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The Government will cooperate fully with Contractor General Greg Christie, in his investigations into the proposed sale of its 45 per cent equity in Jamalco to Chinese firm, Zhuhai Hongfan.
This was disclosed by Minister of Energy and Mining , Hon. James Robertson, in a statement to the House of Representatives Tuesday (June 8) on the Contractor General’s investigations into the sale of the shares.
Mr. Robertson stated that the government’s 45 per cent minority ownership in Jamalco, through Clarendon Alumina Production (CAP), had become a costly burden, which the Jamaican taxpayers can no longer bear.
He said that the problems began in 2000, when CAP was unable to meet its share of operational costs and proceeded to borrow US$125 million, initially from commodity trader Glencore, as an advance. This was repaid by a US$125 million loan secured from the international capital market, of which US$55 million was diverted to help the then Government finance the budget.
In 2002, an additional US$65 million was borrowed from Glencore to meet CAP’s share of plant expansion costs. In 2006, a further US$200 million was secured from the international capital market, US$69 million of which was used to repay the balance on the US$125 million loan, US$126 million to settle further debts that CAP had accrued, and US$5 million toward working capital.
The loans from Glencore were repayable through 10-year alumina supply contracts, with more than a half of the supply at a fixed price and the remainder pegged to the equivalent of 12 per cent of the price of aluminium on the London Metal Exchange.
“Sharp increases in the price of oil and caustic soda, led to a situation where the cost of production far exceeded the price we were receiving under these arrangements,” Mr. Robertson said.
He noted further that as the “debt piled up” and CAP was unable to meet its payments, the Government was required to make good on the payments. In October, 2008, Alcoa issued to CAP a formal notice of default.
“The seriousness of this cannot be overlooked, as it would have impacted the US$200 million globally traded bonds, with grave implications for all Government of Jamaica sovereign bonds. The government had to step in,” Mr. Robertson stated.
Between 2007 and 2010 the government, through the Ministry of Finance and the Petro Caribe Fund, has had to pump approximately US$250 million to meets CAP’s obligations to Jamalco. CAP’s current indebtedness stands at under US$400 million.
Meanwhile, Mr. Robertson stated that under the International Monetary Fund (IMF) agreement, the government could not continue to finance “these losses” and has to divest itself of its shares in Jamalco.
He also added that divesting the government’s shares in Jamalco involves much more than simply selling asset, as there are strategic considerations that have to be weighted carefully, to determine what is in the best, long term interest of Jamaica’s alumina industry.
He stated that China, with its fast growing economy, is the largest market for alumina. In addition the selection of a buyer for the Government’s shares had to take into account the need to maintain and strengthen the partnership with Alcoa, which owns the majority 55 per cent of the shares in Jamalco.
He explained that HongFan had expressed an interest in acquiring the government’s Jamalco shares in 2008. The Government spent considerable time conducting due diligence on the company. HongFan’s interest was maintained through 2009, even when the industry fell to its lowest point and several plants around the world were being shut down and hardly any investor was prepared to take on new ventures, Mr. Robertson said.
“Its offers include not only a substantial price, commensurate with independent valuation, but the assumption by HongFan of the costly supply contracts which are responsible for a substantial part of the accumulated losses and some of which run until 2013. Its offer is also better than that submitted by one of the major global players in the alumina industry,” he noted.
Mr. Robertson also stated that HongFan has the support of the China Development Bank (CDB), and during Prime Minister Bruce Golding’s visit to China in February, he met with both the Aluminium Corporation of China (Chalco) and the CDB to confirm their support for the deal. In April, representatives from Chalco and the CDB visited Jamaica for further discussions, and toured the plant, jointly, with senior officials of HongFan and Alcoa.
The agreement, which was approved by Cabinet has not yet been consummated, however, as under the joint venture agreement Alcoa has the right of first refusal, and has until the end of June to exercise that option.
Mr. Robertson said that all relevant government entities will cooperate fully with the Contractor General in his investigations.