Jan 30 - Fitch Ratings has affirmed Clarendon Alumina Production Limited's
(CAP) foreign and local currency Issuer Default Ratings (IDRs) at 'B-'. Fitch
has also affirmed CAP's USD200 million 8.5% unsecured notes due November 2021 at
'B-/RR4'. The notes continue to be supported by an explicit unconditional and
irrevocable guarantee by the Government of Jamaica (GoJ) for the timely payment
of interest and principal. The Rating Outlook is revised to Negative from
CAP's Negative Outlook Mirrors Outlook for Jamaica:
The Negative Outlook on CAP's ratings follows the revision of Jamaica's Outlook
to Negative on Jan. 18, 2013 to reflect rising financing constraints in the
context of elevated fiscal and external imbalances. CAP's ratings are directly
linked to the GoJ. CAP is 100% owned by the GoJ and is the holding company for
its 45% ownership in a joint venture with a subsidiary of Alcoa called Jamalco,
which is a bauxite mining and alumina refining operation in Jamaica. Jamalco is
an unincorporated joint venture association that involves the proportionate
sharing of production costs and the alumina output of the Clarendon Alumina
Refinery (CAR). CAR's production rate during fiscal 2012 was 1.27 million tons,
down on normal average production of 1.36 million tons due to power issues
during the fiscal year.
Cash Flows Negative; Unfavorable Contracts to Expire in 2015:
CAP's negative cash flow generation is primarily due to the long-term inflexible
supply contracts which have constrained the entity's ability to pass on higher
caustic soda and fuel input costs. FFO generated for fiscal 2012 was negative
USD43.2 million. This compares with FFO of negative USD23.8 million in fiscal
2011. CAP's 2012 capital expenditures were USD11.2 million, mostly used for
Jamalco's mining infrastructure. CAP has two remaining unfavorable alumina
off-take contracts for a total of 652,500 metric tons in 2013 and 637,500 metric
tons in 2014 and the same amount in 2015, at fixed terms. The remaining onerous
contracts expire in 2015.
Negative EBITDA Generation Continues:
As a result of the unfavorable long-term contracts, CAP generated negative
EBITDA of USD44.7 million during fiscal year 2012 and has exhibited negative
EBITDA since 2007. Fiscal year 2012 revenues of USD164 million were based on
total alumina sales of 666,444 metric tons with an average price per ton of
USD256. This compares to fiscal 2011 revenues of USD126 million based on total
alumina sales of 657,372 metric tons with an average price per ton of USD194.
The improvement in revenues was due to the expiration of one of CAP's most
unfavorable contracts, allowing for a better mix of current contract terms.
Government of Jamaica Support Essential:
CAP is unable to meet its debt commitments on a standalone basis and requires
grants from the GoJ to service these obligations. CAP received grants from the
GoJ of USD87 million in fiscal 2012 and USD17 million in fiscal 2011. These
grants ensure that CAP is able to perform to the level required to meet its
supply agreement obligations with customers. CAP is obliged to fund its share of
running and operating expenses at CAR, and it would be unable to meet these
obligations without support from the GoJ.
On a stand-alone basis, CAP has an extremely weak financial profile for its
rating category. Most of CAP's long-term debt is comprised of the USD200 million
notes issued in November 2006. CAP, via its affiliate, Jamaica Bauxite Mining
Limited (JBM), also has a USD11 million obligation (USD65 million original
amount) to Glencore, CAP's main customer. The proceeds of this loan were used to
fund CAP's share of an expansion project with Alcoa. Total debt has increased to
USD424 million in fiscal 2012 from USD373 million in fiscal 2010. Cash and
equivalents increased to USD100 million - USD99 million of which were short term
deposits - in fiscal 2012 from USD4 million in fiscal 2011. The cash increase
was due to Alcoa transferring money into Jamalco to fund capex. Short term debt
was USD145 million as of March 31, 2012.
Ongoing Search for a Buyer:
The GoJ announced in 2009 that it is seeking to sell its 45% stake in Jamalco,
and Fitch understands that this process is ongoing. Fitch notes that Alcoa has a
right of first refusal on buying the shares. CAP's USD200 million 8.5% unsecured
notes due 2021 are subject to a change of control clause which creditors may
choose to activate. Should any potential change of control result in effective
acceleration of the obligation, Fitch will review for possible rating action.
Should CAP not be sold, its future rating actions are directly linked to Fitch's
actions taken on Jamaica. If Fitch were to downgrade the ratings on the
sovereign due to concerns regarding macroeconomic pressures, or upgrade the
ratings due to liquidity improvement, then CAP's ratings would also mirror this
action. This rating linkage will continue as long as the company remains 100%
owned by the GoJ.
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Country-Specific Treatment of Recovery Ratings' (June 15, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Country-Specific Treatment of Recovery Ratings