Thank you. Good afternoon, everyone, and welcome to this update on the situation at Alunorte. We will start with a presentation by CEO Svein Richard Brandtzæg and Head of Corporate Environment, Giovanna Larice. This will be followed by a Q&A session, also joined by Eivind Kallevik from Brazil. We have published the presentation material on hydro.com, and I suggest you have this material in front of you during the presentation. With that, I give the word to you, Svein Richard.
Thank you very much, Stian. I will draw your attention to the presentation that is now on hydro.com and start with the first slide showing that it was extreme weather condition the 16th and 17th of February. That was the start of this situation with 200 mm precipitation within 12 hours. Within the following weeks, it was 900 mm, and it continues. This situation was created a very difficult operational situation, flooding in Barcarena. If you go over to the timeline for events, you can see that it started with the fact that the whole area was flooded.
It was a channel, an old channel, Canal Velho, that was used to discharge rainwater from the area in order to make sure that the water treatment plant that was treating the flow from the red mud deposits, which is the critical part there, was done in the proper way. We got externally inspections, the 17th and 18th of February, where they didn't find any indications of spillover from the bauxite residue deposits.
This is quite important because that is the critical part of the red deposits, which is the bauxite residue storage has been maintained, meaning that there are no indications also today after investigating and checking further, there are no indications even today that there has been a spillover from the bauxite residue deposits. It was quite a lot of attention around the water pipe that was discovered. That water pipe together with four other water pipes was installed during establishment of a sump in the period after a heavy rainfall in 2009 to establish improve the water handling system.
That pipe together with the four others was blocked with concrete because it was only used during the construction of the sump. But one of the pipes were leaking, and it was quite a lot of attention around the fact that there were water coming out of this pipe. Again, this is not water from the bauxite residues, it was water from the surface. So that is one important point. We got reports from Instituto Evandro Chagas that did measurements about pollution. They reported higher contents of different elements, for example, lead and phosphorus, nitrite, all three elements that we don't have in our production.
But still, the content was below the levels of the requirements regarding drinking water, except for the nitrite and phosphorus. It was also a higher measurement of aluminum, and we need to find out where this is coming from. But again, it was quite intensive media coverage after this. Of course, we also understood that this was a very difficult situation for the local society. We started to distribute water. We have engaged four doctors to help the local people. Again, they are in addition to medical advice also distributing medicine to the local people because the drinking water has been polluted. Again, there are many other sources of pollution there.
Again, just to remind you that there has been no leakage or spillover from the bauxite residue deposit. We have established task force to take a good review on the Barcarena situation. We have taken down the production to 50% of Alunorte according to the orders from SEMAS. That was also the ruling from the court based on also a notification from IBAMA. The plant is now running at 50%, which also have an implication on the bauxite production in Paragominas . We have issued force majeure the 2nd of March. I went to Brazil the first and I landed in São Paulo the second and get to Barcarena the third and visited the local societies.
I had a plant tour to see all the areas that was critical during this period during the heavy rainfall, met the authorities and also with the local meetings with local authorities. Due to the very challenging situation, I then decided to appoint Eivind Kallevik, the CFO that you know quite well, as interim head of Bauxite & Alumina. The previous head is now leading a project to review and consider strengthening of the water treatment area at Alunorte, not only long term but also short term. Now we have engaged environmental consultancy, SGW Services, to do independent review of Alunorte's the environmental or possible environmental impact. We have had meetings with the Ministry of Public Health in Belém also with SEMAS, these meetings has been quite constructive.
If you then move on to the next slide and take overview of the Miltônia site, you will see the Alunorte refinery. This is the world largest refinery. We produced about 6.4 million tons last year based on bauxite from Paragominas , but also from MRN. The bauxite is refined to and converted to alumina, which is then shipped to our own smelters but also to external customers. The secure is stored in deposit areas, DRS 1 and DRS 2.
This is a dry stacking of bauxite residue, which is a state-of-the-art, but we have taken this one step further with the new bauxite deposit there or S2, where we have the newest technology, press filter technology, and also the even drier storage systems, dry stacking system in DRS 2. There has been a dispute between difficult licensing of the DRS 2. We have the license to install and also license to commission the DRS 2, but that has now been stopped temporarily. We are now discussing that also with the authorities to make sure that we can continue to use DRS 2, of course, in addition to get back to 100% production. Again, you see the societies are quite close. These are small villages outside the Miltônia city.
