Wed | Aug 23, 2017

Court frees Noranda of bauxite supply contract

Published:Friday | April 15, 2016 | 4:00 AM

An American bankruptcy court judge has given the go-ahead for Noranda Bauxite Limited (NBL) to pull out of its lossmaking, long-term contract to supply Jamaican-mined ore to Sherwin Alumina Company for its refinery at Gramercy on the US Gulf Coast, saying that maintaining the deal would make it difficult for Noranda to reorganise its business and emerge from bankruptcy.

"NBL has met its burden of proving that the rejection of the Sherwin contract is an exercise of sound business judgement, showing that it is in the best interest of the estate," Judge Barry S. Shermer of the US Bankruptcy Court of the Eastern Distinct of Missouri, said in his ruling issued a week ago.

"Overall, the evidence shows that rejection of the Sherwin agreement is necessary if NBL is to effectuate a restructuring. There is no bad faith or abuse of business discretion," the judge concluded.

Important for viability

Yesterday, the head of the Noranda's operations in Jamaica, Antoine Liddell, welcomed the ruling, saying it was important to the company's restructuring and return to viability.

"To be economically viable, Noranda Bauxite must realise higher prices on third-party bauxite sales, reduce its cost and improve productivity," Liddell told the Financial Gleaner through a spokesman. "The court's approval of our request to reject the Sherwin contract is a significant step in that comprehensive bauxite plan."

Noranda Bauxite is a subsidiary of Noranda Aluminium Holdings, which, late last year, filed for Chapter 11 bankruptcy protection, which, ironically, is the same position that Sherwin, substantially-owned by commodities group Glencore, is in. The bankruptcy status of the two companies formed a critical part of the deliberations in the case, which Sherwin argued on a balance of equities rather than a business judgement.

But Judge Schermer disagreed with Sherwin, insisting that it was settled law that in such proceedings in his jurisdiction, and in the absence of some major, overriding public interest consideration, the case be determined by a business judgement test.

"I am sympathetic to Sherwin's plight, but I will not deviate from the well-established business judgement rule," he said.

Noranda mines around five million tonnes of Jamaican bauxite a year, which supplies its parent company's alumina refinery at Gramercy, Louisiana, in the United States. It also does third-party supply agreements, but the bulk of these, since 2012, is the contract to supply Sherwin with ore for its facility, the former Reynolds refinery at Corpus Christi, Texas.

That deal, which was to run until 2018, was struck at a time when Noranda apparently felt it had a concessionary arrangement to pay Jamaica a production levy of US$2.50 per tonne for the bauxite it mined and shipped from the island, rather than the substantially higher rate the arbitrators ruled was applicable when the concession lapsed in 2014.

Noranda argued that it would lose money on the Sherwin contract, including US$16.5 million this year alone, if it was maintained. Sherwin disputed that the deal was uneconomic for Noranda and said should it be vacated Sherwin itself could be forced out of business, with the loss of 575 jobs.

But in asserting the law, Judge Schermer outlined Sherwin's options: "Sherwin must discontinue its business, renegotiate a different contract with NBL on terms less attractive to it, or alter its refinery to accommodate bauxite from a different seller."

When the Corpus Christi plant was built it, was designed primarily to refine bauxite with the chemical quality of Jamaica's, where Reynolds Metals, then America's second-largest aluminium company, was a major player. Reynolds was acquired by Alcoa in 2000.

Despite the potential negative impact on Sherwin, Judge Schermer said: "I see no bad faith or gross abuse of business discretion by any effort that has been made to obtain a more favourable and sustainable price to supply bauxite to Sherwin or any other party."

He added: "I find it to be affirmation of the proper exercise of business jiudgement, the fact that the Committee of Unsecured Creditors (in light of the rejection of damages claim to be filed by Sherwin) and the debtors' lenders have joined in and supported the request to reject the Sherwin contract."

business@gleanerjm.com