What's left for Noble Group creditors: The answer's in Jamaica

For Singapore-listed Noble Group, Jamaican alumina plant Jamalco offers the possibility of raising cash via a sale - a plan that has already been flagged by Noble chairman Paul Brough.
For Singapore-listed Noble Group, Jamaican alumina plant Jamalco offers the possibility of raising cash via a sale - a plan that has already been flagged by Noble chairman Paul Brough.PHOTO: REUTERS

LONDON (BLOOMBERG) - When Singapore-listed Noble Group sits down with bondholders this week for crisis talks to restructure about US$3.5 billion (S$4.75 billion) 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 per cent 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 chairman Paul Brough. But it could be used as part of guarantees to convince creditors to swap 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 US$800 million to US$1 billion over the next two years. 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 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 per cent 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 US$120 million prepayment for a 12-year offtake deal with Clarendon Alumina Partners Ltd, the Jamaican government vehicle that owns a 45 per cent stake in Jamalco.

The next year, Noble bought the 55 per cent stake in Jamalco that had been owned by Alcoa and Alumina Ltd for US$132.7 million.

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 US$280 to US$290 per metric 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 US$450 a ton amid production shutdowns in China that have also driven aluminum prices higher. All the same, most analysts and industry executives expect alumina prices to fall to about US$300 to US$350 a ton in the medium term.

The Jamaican mining ministry, in a medium-term strategic report, forecast that the government's 45 per cent stake in Jamalco will generate operating profits of US$13 million, US$21 million, and US$39 million in the years ending March 2018, 2019 and 2020, respectively.

That compares with operating losses in each of the four previous years, according to an International Monetary Fund report earlier this month. A plan to switch the plant's power source to natural gas could "dramatically increase" profitability, according to Jamaica's mining minister.

Noble estimated the fair value of its 55 per cent stake in Jamalco at US$289 million when it bought it in 2014.

In the most recent comparable deal, China's Jiuquan Iron & Steel Group Co Ltd. (Jisco) bought another Jamaican alumina plant, called Alpart, from United Co Rusal for US$299 million.

That plant's capacity of 1.67 million tons is above Jamalco's 1.425 million. But Alpart's costs are higher than Jamalco's and the plant has been closed since 2009. A person familiar with the matter said that Jisco would need to invest a further US$150 million to restart production.

Everiss said that other Chinese companies could be interested in buying Noble's stake to reduce their exposure to alumina prices.

"There are still other companies that are in a similar position to Jisco in that they are fairly dependent on third-party alumina," he said.

Among trading houses, Glencore is likely to be interested, as is Concord Resources Ltd, a private-equity backed trader run by Mark Hansen, who as head of metals at Noble oversaw its acquisition of the stake in Jamalco.

But while the revival in fortunes of the aluminum industry comes at the right time for Noble, there are uncertainties over Jamalco's future that may make it less attractive.

For one, Jamalco's output has been below capacity, hampered by the financial woes of both shareholders. The Jamaican government had to lend Clarendon Alumina Partners US$27 million to settle its arrears this January, according to the IMF.

CRU estimates that Jamalco produced just under 1.1 million tons last year, and is on track to produce about 1.2 million tons this year, Everiss said.

What's more, a three-year deal under which Alcoa executives continued to run the joint venture expires this month, an Alcoa spokesman confirmed.

And it's not clear how plentiful its bauxite resources are. In its 2013 annual report, Alcoa said that its probable and proven bauxite reserves in Jamaica were just 0.8 million bone dry metric tons, less than one year's production.

Noble, however, said in a statement last year that Jamalco had "20+ years of high-grade, near-surface bauxite reserves."

For Jamaica, the prospect of a new owner for Jamalco could be the latest sign of a revival of an industry that has been in decline for a decade.

"We do think that Jamalco is still a gem and will get better," said Parris Lyew-Ayee, executive director of the Jamaica Bauxite Institute, a government agency. "If prices hold for a little while, I think there are better days ahead than we have seen for a long time."