According to an Alcoa (NYSE:AA) spokesperson, the company is expected to reach a final decision by end of this month over whether to proceed with the $600 million modernization plan of its Massena operations. The decision is important for this facility because it will continue to receive low-cost hydropower from the New York Power Authority (NYPA) for 30 years beyond 2013 only if it goes through with the modernization plan. According to an agreement between Alcoa and NYPA, if the company submits its proposal by March 31, it will receive 239 megawatts of additional power for restarting its Massena East plant. The supply of cheap power makes manufacturing in Massena an attractive proposition for Alcoa. 
The modernization plan will result in increased production, reduced wastage and better working conditions. However, Alcoa is still undecided on the plan due to potentially huge environmental liabilities it may have to incur if it goes ahead. While shutting down the facility instead will not put a significant dent in the company’s total smelting capacity, it will lose out on a manufacturing base which can be low-cost for the next 30 years due to power-related savings.
Alcoa’s Massena facility is the longest continually operating aluminum facility in the world. The company operates two facilities here – an integrated aluminum smelting/ fabricating plant and a smelting/casthouse facility. It began operations here in 1902 to take advantage of the abundant hydroelectric supply in the region.
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What Does The Massena Plant Produce?
Massena is home to two aluminum smelters, the East plant and the West plant. The West plant produces 130,000 metric tonnes of molten aluminum everyday while the East plant produces 125,000 metric tonnes. The aluminum produced is then processed by the downstream business segments of the company to make ingots, rods, bars and screws. These are then supplied to customers in the construction, electronics, packaging and transportation industries. 
What Does The Modernization Plan Involve?
The modernization project includes the construction of a new potline at the Massena East plant which will produce 144,000 metric tons of aluminum per year, upgrades to existing facilities at Massena West, and modifications to other existing facilities that will help integrate the two plants and support the new potline. In addition to building a new potroom at the East Plant, Alcoa will replace the current “Soderberg” technology at that facility with the more modern “pre-bake” technology which is already in use at the West Plant. “Pots” are steel-lined containers in which molten aluminum is smelted. They are arranged in long rows in large buildings called potrooms. 
Once Alcoa starts using the pre-bake technology at the East plant, there will be significant improvements in air quality and emissions and a reduction in the quantity of waste generated in the aluminum-making process by up to 56%. It will also reduce the amount of dust generated, thus creating better working conditions for workers.
What Is The Hang-Up?
For all the expected benefits from modernization, Alcoa is in a dilemma because it faces extra environmental costs beyond the $600 million for the project.
Alcoa has been conducting investigations and studies of the Grasse River, adjacent to Alcoa’s Massena plant site, under a 1989 order from the U.S. Environmental Protection Agency (EPA) issued under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). This act deals with the usage, disposal, storage or treatment of hazardous substances at a number of sites in the U.S. Sediments and fish in the Grasse river contain varying levels of polychlorinated biphenyls (PCBs) due to Alcoa’s operations, and the EPA wants the company to bear the cost of cleaning up. 
If Alcoa chooses to modernize, it will also have to undertake the Grasse River remediation project, the scope of which will be chosen by the U.S. Environmental Protection Agency (EPA). The proposed remediation project comes with an estimated price tag of $245 million, which would have to be borne entirely by Alcoa. Other proposed options for the cleanup range from a 3-year, a $114 million option, to an 18-year, a $1.3 billion option, according to the EPA.
If Alcoa decides that the cleanup is too costly, it may choose not to move ahead with the proposed modernization. Alcoa officials have already stated the company is willing to commit to the EPA’s proposal, but maintain that a cheaper, capping-only remedy would be as effective as dredging which is being suggested by the EPA.
Although the combined smelting capacity of the two plants at Massena represents a relatively small portion of its worldwide smelting capacity of 4.2 million tonnes, it is a significant part of its total smelting capacity of 639 million tonnes in the U.S. Also, it is a low-cost operation due to availability of cheap power. Electricity costs account for up to 25% of the total cost of producing aluminum which make its cost critical to profit margins. Alcoa will definitely want to take that into account before arriving at a decision.
We have a Trefis price estimate for Alcoa of $8.Notes: