Need more on the Noranda deal

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.