Sun | Oct 21, 2018

Delroy Warmington | Be bold on Jamalco buyout

Published:Sunday | January 14, 2018 | 12:00 AM

For too long, the Jamaican economy has been in a pregnant pause. This gestation is definitely too long. It is time for the economy to emancipate itself from this coma.

The mining industry can play a critical role in reviving this economy. There is no leviathan to lift this lethargic economy. It is time for the Government to exploit the golden opportunity being presented. Act in a prescient manner and acquire Noble Group's stake in Jamalco.

The straitened times have forced Noble to divest of major assets. We have a motivated seller with not too many alternatives. It is not whether they are going to sell but to whom and at what price. Jamaica can't afford to let this prized asset fall into the hands of financial buyers.

Noble is in dire financial conditions. Its market capitalisation has declined from more than $10 billion to less than $200 million. They have $400 million of debt maturing in March and $1.2 billion of revolving credit that have to be refinanced. There is no cash flow to support these obligations.

Moreover, the three major credit agencies have significantly downgraded their credit ratings of Noble. Most banks are reducing their exposure to Noble. There is a strong possibility that the company could be liquidated. It could default on obligations without the forbearance of its lenders.

Jamaica can't adopt the seductive simplicity of doing nothing. If it does, it runs the risk of a catastrophic outcome. There are not too many strategic buyers out there. The financial buyers are agnostic to the well-being of Jamaica. They most likely will flip this asset several times with no concern about the impact on Jamaica.

The Government should learn its lesson from the divestiture of JPS. Where everyone made money off the transaction, except the people of Jamaica. The company was constantly being sold to buyers with a short-term view. It would be asinine to allow this scenario to be repeated.

The template for this acquisition should be Noble's transaction with Mercuria, where they sold their gas business for $185 million. The asset had a book value of $394 million. Noble was expecting $261 million but settled for $185 million. Remember that they only paid $140 million for their 55 per cent stake in Jamalco.

According to Bloomberg, for its 45 per cent stake in Jamalco, Jamaica will earn $13m, $21m and $39m in 2018, 2019 and 2020, respectively. As a 100 per cent owner, Jamaica would now earn $29m, $47m, $87m, respectively, for these years. This $163m can have an extremely positive impact on the Jamaican economy.

Granted, the company is laden with debt, but these profits are can easily support the debt. Now that Jamalco has decided to switch to natural gas from oil, they will see a significant saving of possible $30m per year, which will fall straight to the bottom line.

Some will say the IMF will not allow this. I would assume the IMF is rational and will not further impede the growth of the Jamaican economy. There is leverage in the IMF agreement. Jamaica should use the elasticity embedded here to make this deal a reality.

What Jamaica wants from the IMF is for it to be rational, tough and fair. It is about time the IMF agreement be clothed in a coat of sincerity. Look at the draconian 7.5 per cent primary surplus that was imposed on Jamaica. There were several countries whose economic conditions were far more dire than Jamaica's. Yet, Greece and Ukraine were spared this albatross.

Currently, Jamaica has more than US$3b in national reserve and growing. A good portion of this is earning less than two per cent per annum. The return on this investment would be substantially superior to this.

The net national reserve is not Jamaica's problem, it is more than adequate. The problem is growth. Therefore, we should use it to enhance growth. One hundred and fifty million dollars less in reserve is not detrimental. Why not take advantage of this compelling investment? Obviously, there is no risk-free investment. Granted, commodities prices can be very volatile.

Here the risk can be mitigated. Foregoing this investment because the volatility of aluminium price is equivalent to telling the farmers in St Mary not plant their banana crop because there is the possibility of hurricane.

The Jamalco assets are more strategic to this country than anyone else. Owning 100 per cent of Jamalco does not have to be permanent. Jamaica could run the company for a while, reducing its breakeven point, then find a strategic buyer. Then it could include advantageous covenants. Jamaica will be able to determine the time, price and buyer. That latitude is not available today.

The economy needs an amalgam of private and public investments. This is the time for the Government to step up to the plate. There is optimism this will happen. You can win the admiring sobriquet of 'the government that puts Jamaica first".

- Delroy Warmington is a global fund manager. Email feedback to columns@gleanerjm.com and dlwarm2001@yahoo.com.