Jamaican Government takes Noranda to court over bauxite levy
Saying it’s wary of the company’s ability to pay if allowed to rack up arrears on bauxite production taxes, Jamaica has sought a court injunction to stop Noranda from exporting the ore until their dispute over the levy rate is resolved at arbitration in Bermuda.
No date has yet been set for the arbitration hearings, but a judge in the Supreme Court’s commercial division is expected to hear arguments on the injunction on June 11.
In an affidavit last week supporting Jamaica’s request for the injunction, Financial Secretary Devon Rowe argued that the Government of Jamaica (GOJ) could be “severely prejudiced” in the recovery of the debt if it succeeded at arbitration and Noranda had been allowed to export bauxite and not pay the production levy at the full rate.
“The GOJ has reason to be concerned that Noranda’s financial position places the GOJ at risk of not recovering the levy that arbitrators may order Noranda to pay to the GOJ. The GOJ has brought this to Noranda’s attention but it has denied it,” said Rowe.
Conversely, the government has pledged to pay any damages that Noranda might suffer if the injunction is granted and it eventually prevails in the dispute.
Noranda Bauxite Limited is a subsidiary of the US listed company, Noranda Aluminium Holdings, which has operational control of the entity.
The dispute is over what tax rate should apply for each metric tonne of bauxite Noranda exports from Jamaica, dating from January of this year. The government insists that it is the full rate of US$7.56 per tonne, but Noranda is apparently prepared to argue that the US$2.52 that it paid under a concessionary regime signed in 2010 is still in force. That downward adjustment in the levy happened at the time of the global economic collapse and the Jamaican government was in a scramble to keep its bauxite/alumina sector afloat.
Significantly, Noranda has suspended payments altogether, apparently on their interpretation that they are entitled to do so until the issue is resolved.
At the higher production levy rate, assuming Noranda exports four million tonnes of bauxite – it’s average output in recent years – its tax obligation to the government would be around US$30.2 million, or approximately J$3.5 billion. If Noranda prevails its bill would be around US$10 million (J$1.2 billion), which would leave a significant hole in the government’s revenue and potentially unsettle its requirement to deliver a primary surplus of 7.5 per cent of GDP under its economic support agreement with the International Monetary Fund.
While as a private company Noranda Bauxite’s financial statements are not readily available, Rowe extrapolated from Noranda Holding’s public filings in the US that its bauxite mining subsidiary’s current assets over its current liabilities nose-dived last year by 88 per cent to a mere US$2.7 million. It’s net equity declined by a quarter to US$61 million.
But perhaps more worrying for the government was the company’s EBITDA - earnings before interest, taxes, depreciation and amortisation - which was a negative US$8 million. In other words, the company has not generated enough cash to cover its primary operations and has been on this downward trajectory for the past five years.
The government is apparently concerned that Noranda could hardly look to its parent for a bailout, if required, given that “both have reflected deteriorating performance and weakened financial positions since 2010”.
According to Rowe’s affidavit, while last year was an improvement, Noranda Holdings reported a net loss of US$26.6 million, while its equity declined 51 per cent to US$75.2 million and its long-term debt rocketed from 4.4 times to 9.1 times equity.
In the circumstance, Rowe insisted, there is a real likelihood that if Noranda exports the bauxite without paying the levy in part or in full, recovery may not be possible and it may well be impossible to calculate the loss to Jamaica and the advantage gained by Noranda.
“Furthermore, even if it were possible to calculate that loss, it may be impossible to recovery appropriate damages from Noranda,” said Rowe.