Clarke explains new CAP agreement with Noble Group

Clarke explains new CAP agreement with Noble Group

Finance minister explains new CAP

Senior staff reporter

Friday, August 14, 2020

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Minister of Finance and the Public Service Dr Nigel Clarke says that the new commercial agreement between the government and its joint venture partner, the Noble Group, is an important step towards incorporation and an initial public offering (IPO) for the Clarendon Alumina Production Limited (CAP).

Dr Clarke told the House of Representatives on Tuesday that with the support of his ministry, CAP — which is wholly owned by the Government of Jamaica (GOJ) and is a 45 per cent shareholder in the unincorporated Jamalco Joint Venture — has reached a commercial agreement with its joint venture partner, the Noble Group, as follows:

(i) CAP (through a loan from the GOJ) will repay debt obligations due to the Noble Group, in the amount of approximately US$136.7 million (the “Noble Group Loan”).

(ii) The associated security package held by the Noble Group that secures the loan will be released on repayment of the Noble Group Loan.

The security package consists of: A debenture comprising a fixed and floating charge over CAP's interest in the Jamalco joint venture; Security Assignment Agreement; and mining rights granted by way of Special Mining Lease 170 (SML 170).

(iii) CAP and Noble Group will immediately terminate, by way of mutual agreement, the “Alumina Sales Agreement”, (which ordinarily terminates in 2025, and under which CAP sold its alumina forward to Noble in 2013), and replaced it with a three-year alumina marketing agreement in respect of CAP's alumina off-take from the Jamalco operation.

Under the three-year marketing agreement, CAP will enjoy the same price for alumina that Noble has secured for itself with respect to its alumina off-take from the Jamalco operation.

Dr Clarke noted that this has not been the case under the existing Alumina Sales Agreement. In return for the marketing of CAP's alumina at an equivalent price to what it obtains for itself, Noble will be paid a commission of two per cent by CAP on the sales price obtained.

“These transactions represent an important step towards the incorporation and eventual IPO of the Jamalco Joint Venture. The transactions align the interests of the joint venture partners who will now, for the first time, enjoy the same fortunes with respect to the Jamalco operation: the same costs and the same revenue less the aforementioned commission,” he noted.

Providing background to the development, Dr Clarke pointed out that on June 7, 2013 CAP entered into a Pre-Payment Facility (PPF) Agreement and an Alumina Sales Agreement with Noble Resources Limited (NRL), a company in the Noble Group.

Under this arrangement, NRL provided a prepayment financing facility to CAP in the sum of US$120 million, for the purpose of repaying amounts previously owed to the joint venture and temporarily bridged by the PetroCaribe Development Fund, the National Insurance Fund (NIF) and the Development Bank of Jamaica (DBJ).

This was done primarily to pay off CAP's portion of its working capital debt to Alumina Company of America (ALCOA) and also to fund further shortfalls that were expected to occur, in the medium term, until recovery of the alumina market.

He said that on, or around, October 1, 2014, the PPF and the Alumina Sales Agreement were novated to Noble Resources International PTE Limited (“NRI PTE”) (Dubai Branch).

Under the 2013 Alumina Sales Agreement, CAP agreed to sell forward the alumina comprising its 45 per cent interest from the Jamalco operations, and use the income to set off the amounts advanced by NRL.

The price at which CAP's alumina was sold forward to NRL was determined by a formula referring to the London Metal Exchange (LME) index. Under the Alumina Sales Agreement, NRL and its affiliates have been and are free to sell the alumina purchased from CAP in this manner on the open market and retain, for itself, the price differential.

“It should be noted for historical accuracy, that the 2013 forward sale agreement does not represent the first time that CAP sold alumina forward. The first forward sale agreement took place over 30 years ago. Furthermore, the 2013 forward sale agreement was an improvement on the forward sales agreement of 2006 that they replaced,” Clarke said.

However, he said that over the course of the 2013 Alumina Sales Agreement CAP's proceeds from its share of the alumina off-take have been insufficient to meet Jamalco's cash calls. This has exerted significant fiscal pressure on the Government of Jamaica, which has had to support CAP with working capital, draining precious resources from the Government and impairing CAP's equity value.

“Over the course of the past 16 years, the Government has supported CAP in the net aggregate amount of over US$800 million. Over the past four years net working capital support advanced by the Government to CAP, excluding amounts repaid, totals US$64 million, all of which has come in this financial year,” the minister explained.

“The need for working capital support arises as CAP's proceeds from its share of the alumina off take has been insufficient to meet Jamalco's cash calls.

“The Government does not have any more space to advance working capital to CAP in this financial year. Instead, with these transactions we will be strategically using resources that can be made available for debt repayment to structurally improve the cash flow of CAP — by getting better prices for Alumina relative to market — thereby reducing the likelihood of new working capital needs that require the GOJ's intervention,” Clarke informed the House.

In keeping with the Government's previously stated policy, focus on divesting ownership of selected State assets to Jamaicans, the IPO will give the Jamaican public the opportunity to own a direct stake in a globally competitive national champion.

The reorganised Jamalco will also be capable of arranging third party finance, with banks and other financial institutions, which can be used to support expansion plans.

Jamalco is currently in discussions with local banks regarding new facilities.

With the CAP's liabilities to Noble being a part of Jamaica's national debt, the marketing transaction is expected to result in a one per cent reduction in gross domestic product.

Opposition spokesman on finance Mark Golding said the Opposition is pleased that the new arrangement is anticipated to result in a more profitable alumina prices for CAP. He said he was not, however, convinced that the proposed incorporation of Jamalco is as significant as touted, but hoped for a successful initial public offering (IPO).

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