Jamaican aluma business crucial for Noble
WHEN Noble Group sits down with bondholders this week for crisis talks to restructure about $3.5 billion (R48.85bn) in debt, a business in Jamaica whose history goes back to the days of commodities legend Marc Rich will play a crucial role.
The Jamaican alumina plant, called Jamalco, is likely to be the most valuable of Noble’s remaining physical assets following the sale of its global oil and gas trading businesses. Thanks to a 50 percent surge in the price of alumina – long an unloved commodity in a struggling industry – it’s also generating cash that is helping to keep the company afloat.
“The bulk of the good assets have been sold. There’s not much left, honestly, besides Jamalco,” said Jean-Francois Lambert, a consultant and former head of global commodity trade finance at HSBC Holdings. “This asset is likely to attract some interest.”
For Noble, Jamalco offers the possibility of raising cash via a sale – a plan that has already been flagged by Noble chairperson Paul Brough. But it could be used as part of guarantees to convince creditors to swop some of their bonds for a mandatory convertible bond paying later.
The plant, located on the site of a former plantation house, has a colourful history in the take-no-prisoners world of commodity trading of the 1980s.
When Marc Rich, who founded what is today Glencore, wanted to cement his position in the country, he went as far as helping to pay for the Jamaican bobsled team, whose participation in the 1988 Winter Olympics was depicted in the film Cool Runnings.
The business, which includes an alumina refinery, bauxite mining and a port on the south coast of the Caribbean island, is central to a plan to sell more assets that Noble has said could raise $800 million to $1bn over the next two years.
Assets The company hasn’t said exactly which assets would be included, but Brough last week dropped a heavy hint that it would include Jamalco, referring to “fairly chunky assets” in the aluminum sector.
Noble, however, could opt to put the proposals on hold for now, instead of bundling some of its assets into a special purpose vehicle to convince bondholders that enough operations would remain within the company to pay its debts.
Jamalco has long been a key part of the global alumina industry and an asset coveted by some of the biggest commodity traders.
The company was started in 1959 by US industrial giant Alcoa as a venture to mine bauxite, the raw material used to produce alumina and aluminum, at a time when Jamaica was the world’s largest producer of the commodity. The country is now the eighth-largest alumina producer and sixth-largest bauxite miner.
In the 1980s, when Alcoa closed the Jamalco alumina refinery, Rich stepped in and secured a 10-year contract 25 percent below market prices, according to a report by the World Bank.
Glencore was the dominant trading house in the Jamaican alumina industry until 2013, when Noble made a $120m prepayment for a 12year off-take deal with Clarendon Alumina Partners, the Jamaican government vehicle that owns a 45 percent stake in Jamalco.
The next year, Noble bought the 55 percent stake in Jamalco that had been owned by Alcoa and Alumina for $132.7m.What is Noble’s stake in Jamalco worth today?
One issue is that Jamalco’s costs are high relative to the global alumina industry thanks to its reliance on fuel oil. Anthony Everiss, a senior consultant at CRU Group, estimated Jamalco’s costs at about $280 to $290 per ton of output.
“The issue has always been the energy supply, that’s what has made it a high cost asset,” Everiss said.
The recent surge in alumina prices could not have come at a better time for Noble. Prices have risen to more than $450 a ton amid production shut-downs in China that have also driven aluminum prices higher. All the same, most analysts and industry executives expect alumina prices to fall to about $300 to $350 a ton in the medium term.
Profits The Jamaican mining ministry, in a medium-term strategic report, forecast that the government’s 45 percent stake in Jamalco will generate operating profits of $13m, $21m, and $39m in the years ending March 2018, 2019 and 2020, respectively.
That compares with operating losses in each of the four previous years. A plan to switch the plant’s power source to natural gas could “dramatically increase” profitability, according to Jamaica’s mining minister.
For Jamaica, the prospect of a new owner for Jamalco could be the latest sign of a revival of the industry. – Bloomberg