In a blow to the small mining town of Nhulunbuy mining giant Rio Tinto has said bad market conditions are making it tough to run its Gove alumina refinery and it is dumping a proposal to make the plant cheaper to run using natural gas.

The mining giant on Tuesday said it no longer wanted to go ahead with plans to convert the diesel-fed plant to gas, which would have dramatically cut the cost of running the refinery, which employs about 1500 people from the satellite town of Nhulunbuy.

The gas-to-Gove project had been seen as lifeline to the refinery and the 4000 residents who live in Nhulunbuy.

"Rio Tinto is reviewing the status of its alumina refinery at Gove, with deteriorating market conditions amplifying the challenges of the current operating environment," the company said in a statement on Tuesday.

"Despite considerable efforts to improve the refinery's performance, continuing low alumina prices, a high exchange rate and substantial after-tax losses for the refinery are key factors under consideration," it said.

The move has again sent fear through Nhulunbuy.

"Everybody in this town I think, they are sick of being stuck on a rollercoaster," said John Tourish from the Walkabout Lodge in Nhulunbuy.

"You never know when it is about to go down and next thing they build you back up and throw you back down again," Mr Tourish said.

The Gove alumina plant near Nhulunbuy is one of the world's largest processors of alumina, which is refined from the rich bauxite resources in the area.

Under a deal initially agreed to by the NT government in February the Territory would release Rio with enough gas to power the plant more cheaply and the federal government would underwrite the cost of financing a gas pipeline to Gove, to enable Rio Tinto to continue running the plant.

But after Adam Giles toppled Terry Mills to become NT chief minister in March he said the original deal had never been finalised and he instead wanted a different agreement, which would involve offering a mixture of gas and diesel to the town.

In the wake of criticism of his new offering Mr Giles later offered a separate deal that included more gas.

On Tuesday Mr Giles said he was surprised to learn Rio Tinto was abandoning the gas-to-Gove proposal.

"We had been working quite thoroughly as has the federal government, as have other companies such as Santos who put many other projects on shelf," Mr Giles said.

"It was somewhat disappointing," he said.

The local MLA for Nhulunbuy, Labor's Lynne Walker, said she thought the town was getting a raw deal from the government because they had not elected a Country Liberal Party politician to represent them.

"At the beginning I didn't believe that this is about politics, but the more that this crisis has gone on over a period of months, the more people are starting to think that they have been abandoned because it is not a CLP-held electorate," Ms Walker said.