facing smelters in the world. At these prevailing prices, smelters in the Pacific Northwest can operate competitively only if aluminum prices are very high. Thus, the key to restoring competitiveness for GNA's smelters is to reduce their power cost.

Footnote 2
The practical minimum operating level for GNA's two smelters is one out of three lines at Goldendale, or roughly 109 MW of smelter load, and one of the two lines at The Dalles, or roughly 85 MW of smelter load. A 200 MW contract with BPA would allow GNA to maintain these minimums. However, depending on circumstances, it might well make more sense for GNA to shift all of its production to Goldendale to maximize efficiency if there were an extended slump in the market for primary aluminum.

Footnote 3
Historically, alumina ore has been priced either at a fixed price per metric ton or at a variable price of 12-13% of the LME price per ton of aluminum. It takes about 1.94 tons of alumina to produce one ton of primary aluminum, so the cost of alumina typically represented about 15% of the LME price of aluminum. Recently, as described later in the text, the market price of alumina has soared to over two to three times its normal price and at times has represented 50-60% of ther total cost of primary aluminum.