Primary and secondary mill scales (MSs) are waste products produced by the surface oxidation of steel during the hot (800 to 1200 °C) rolling process in downstream steelmaking. While the primary MS is comprised of FeO, Fe3O4, and Fe2O3 in a range of proportions, the secondary MS primarily contain red ferric oxide (Fe2O3) (red MS). We report a novel route for extracting iron from red MS and transforming it into ferro-aluminium alloys using carbothermic reduction in the presence of alumina. The red MS powder was blended with high-purity alumina (Al2O3) and synthetic graphite (C) in a range of proportions. The carbothermic reduction of red MS-Al2O3-C blends was carried out at 1450 °C and 1550 °C under an argon atmosphere for 30 min and then furnace-cooled. The red MS was completely reduced to iron at these temperatures with reduced iron distributed around the matrix as small droplets. However, the addition of alumina unexpectedly resulted in a significant increase in the number and sizes of iron droplets generated, much higher reactivity, and the formation of ferrous alloys. A small amount of alumina reduction into metallic aluminium was also observed at 1450 °C. There is an urgent need to identify the true potential of industrial waste and the materials within it. This study showed that red MS is a valuable material source that could be transformed into ferro-aluminium alloys. These alloys find application in a range of industrial sectors such as construction, automotive, infrastructure, etc.