I have visited this site, I met the community , and I also spoke to representatives for the people that have very difficult situation because there are flooding of sewage. There are dangers for drinking water, and it's quite difficult situation for these people. I think I will leave work then to Giovanna that will go through more details about the operational issues and the situation with Alunorte.
Okay. Before I go into more details, I'd like to start by possibly stating the obvious. That is to remind you that Alunorte is the world's largest alumina refinery, and as such, it is supported by a vast and complex water and wastewater system. Therefore, a complete statement on the integrity of the entire water and wastewater system cannot be given until all the relevant task forces have completed their work. As a result, the facts, the overview I present today are the facts that we know today, but these may be updated as the relevant task forces complete their work. Going back to the map the CEO just discussed, what we see on the right-hand side are our bauxite residue storage areas, which we refer to as DRS 1 and DRS 2.
Any bauxite residue generated by the alumina refinery process is stored in DRS 1 or DRS 2. This bauxite residue is characterized by high pH levels, and the reason for this is that it comes in contact with caustic soda that is used in the alumina refinery process. Any water running off the DRS 1 and DRS 2 is hence collected in the water basins that you see surrounding the perimeter of DRS 1 and DRS 2. From these water basins, the water is channeled. If you could move on to the next slide. Yes. As you can see from DRS1 and DRS2, the water in the water basin is channeled to the wastewater treatment plant. At the wastewater treatment plant, the water from DRS1 and DRS2 is treated before being discharged to the river. The discharge to the river is regulated by permits.
What you also see from the schematic is that the wastewater treatment plant deals with a second key stream coming from the refinery area. This water stream is characterized by less, not as high pH levels as what you would see coming from the DRS1 and DRS2 storage area. Again, the wastewater treatment plant treats this second stream of water coming from the refinery area before discharging it to the river, along with the treated water from DRS1 and DRS2. The next slide. Anyone? This slide here shows the known points of interest to date. What we have is, we've identified a section with cracks, and this refers to the pipeline that leads water from the water basin surrounding DRS1 to the wastewater treatment plant.
So far, we have no indication that any leaks from these cracks would have come in contact with the external environment. The remainder of the pipeline leading from DRS1, the wastewater treatment plant, is currently under review by the internal task force, which is due to conclude sometime in the beginning of April. The second known point of interest to date is with regards to the flooded area in the northeast corner of the refinery premises, where we also discovered the presence of five disused pipes. Where the seal on one of the pipes had failed, leading to a small leak of water from the flooded area to the external environment. Lastly, the last known point of interest is with regards to the discharge of water through the Canal Velho to the river.
In the next slide, I'll go in a bit more detail surrounding the flooded area and the disused pipes. What happened is that as a result of the extreme rain event, the northeastern corner of the refinery referred to as sump 45 flooded. The flooding was further aggravated by the fact that the local pumps failed as a result of the power outage caused by the same severe rain event. When we investigated the flooded area, we discovered a diffused pipe in the northeastern corner, which had allowed some water to leak out to the external environment as a result of the failed seal.
As the CEO pointed out, these pipes that we discovered and the subsequent pipes that we discovered are not connected to Alunorte's water and wastewater treatment system, but rather were built during the construction of that area to promote drainage. After we discovered the diffused pipe, we put in place mitigating actions that subsequently led to it being sealed through soldering. Whilst performing this work, we discovered an additional four pipes in the area, and to date we have no indication of leaks from those four pipes, which were then further sealed with soldering from Alunorte. Alunorte commissioned a third-party environmental consultant, Envirotech, to sample the area that is roughly represented by the green box.
The consultant took soil samples along the leak path then sediment and water samples within the river that's marked on the map. PH measurements were taken of all of these samples, the report concludes that from a pH perspective, there is no sign of a significant or lasting environmental impact within the area investigated. Now in the last and final slide, I will go into a bit more detail on the use of Canal Velho to discharge water. What you see in blue are the water streams that occur under normal operating conditions. Normally, under normal operating conditions, the water from the refinery area is channeled along the industrial effluent channel to the wastewater treatment plant.
At the wastewater treatment plant, the water is treated, and then it's released to the river along the outer canal, which is labeled as treated wastewater. It's discharged into the river, for which we have permits in place. Before being discharged to the river, the treated wastewater can mix with a second stream coming from Albras, which is our primary smelter, coming from their coke and pitch storage area. These two streams mix before being discharged to the river. As a result of the extreme rain event, it was decided that part of the water coming from the refinery would be discharged through the Canal Velho as opposed to the industrial effluent channel. This was done in order to relieve pressure on the wastewater treatment plant.
It's important to note that Alunorte has in the past requested a permit from the authorities to use the Canal Velho for exactly this kind of event. However, when we used the Canal Velho in February to discharge this additional water, we had not yet received a formal rejection or approval of our permit request. Upon using the Canal Velho to discharge the water, we immediately informed the authorities. Subsequently, preliminary findings from the internal task force that we put in place to review the system have come up with some additional findings. They have found two additional contributions to the Canal Velho stream. The first additional contribution comes from the north of the Canal Velho and is due to an overflowing of the wastewater holding basins closest to the industrial effluent channel.
Whilst the second additional stream to Canal Velho comes from the south, from an overflowing of the surface waters from the coal and bauxite storage area. There's are two additional streams for the Canal Velho discharge. It's maybe useful to note that as part of our permit to discharge water to the river, we need to perform basic pH monitoring. Basic pH monitoring over the relevant period indicates that with the exception of some short-term spikes, the pH of our discharge to the river is within our limits. That's what I have to say.
Okay. If we just take a look at the summary of incidents, that is the total overview as we have now. Of course, we are now working further with, we have the independent review and also the task force. That is something we are going to follow up also going further. As mentioned, what is the most important thing here is that the full indication so far, which was also in fact, discussed in Brasilia with IBAMA the day before yesterday, concluded or at least or stated in this meeting from IBAMA that there's been no spillage from the bauxite residues during this situation.
If we then move on to the next one and then look at the page where we have here what it was initiated of measures to resolve the Alunorte situation. First of all, Eivind Kallevik is in place. He's joining us on telephone here from Brazil, heading the Bauxite & Alumina business area now. We have established a project to assess the further strengthening of the robustness of the water treatment system at Alunorte. We have the internal expert task force to give a comprehensive review of the situation. Now, of course, then also look at what can be done to improve and make the plant also medium, long term more robust with regard to extreme weather conditions.
Then we have the commission, SGW Services to do an independent review, and then come with a report to us. First phase will be reported 9th of April, and the independent review report will be finalized in May. We have also launched a clean water initiative and committed to work together with the community for water supply to our neighbors in Alunorte. If you go further to the next one and just see the timeline here, what we are doing on health, water and environmental area in Barcarena. Water distribution started, and we also use a third party, Servo, to make sure that we do this in a compliant way. We have now in negotiation and dialogues with the communities.
We have started the dialogue with the NGOs. We have established four doctors that are helping the local society for some diagnosis in collaboration with the local municipality. We have established a cooperation with the Red Cross, both short term and long term, doing mapping of the health of people there. Continue to distribute water according to the United Nations specification. Stakeholder engagement initiative, the external expert in Barcarena is in place. These are the headlines. If you go to the last page for us now, it is very important to get all the facts on the table. We also get a full overview of what has been done and what has happened during this crisis.
Our main concern is of course, related to health and safety and environment for the community and employees. Our employees are doing a tremendous job now to handle the situation. We will then present the results from the external and internal review in April 9. Then, finally, the external review will be presented in May. I think that is the main messages from me today, and I think we are ready for questions.
Thank you. If you would like to ask a question on the phones at this time, please press the digit one on your telephone. Sorry. Beg pardon. Please press the star followed by the digit one on your telephone. Please ensure that your mute function is switched off to allow your signal to reach our equipment. If you find your question has already been answered, you may remove yourself by pressing star two. We'll pause for just a moment to allow everyone an opportunity to see. We can take our first question from Jason Fairclough from Bank of America. Please go ahead. Your line is open.
