Need more on the No­randa deal

Jamaica Gleaner - - OPINION & COMMENTARY -

GIVEN JA­MAICA’S eco­nomic dif­fi­cul­ties and the limited fis­cal space with which it is forced to ma­noeu­vre un­der its agree­ment with the In­ter­na­tional Mone­tary Fund, we ap­pre­ci­ate the ad­min­is­tra­tion’s sense of ur­gency to lock in fi­nan­cial in­flows to the govern­ment cof­fers. Last week’s an­nounce­ment of an ar­range­ment with an en­tity called New Day/DaDa Hold­ings for a li­cence to mine baux­ite in Ja­maica, as a suc­ces­sor to No­randa Baux­ite Ltd, strikes us as such a deal, whose ba­sis de­mands fur­ther ex­pla­na­tion and greater clar­ity.

The ge­n­e­sis of this ar­range­ment is the bank­ruptcy of the USbased min­ing firm, No­randa Alu­minum Hold­ings Cor­po­ra­tion, which was listed on the New York Stock Ex­change and among whose hold­ings is the Gramercy Alu­mina Re­fin­ery in Louisiana. No­randa Alu­minum’s other im­por­tant op­er­a­tion is its 49 per cent stake in No­randa Ja­maica Baux­ite Part­ner­ship, whose re­main­ing 51 per cent is owned by the Ja­maican Govern­ment. No­randa man­aged the busi­ness.

It is in Ja­maica’s in­ter­est that No­randa’s Ja­maica Baux­ite, by what­ever name, is main­tained as a go­ing op­er­a­tion, to pre­serve jobs and any taxes and roy­al­ties earned from the op­er­a­tion. Crit­i­cally, too, as a part­ner in the busi­ness, and the sov­er­eign power in con­trol of li­cences to ex­ploit nat­u­ral re­sources in the is­land, the im­pri­matur of the Ja­maican Govern­ment was nec­es­sary for any sale of the No­randa as­sets as part of its bank­ruptcy res­o­lu­tion.

FI­NAL ANAL­Y­SIS

Two other firms, the Noble Group, the ma­jor­ity owner in the Ja­malco Alu­mina Re­fin­ery, and the global com­modi­ties traders, Glen­core, re­port­edly showed in­ter­est. In the fi­nal anal­y­sis, New Day got nod from the Govern­ment and the bank­ruptcy courts.

This news­pa­per is not privy to the data and re­lated analy­ses that un­der­pinned that de­ci­sion, and so is not in a po­si­tion to of­fer a de­fin­i­tive opin­ion on the sound­ness of the deal. We are, how­ever, in the ab­sence of ad­di­tional in­for­ma­tion, con­cerned with the ten­ure, 25 years, of the ar­range­ment as struc­tured.

Since the mid-1970s, the ba­sic tax struc­ture for Ja­maica’s baux­ite-alu­mina in­dus­try has been a pro­duc­tion levy that in­dexes the out­put to the global price of alu­minium. This sys­tem was con­ceived as way to get around trans­fer pric­ing schemes by transna­tional op­er­a­tions and to en­sure that the coun­try gets a fair re­turn on a fi­nite re­source. Since the 1980s, the floor rate for the levy has been US$5 per tonne of baux­ite, although, de­pend­ing on mar­ket con­di­tions, the Govern­ment some­times gives con­ces­sions, or em­ploys a mix of the pro­duc­tion and in­come taxes.

In this case, the Govern­ment has agreed to which­ever is higher – the levy of US$1.50 per tonne of baux­ite shipped by No­randa or 17.33 per cent on the com­bined earn­ings of the Gramercy and Ja­maica op­er­a­tions, be­fore in­ter­est, taxes, de­pre­ci­a­tion and amor­ti­sa­tion. The lat­ter op­tion is, on the face of it, at­trac­tive – as­sum­ing that the busi­ness has strong earn­ings.

The is­sue here is that the re­fin­ery was al­ways the more trou­ble­some part of No­randa’s op­er­a­tions and the area over which Ja­maica is likely to have least ac­cess and lit­tle con­trol. Trans­parency will be para­mount.

There are two other very im­por­tant fac­tors. First, 25 years is a long time, al­low­ing for many mar­ket cy­cles, in­clud­ing up­ward ones, dur­ing which the Govern­ment could be locked into a levy that is 30 per cent of the rate of what No­randa now pays. Fur­ther, there is the dan­ger of other firms ask­ing for the same treat­ment, even claim­ing en­ti­tle­ment.

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