Rusal sets sight on Jamalco

Russia's UC Rusal has linked its planned re-opening of the Kikvine alumina plant in Manchester to being allowed to purchase the Jamaica government's 45 per cent stake in the Jamalco refinery in Naine, Clarendon, industry sources in London and Moscow have told the Financial Gleaner.

"At present, ostensibly the Jamaican Government is negotiating with the commodity traders, Glencore, for their acquisition of the equity Jamaica holds in Jamalco through its vehicle, Clarendon Alumina Production (CAP)," according to a UK source conversant with the talks.

"However, Glencore has a stake (around eight per cent) in Rusal and apparently there is an agreement between the two that would allow Rusal to take over Glencore's offer," the source added.

"Rusal has insisted on the acquisition of the shares as quid pro quo for restarting Kirkvine."

Neither James Robertson, the mining minister nor Rusal's country manager for Jamaica, Igor Dorofeev, were available for comment yesterday.

There are, however, suggestions in some circles that the government may be inclined to acquiesce for two reasons:

To get the hundreds of jobs and the economic rejuvenation of surrounding communities that would come with the re-opening of Kirkvine; and

Because of the pressure from the International Monetary Fund (IMF) to unload its stake in the loss-making CAP so as to improve the country's ability to meet fiscal targets.

"Recent warnings by the IMF about CAP's debt and losses, it is believed, would have emboldened Rusal," said one Financial Gleaner source.

Rusal, controlled by Russian billionaire Oleg Deripaska, owns the 550,000-tonne Kirkvine plant as well as a 650,000-tonne refinery at Ewarton, StCatherine - both of which it acquired from Glencore.

Rusal also owns 65 per cent (its partner is Norsk Hydro) of the 1.6-million tonne Alumina Partners refinery in Naine, St Elizabeth.

Rusal closed its Jamaica alumina refineries in 2009 at the height of the global recession, saying that the mid-tier efficiency plants were too expensive to be profitable in the prevailing conditions.

However, it re-opened the Ewarton refinery last June after the Jamaican Government acceded to hefty fiscal concessions.

These included dropping its bauxite production levy in the first year of the deal and, thereafter, only collecting half of the tax - US$2.50 per tonne of bauxite equivalent of alumina shipped - if the average price of aluminium stayed at US$2,100 per tonne, or lower.

If the price of aluminium rose above the benchmark $2,100, the levy payment would rise 20 per cent, to US$3 a tonne of bauxite equivalent of alumina shipped.

Two months ago, Energy Minister Robertson announced that Rusal would also take Kirkvine out of mothballs at mid-year.

Rusal, however, as was revealed by the Financial Gleaner in March, is insisting on terms that were, in most cases, twice as good as what it received when it re-opened Ewarton even though the price of aluminium, against which alumina is benchmarked, has shot up in recent months and is now hovering at around US$2,600 a tonne.

For instance, Rusal proposed a cancellation of the levy for two years and, thereafter, a rate of US$1 if aluminium did not go above the US$2,100 price.

Thereafter, the levy would rise by US$0.50 for every US$1 upward movement in the price of aluminium.

It has now emerged that Rusal's demands go beyond financial concessions to acquiring the Government's shareholding in the 2.4-million tonne capacity refinery it owns with Alcoa and a near stranglehold of Jamaica's alumina refining industry. Rusal already owns half of Jamaica's capacity.

The problem with CAP is its accumulated losses of nearly US$400 million and debt of a similar amount, especially at a time when the Government, under a US$1.3-billion loan agreement with the IMF, is being forced to rein in spending and offload unprofitable companies.

In CAPs case the Rusal/ Glencore alliance is believed to have additional leverage by the fact of a US$62-million loan Glencore made to the former People's National Party (PNP) administration in 2002, securitised against the forward sale of alumina. The money was used to finance CAP's portion of an expansion of the Jamalco refinery.

Under the agreement with Glencore, CAP was to sell half of the delivered alumina at US$180 per tonne and the rest at a variable price of 12.25 per cent of the price of aluminium on the London Metal Exchange. However, the price of aluminium tanked and the inflows were insufficient to service the debt.

According to the administration that came to office in 2007, the forward sale has cost the country J$12 billion (in additional payments and lost earnings) since 2002 and will add another J$15 billion by the time it ends in 2013.

However, analysts argue that given the current and likely rising price for aluminium, Jamaica could recoup some of the losses.

"The possibility would be completely foregone if the government is forced to sell CAP at this point," said the Financial Gleaner source. "And it would be worse if CAP gets it and almost all the muscle in Jamaica's bauxite mining and alumina refining."