Good morning, team. First, it does seem like you're being quite proactive and open in your approach to this situation. You're trying to do the right thing, so just it is to be commended. Well done on that. Second, you know, we are financial analysts. We're gonna care about the financial impact. Realize it's early days, but our clients are asking us to take a view on the financial impact. Bauxite and alumina, we think is about 25% of EBITDA this year. We've got, you know, 50% shutdown. Can you help us frame how to think about the potential financial impact? I guess there's a couple angles I have here. I mean, first, to what extent is your cost base fixed versus variable at these assets, right?
Beyond that, you've given a time frame here, out to May, where you're gonna be presenting your findings. It sounds like we're gonna be looking at three to four months of 50% reduction in production at least. Is that a fair way to characterize it?
Thank you, Jason. Just before I leave the word to Stian there, the cost base in Alunorte is about 80% variable cost in Alunorte. With regard to timing, it is too early to say anything about that. Stian, you can continue.
Yeah. As Svein says here, obviously timing is important in terms of defining the financial implication. Obviously losing out on half the volumes of Alunorte, and then obviously losing out on the margin that would in normal situations give us is the main effect here. You will have an indication of the cost level that we had in Q4 and obviously also the price that we are seeing today, which gives an indication of the margin loss as such. As he also points to, if you look at Alunorte, obviously around 80% is variable cost and thereby you also have some fixed cost that you're not able to get out in at least in the short term.
For Paragominas, the situation is the opposite, where you have a larger fixed cost base, and obviously we'll need to take down Paragominas as well, adding to the cost side per ton produced. I can maybe also add that obviously we'll need to source more material in the open market with that potential effect on that as well.
In terms of the additional costs related to this, it's more difficult to say, but at least that gives you an indication, yes.
Yeah. Look, and I guess, you know, one other follow-up, and then I think I know what the answer is gonna be. You know, to the extent that you are spending lots of time, you're spending lots of effort, you know, how material should we think about the extraordinary costs that would be associated with this incident? You know, between the consultants and the scientists and the lawyers and the... You name it.
Yeah, I think, you're right. We are also using some external resources to support us during this critical situation. I'm sorry that it's a bit early to conclude on this. We can get back to you to this as soon as possible.
Okay. All right. Thanks for your forthrightness. Yep. Thank you.
Thank you. We can now take our next question from Daniel Major from UBS. Please go ahead. Your line's open.
Hi there. Couple questions. Can you give us an update on how long you could operate the refinery for at 50% or 100% capacity if you are unable to secure the license to get start using DRS2? Secondly, is there any CapEx implications in terms of the sort of remedial work and anything to do with the spill? Does that have any impact on the group CapEx or B&A CapEx guidance for this year? A third question, how much alumina inventory do you have? Therefore, in terms of your own smelters, when will you have to start coming into the market to buy third-party material in order to maintain capacity?
Okay, thank you, Daniel. With regard to the operation of the 50%, we can operate Alunorte at 50% going forward. That is something that we can do for a long period. Of course, we would like to bring the capacity back to 100% as soon as possible. With regard to CapEx, no, it is too early to say because the task force is looking at what we can do now to increase the robustness. If we, for example, need to do some capacity increases for the water treatment area, which is one area we are looking into, that is something we have to come back to you, Daniel.
With regard to the smelters and the alumina, maybe Stian, you can comment on that because we have our alumina, we have for the shorter part well sourced. You have to comment some more on that, Stian.
Yeah. Daniel, based on the alumina in the silos and what we've been able to purchase in the market, we're in a comfortable position, at least a month going forward, maybe even into May. Obviously, we will need to buy more cargoes as well to make sure that we have sufficient alumina beyond that time period, and obviously that is ongoing.
Okay, thanks. Sorry, can I just follow up on the first question? You can operate the refinery sort of indefinitely or for a long period of time at 50% without getting the new license. How about assuming you bring the production back on in May, June, how long could you operate at full capacity before DRS1 was full, and you'd have to then, you know, look at other alternatives or close capacity?
Yeah. The original plan was obviously to change from DRS1 into DRS2 during this year and into early next year. To give you sort of an exact indication of how long we could potentially run only at DRS1, either at 60% or 100% is somewhat difficult. If the original target was to switch over during this year, obviously the length will be prolonged by only running 60%. I'm struggling to give you a very fixed answer to it, Daniel.
