Does Noranda tax regime need rethink?

FOUR YEARS ago, when t he Holness administration approved American investment company DADA Holdings’ acquisition of the bankrupt Noranda Aluminum’s 49 per cent interest in a bauxite mining partnership with the Government, Jamaica agreed to change the arrangement under which DADA compensated the island for exploiting this finite mineral resource.

For more than four decades prior, the default position, though sometimes waived or adjusted during periods of market stress, was for companies to pay a production levy – a tax based on the amount of bauxite firms mined and linked to the price of alumina on the London Metal Exchange. The levy was 7.5 per cent of the realised price of alumina – the mineral extracted from the ore and then refined into aluminium – but with a base, or floor, rate of US$5 per tonne of bauxite mined. The aim of the scheme was to ensure that Jamaica gained a decent return from its bauxite without having to contend with the murky transfer pricing and other opaque accounting arrangements that transnationals often get up to.

With the DADA deal, the Government opted for something of a hybrid. First, for DADA Holdings the base levy was lowered to US$1.50, or 30 per cent of the normal rate. The company would pay the higher of this lowered rate and 17.3 per cent of its earnings before interest, taxes, depreciation and amortisation (EBITDA) from the combined operations of Noranda Bauxite Mines and its alumina refinery subsidiary at Gramercy, Louisiana. Two years ago, this arrangement was locked in for 25 years.

It has never been announced which of the tax mechanisms has been triggered since they came into force and how much Jamaica has earned from the arrangement. Neither do we know what arrangements are in place for transparent monitoring of what takes place at the Gramercy refinery. Recent developments, however, give these matters new and greater currency.

Last month, DADA Holdings announced that it had entered a joint-venture agreement with a Canadian green technology firm, Enervoxa, to extract rare earth elements (REE) from alumina production residue at the Gramercy facility. The deal contemplates capital investments of US$800 million, on which final decision is to be taken within a year. The separation facility, using Enervoxa’s proprietary technology, it was announced, will have capacity in excess of one million tonnes of REE and other minerals per annum.

DADA Holdings boasted that it has “35 million dry ton reserves of mineral-rich residual bauxite” at Gramercy, which means that it would be close to market with its rare earth metals, thus giving an advantage over US competitors. Almost all of that bauxite is from Jamaica, shipped by Noranda Bauxite, during its four years of control by DADA Holdings, or by previous owners with other names.

NOT CLEAR

It is not clear if when Jamaica entered the taxation deal with DADA, it contemplated that the bauxite would be feasibly used for anything but the refining of alumina. Although, by then, the Government’s Jamaica Bauxite Institute (JBI) was already in a joint venture with Japan’s Nippon Light Metals to develop technologies for the extraction of REEs from the effluent from alumina refineries. Nippon invested US$50 million in a research facility in Jamaica, leading to the partners filing patents for some technologies. They, however, never took the project to market. That, presumably, was because the price for rare earth metals, critical in the manufacture of a wide range of high-tech consumer and defence products had softened, making their extraction from so-called red mud uncompetitive.

However, rising economic and geopolitical competition between the United States and China, which produces more than 60 per cent of the world’s rare earth metals, has set off a new round of economic discussions and strategic analyses about the future market control of these elements, similar to what happened a decade ago when Beijing temporarily halted the shipment of REEs to Japan.

In the circumstances, should the Nippon-JBI extraction technologies prove cost-effective, as DADA and Enervoxa suggest theirs to be, the intrinsic value of bauxite, including red mud – of which there are hundreds of millions of tonnes around Jamaica’s alumina refineries – would have risen. In that context, there must be questions of whether Jamaica should reconsider its levy/taxation regime for bauxite, including its deal with DADA Holdings, if that is possible. It is also an opportune moment for the Government to disclose what has been earned under the DADA deal and how that compares with what was projected. That is a matter to be addressed by the finance minister, Nigel Clarke.

Additionally, the mining minister, Robert Montague, as this newspaper urged last week, should report on the status of the JBI’s deal with Nippon and the prospect of the joint venture advancing from the laboratory to the extraction of REEs and/or other minerals from bauxite and its residue.