CAP divestment was near finish line

Bruce Golding, Guest Columnist

In closing the Budget Debate, Finance Minister Peter Phillips sought to reconcile the apparent conflict between his pronouncement and that of Minister Paulwell made earlier in the debate regarding the divestment of Clarendon Alumina Production (CAP). I understand from what Dr Phillips said that Glencore's offer for immediate purchase was deemed unacceptable by the Government and it has opted instead for Glencore's alternative offer of an option to purchase at any time between January 2015 and December 2020.

The minister also announced another forward-sale agreement with Glencore in exchange for Glencore's funding of CAP's obligations going forward. Details of this arrangement, which could possibly last for the next 7¹/² years, especially the price at which the alumina is to be delivered, will need to be divulged before we can determine whether the proceeds of the sale will be sufficient to cover CAP's obligations in regard to Jamalco's recurrent and capital costs so that they don't become a financial burden on the Government.

It is also important to know how the option to purchase is linked to the forward-sale agreement. Does it preclude the Government from seeking an alternative buyer while the agreement is in place? In this scenario, Glencore would have no obligation to exercise that option by the end of 2020 and, therefore, for all intents and purposes, CAP will remain with the Government indefinitely.

Mr Paulwell has claimed that the plan worked out by the previous government for the sale of its CAP shares was not well advanced. This is incorrect, and in order to set the records straight, it is useful to provide some background.

When the Government acquired 50 per cent ownership of Jamalco in 1988, with Alcoa retaining the other 50 per cent, it assumed responsibility for one-half of the operating and capital costs of the refinery. In order to maintain its viability, the plant capacity had to be upgraded from 500,000 metric tons to 1 million in 1999, 1.25 million in 2003, and 1.425 million in 2007.

The GOJ, as 50 per cent shareholder, could not find the cash to finance its share of the operating costs plus all of these upgrades and, therefore, a series of 'creative' measures were instituted. These included a US$100-million forward-sale agreement and a subsequent US$200-million forward-sale agreement with Glencore to enable the Government to meet its share of these costs. These proved insufficient and, as a result, it was agreed in 2007 that Alcoa's shareholding would be increased to 55 per cent.

Notwithstanding these 'creative' measures, CAP's position continued to deteriorate, aggravated by the massive increase in oil prices that reached US$147 per barrel in 2008, as well as the forward-sale agreement that tied delivery of a substantial part of its share of the alumina produced to a fixed price that, at some stages, was as much as US$126 below the cost of production.

TIGHT SQUEEZE

The Government was forced to make budgetary provisions of some J$12 billion between 2008 and 2012, at the expense of other critical necessities, to reimburse Alcoa, which had to advance the funds to meet our unfunded share of the costs. All told, the Jamaican Government and people have accumulated losses of between US$400 million and US$500 million on this venture.

The previous Government took the decision early in its administration to divest its 45 per cent share in Jamalco in order to cauterise these losses and recoup as much as possible of what had already been lost.

In this effort, we faced considerable difficulties. The global recession, which the authoritative National Bureau of Economic Research now timelines as having commenced in December 2007, led to a sharp fall in alumina demand and mounting stockpiling from pre-existing long-term supply contracts. Several alumina refineries around the world were shut down, including our own Alpart, Kirkvine and Ewarton. In such a climate, securing a buyer for CAP was not going to be easy, but we felt strongly that the haemorrhaging had to be staunched.

Our first approach was to Alcoa. This was logical, since it was the majority partner in charge of the operations and would hardly require any extensive due diligence. Alcoa, which was battling the effects of the global downturn, stated that such an acquisition could not be accommodated within its strategic plan. (I note that it has also declined a recent approach by the current Government).

We then looked to China, given the fact that its economy was still relatively buoyant and it had become the primary source of demand for alumina. During my meetings with government and business officials in Beijing in February 2009, I indicated our interest in Chinese investment in Jamaica's alumina industry and the availability of our 45 per cent equity in Jamalco.

We subsequently received a proposal from Zhuhai Hong Fan Trading Company that, although principally a metal trader, had an arrangement with China's largest aluminum company, CHALCO, for the supply of alumina. A sale agreement was eventually signed which offered an attractive price and included commitments for further expansion of the refinery.

After several months, it became apparent that Hong Fan was having difficulty in sourcing the funds to consummate the agreement, and when it sought substantial changes to the original terms, the Government terminated the agreement.

We then entered into negotiations with Glencore and the broad terms of a sale agreement were worked out. During this process, however, we became aware that there was a private agreement between Glencore and UC Rusal whereby Rusal had the right to take over any alumina asset acquired by Glencore. This raised critical issues since Rusal, through its full ownership of Alpart and 93 per cent ownership of Kirkvine and Ewarton, already controlled 65 per cent of Jamaica's alumina plants. To proceed with such an arrangement with Glencore raised the prospect of Rusal controlling 80 per cent of our refineries.

For strategic reasons, the Government considered such a prospect to be undesirable. After intense discussions with both Glencore and Rusal, the latter agreed to waive its right of acquisition and Glencore agreed that any future sale of its assets in Jamalco would be subject to approval by the Jamaican Government.

The broad terms of the proposed sale agreement with Glencore were confirmed in a letter from Glencore dated October 5, 2011 and were approved by Cabinet shortly before I demitted office in the latter part of that month.

CONDITIONS AGREED UPON

While it would not be appropriate to divulge the specific terms of the agreement since this may prejudice future negotiations, it would do no harm to say that they included the immediate cancellation of the forward-sale contracts, an initial cash payment with subsequent payments being tied to the provision of LNG or, alternatively, a decision by Jamalco to build its own coal plant.

Other issues dealt with included the provision of additional bauxite reserves to facilitate further plant expansion and the approach that would need to be made to the diverse holders of the US$200-million CAP bonds which had been structured in such a way that a majority vote of all of them was required to terminate the forward-sale contracts.

All that was left was for the agreement to be submitted to Alcoa which, under the terms of the Jamalco joint venture, would have had 90 days in which to either agree to the proposal or submit an equivalent or better offer.

It may be that the new administration did not favour the terms of the agreement that had been so tediously negotiated. If so, it should say so and state its reasons, but unless there was some subsequent development of which I am unaware, it is grossly incorrect to say that the divestment of CAP was not imminent.

Bruce Golding is a former prime minister. Email feedback to columns@gleanerjm.com.