Yeah. Okay, thanks.
Thank you. We can now take our next question from Menno Sanderse from Morgan Stanley. Please go ahead.
Yes, thank you. A couple from me as well. Can we first start to talk about what volumes we are talking about in terms of leakage? Any indication of how much caustic soda was leaked, just to get a better sense of the magnitude of all of this, besides the fact that it actually happened? Secondly, forgive me for being blunt, but if you don't get DRS2, you basically have to shut the refinery down. You need DRS2 to operate the refinery either at 50% or at 100% beyond, say, the mid of next year. Is that a true or not true statement? Finally, two small ones. Part of Alunorte's second tailings dam was closed down as well.
Could it operate at 11 million tons capacity on one tailings dam, assuming you could go back to 11 million tons? Obviously, it depends on the refinery. Finally, how often does 200 mm per day happen? The slide shows you only days up till February, or beginning of February. How big was this rain event in a historic context, so we can make our own judgment on what may have to be done to this, to the asset going forward to make sure that the company can deal with it in the next comes?
Thank you, Menno. With regard to the leakage of caustic soda, it was again, we have had no leakages from the red mud deposits as of today as all the information and indications, I mean, even what IBAMA has also communicated in Brasilia is there are a lot that did not have any leakage from red mud deposits. There was a overrun during a power failure in during the critical hours during thunderstorm and it was like hitting a substation, so we lost current for a while. That was one of the reasons why the Canal Velho was used because this leakage or this overrun contain bauxite.
It was water and caustic soda that was collected. It has to be neutralized before it was discharged. That was the situation where they, the local management, decided to use Canal Velho. It is too early to say about this, give you any indications. With regard to the limitations we have on caustic soda discharge to the big river is that we have only had small peaks where we have been above. The limit was a pH of nine. As you probably know, the pH is a factor of the negative logarithm of the concentration of hydrogen ions in the distribution.
We have been on average level below the requirement, and the requirement is based on. We have measured on extra measurements where we've seen there's been some high spikes, but there is no sign up to now and now there's been quite a lot of work that has been taking place. No signs that there has been environmental damages of this. You probably know that the classification of caustic soda is that it is not classified as poisonous but as corrosive. They have been focusing on neutralizing the caustic soda. With regard to DRS 2, the situation there is that we have got the license from SEMAS to install and commission DRS2 .
And yes, this is my sense that in the last half of the end of the year, according to plan, and then we should get a normal operation license. And it has been challenged by IBAMA in crossing out if CMOD has the right to do that. So that is the issue between CMODs and IBAMA. But we have not been licensed to do it. So we are also now discussing that with the authorities where we can get the DRS to be replaced, because that is the most, I would say, state-of-the-art, the best technology for handling bauxite. Mineração Paragominas, you probably know that we have invested in a new tailing deposit. In fact, we are now in operation.
The fact that we cannot use the valley anymore is absolutely also the plan we had in place. That is not-
Okay.
Hampering any volumes from the production of Paragominas.
Right. Finally on the magnitude, can you give us a bit more historic context of what type of event it is? I mean, one in a thousand years, just to understand or get a better understanding of how much the company may have to change the assets to deal with these events in the future?
Yeah. That is the next part of your question. I will try to answer that because before we acquired these assets in 2009, Alunorte had a extreme rainfall which resulted in a leakage in the river that goes past the local society. That has not happened this time. After this event-
Mm-hmm.
They changed the capacity of water handling from what they call the 100-year precipitation to the 1,000-year precipitation. The DRS 2 has the capacity to handle the 10,000-year rainfall. What that means can be discussed because now there is a climate change, but at least it seems that the 100-year precipitation is coming more frequently than every 100 years, and it may be even that the 1,000-year precipitation is coming more frequently. What we are looking into now is that to make sure that this is never going to be happening again, we are looking into investment in improving the water treatment capacity.
That means we may install a water treatment plant which can handle the extreme situation as we had if that should happen again. Find the conclusion on this and start the taking, that is the one direction we are looking into now.
Okay. Thanks a lot.
Thank you. We can now take our next question from Daniel Lurch from Exane. Please go ahead. Your line is open.
Hi. Good morning. Thanks very much for the call and for taking my question. Just two quick ones. Can you speak maybe a bit about your discussions with authorities you had so far? Did you get any indication what would make authorities comfortable to return Alunorte to 100% capacity? Maybe on the internal and external review which you have commissioned and the connection of these reviews to the discussion with authorities, are environmental authorities in agreement that these two reviews are sufficient?
To assess the situation, I mean, assuming that there are no additional negative conclusions, is this sufficient for them to make an informed decision, or do you expect that there will be additional reviews by the Brazilian government, for example, into the situation? Thank you.
Thank you, Daniel. We have a constructive dialogue with the authorities. Again, we established the internal review to use our all best resources to make sure that we have a full overview, that we have all the cards on the table, and that we can make the right decisions about what is going to be done with Alunorte going forward. We also would like to take the external review, make sure that there is no bias about what has happened there, and that external review can do the measurements with the, in a way, the required chemical analysis and the required evaluations that an external professional independent party can do. The dialogue with authorities is as I said, constructive.
It is, it may be that there are questions coming up that they would like to do also their own reviews. That would be no surprise. I think we are on the right track. We are doing the right thing. I think the authorities see that we take this situation very seriously. I think one of the requirements for Hydro going forward is that we should do more to support the local authorities or not the local authorities, but the local communities that we are helping the local communities, which is, we are talking with very poor people that are living close by. They are lacking infrastructure on sewage and water. Maybe that this is an area where we have to give the most important.
That should be no surprise, going forward, because this is also something that I think the local authorities would be happy if we can help with.
Okay. Thank you.
Thank you. As a reminder, ladies and gentlemen, to ask a question, please press star one. We can take our next question from Johannes Grunselius from Handelsbanken. Please go ahead.
Okay. Thank you. Yeah, most of my questions have been answered, but perhaps a bit of a follow-up. I mean, in your discussions with authorities, do you get any sense that fines can be involved in here or that authorities are changing the tax regime for you, for instance, putting in a royalty or increasing the corporate tax or whatever? Can you elaborate a bit on that, please?
Yeah. Again, the dialogue, Johannes, with regard to the authorities are very constructive. There has been issued fines already. One is related to the usage of the old channel, Canal Velho. It's, I think we still need to get some more time to get the full overview of what is going to happen going forward. I'm not sure that discussion is finished yet, or that, with regard to the fines, if that is fully developed from the authorities, what they want to do there. With regard to the tax regime, it has been mentioned by a local newspaper that Hydro has a very attractive tax regime. The governor has been attacked, that he has been too supportive to Hydro.
This is an agreement that we have gone into, and I have had no, there are no indications that that is something that they will restart that time. With regard to the royalty status, also something that is for whole industry, we haven't got any comments to that during these discussions and the dialogue that we have with the authority so far. I would say that there are also strong indication that authority is also very concerned about Hydro running at 50% because it has a big implication on the jobs, local jobs. We have there are about 3,000 jobs at Alunorte. If you also include the contractors, it has also further implications in the local society there.
I think there are quite strong forces now that we should get back in production as soon as possible. The authorities have to see that we also are again taking and giving the support to local society, that we are implementing the actions that are necessary to make sure that the way we are able to handle the this situation going forward if there also should be a sort of heavy rainfall. This is ongoing. I will say that also the support we have from unions are extremely strong. We have not experienced that before in Brazil. Again, there are many different stakeholders now that are quite active. Again, it is difficult to promise anything. It may take time.
We are doing this the Hydro way, get everything on the table, be open and transparent, and make sure that we do this in a sustainable way within all the rules of compliance. We are thinking not only for short-term solutions, but also the long term for our activities in Alunorte.
Okay. Thank you.
It's Svenskar. It's Ivan from Brazil. Just a small clarification. When it comes to the use of Canal Velho, what we have received is what we call an infraction notice, which could indicate that there is a fine coming or a warning. We have not received anything, any fine as of today, related to the use of Canal Velho.
Thank you. We can take a follow-up question from Menno Sanderse from Morgan Stanley. Please go ahead.
Yeah, thanks again. Two small ones. First on asset integrity. Can you run at 50% while maintaining asset integrity? Or does running at 50% mean you'll have higher maintenance CapEx/operating costs going forward? Secondly, just around the three assets in Brazil. Can you just remind us, could Paragominas sell into the external market, yes or no? Or can it only sell to Alunorte? And can Albras, in theory, use other alumina, or is that difficult given its location? Thirdly, how many people in total are employed by the three assets, both contractors and own employees? I get to 10,000 roughly if I look at the annual report, but that may be wrong.
Thank you, Menno. Good questions. With regard to asset integrity, obviously that, whether we produce 100% or 50%, it doesn't change in a way the integrity of the assets as such. The exposure area is obviously proportional to the area of bauxite residue, so that doesn't change. Of course, with the fact that we have to reduce the production at Paragominas means that there are more water going through the pipeline than previously, which of course is to be handled.
In effect, from an environmental point of view, the authority or authorities should be very interested, also from that point of view, to make sure that we do get back to 100% production, because then it's less water to be also from the Paragominas mine. With regard to Paragominas bauxite, that is transported through the pipeline only to Alunorte, so we cannot sell that into the market. That means that we can take less bauxite from MRA, as you know. That may have an implication there. With regard to Albras, of course, Albras get alumina just over the fence from Alunorte.
I think the, that, it could be swapping of a bauxite there, other solutions, that could be more interesting that we make of additional supplies of bauxite from other sources. Or, I mean, or alumina from other sources, to Albras. As I said, there are around 3,000 jobs in Alunorte. On top of that, there are including... Well, direct, if you take all the direct employees, in, related to bauxite, alumina, and also, Albras, it's 5,000 direct, 7,000 contractors, in 2017 approximately. There are quite a lot of, people involved there. So.
Yeah. 5,000 direct and 7,000 contractors, is that right?
In 2017.
Yeah, yeah. Okay, okay.
That was so you get the, in a way, the full, 2017 number, which is the most relevant there.
Yeah.
Now we are reducing the usage or the contractor, contractors are now out as far as we can to reduce the cost. Of course, now we are also looking at reducing the number of workers. This takes time. With 80% variable cost, we should also be able then to reduce some of the fixed costs going forward. This takes time now.
Of course.
Yeah. The main message on it.
Thank you very much.
Thank you, Menno.
Thank you. We can take our next question from Karl Høgtun from DNB Asset Management. Please go ahead.
Hi, this is Laura McTavish here from DNB. Regarding spills into canals permits, we assume these decisions to have been taken at a local level. Do you foresee that there will be any changes in how such decisions are approved moving forward?
Sorry, I didn't quite get that.
It was difficult to hear you. Could you please speak closer to the microphone?
Yes. Regarding the spills that into the canal that were not covered by permit, we assume this has been taken, these decisions have been taken at a local level. Do you foresee that there will be any changes in how these decisions are approved moving forward?
You're talking about the spills not covered by licenses and how that could affect regulations for that going forward, is that correct?
Just the decision to do this. Will there be any changes in how such decisions are approved?
Yeah.
I think, the question she's asking is, the decision sequence that led to the use of Canal Velho was done internally.
Yeah.
Are we looking to review the way decisions are made going forward?
Yes. Okay. That's a good question. With regard to the situation there, and due to the extreme weather, it was treatment of water from the bauxite residues that was very important. There was also treatment of water, of rainwater. Normally, this should go through the water treatment system, all of it. As the water treatment system was overloaded for a period of time, they choose to use Canal Velho for rainwater. This is again water that is... I would say normal rainwater that is mixed with some other soil. It could be some dirt from within the plant. That was done to make sure that we did not have any...
To avoid environmental impact during this situation. I think in this critical situation, it was a decision taken by the local management that I think still we are evaluating it, but it seems that in order to avoid environment damages, it seems that this was the right decision, although we didn't have the license to use Canal Velho. This is something we are going to conclude about later when we have the full report from the review. That is going to be finished the 9th of April, we will be back again.
Great. Thank you.
Sorry for missing.
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Thank you. Ladies and gentlemen, that will conclude today's call. You may now disconnect.