Dear Editor,
Almost four years ago, on August 4, 2005, the following exciting headline appeared in SN: ‘Deal sealed for bauxite mining at Hururu.’
The text following the headline stated that Prime Minister Sam Hinds, who signed on behalf of the Government of Guyana, in a press release from GINA, noted that the agreement held tremendous prospects for the village of Hururu and the people of Guyana as a whole and that RUSAL and its predecessor, Aroaima Mining Company, had already contributed $12 million to the village for use of the road that runs through the community with an additional $16 million to be given annually for its maintenance. The press release further stated that RUSAL had already commenced the importation of equipment to increase bauxite production at Aroaima from the 2004 level of 1.2 million to 1.6 and 2.5 million tonnes, in 2005 and 2006 respectively.
My knowledge of the Kwakwani bauxite resources suggested that the deposit identified for this development must be 22 Kurubuku which is adjacent to the village of Hururu right across the Berbice River from Aroaima, and estimated to contain proven reserves of 35 million tonnes (now shown in one RUSAL release as 45 million tonnes) of high grade trihydrate bauxite ideal for sweetening lower grade bauxites from other locations. Later discussions with the RUSAL Guyana subsidiary’s CEO confirmed my suspicion and further indicated that it also included the adjacent 28 Kurubuku deposit estimated at 24 million tones. While I did not envisage Kurubuku contributing to the doubling of production by 2006 – quite an ambitious target – I was excited over the development, realizing that the most dynamic player in the world aluminum industry had entered Guyana in earnest and that exploitation of bauxite resources that could sustain production in Berbice at current, or even increased levels for 25-30 years was about to take place. Later discussions with the CEO, revealed that production in Kurubuku was scheduled to commence at the beginning of 2008, later delayed to end 2009, and further that their plans involved the installation of a second dryer at Aroaima and the construction of a bridge and conveyor system across the Berbice river to transport the Kurubuku bauxite direct to the dryers.
I was, however, disappointed to discover just a few weeks ago that none of the production targets mentioned in the 2005 agreement had been achieved – production averaging 1.4 million tons per year in 2005 and 2006, and reaching only 1.8 and 1.6 million tonnes in 2007 and 2008 respectively, and in spite of a very detailed production plan including an Environmental and Social Impact Assess-ment submitted to the Geological Survey Depart-ment for approval in 2006 and the importation of a substantial quantity of new equipment, no development had commenced in Kurubuku that would allow production to commence at the end of 2009. I cannot contemplate the Government of Guyana being unaware of RUSAL’s failure to achieve the targets and honour the promises in the agreement reported on August 4, 2005 and hope that they have credible excuses (definitely not the current meltdown in the aluminum industry which started only in the second half of 2008) for the lapses; I think they owe the residents of Hururu whose hopes were raised and the people of Guyana as a whole an explanation for these developments.
But even after RUSAL had failed to perform in accordance with the August 2005 agreement in terms of production levels and had shown no signs of initiating the Kurubuku development, we see in the local press of February 8, 2007, the breathtaking news that President Jagdeo had signed a Letter of Intent with RUSAL which covered, subject to feasibility studies, the establishment of an alumina refinery, an aluminium smelter and a hydro-power facility in Guyana. I must say that I was unimpressed with this revelation, since there appeared to be no serious development on the January 2003 Memorandum of Intent between the Government of Guyana and RUSAL which involved an estimated US$1B investment, including a ridiculous US$10M feasibility study for possible rehabilitation of the existing alumina refinery or construction of a new refinery in Linden. I have grown, over the past 20 years, to be, probably, the greatest sceptic of announcements about agreements for feasibility studies, and investment decisions for greenfield alumina refineries and massive integrated projects in the aluminium industry. No fewer than 25 such studies and agreements announced in both bauxite and non-bauxite producing countries, and, with the exception of China, only two such refineries, one in Brazil and one in Australia, and again with the exception of China, only two new large fully integrated projects in Russia, have been built over that period.
It is also worthy of note that RUSAl, over the past five years, has expressed interest or signed all known forms of agreements for similar projects in almost every country with bauxite reserves, measured, indicated or even inferred bauxite resources and/or potential for cheap electric power generation – bauxite/alumina/aluminium complexes in the Irkutsk region of Siberia, Venezuela, Kazakhstan and Guinea; bauxite and alumina projects in Congo, Brazil, India, Cambodia, Malaysia, Mozambique, Indonesia and Vietnam and aluminum projects in Australia, Libya, Congo, Papua New Guinea and Argentina. This array of projects looks like a shopping list for the 21st century, with most of the feasibility studies, if at all undertaken, being nothing more than perennial low intensity studies, with any of those seriously undertaken being effectively evaluation of mutually or non-mutually exclusive investment alternatives.
I wonder what would be Guyana’s ranking in such a scenario, especially when profitability or return on investment are not always the sole investment criteria.RUSAL’s spectacular growth since it entered the aluminium scene just 9 years ago, cannot be denied; it should be noted, however, that nearly all of that growth was achieved through acquisitions and mergers, the most significant through its merger with SUAL and Glencore to form UC RUSAL, which, almost overnight, propelled it to the position of the world’s No.1 alumina and aluminium producer. This growth mechanism is not abnormal for companies on a fast track growth path in an industry with long lead times and needing massive investment for new capacity. The acid test of the company’s future would, however, come when access to favourable low investment acquisitions and mergers becomes more difficult and investment in substantial brownfield or greenfield capacity becomes necessary. UC RUSAL appears to have arrived at that juncture. Consistent with its stated objective of maintaining its leadership position in the aluminium/alumina industry, the company, in late 2007, unveiled an ambitious 2008-2013/14 US$11B programme involving efficiency upgrades, brownfield expansion and greenfield projects to increase aluminium capacity by 2 million, alumina capacity by 7 million, bauxite capacity by 12 million tonnes, and a large new energy project in Russia with 70% and 85%, respectively in aluminium and alumina emanating from greenfield capacity. Incidentally, the programme includes expansion of annual bauxite production capacity at Bauxite Company of Guyana from the 2007 level of 2 million tonnes to 3.2 million tonnes by 2010. Paradoxically, the announcement of this programme came about nine months before the start of the current meltdown in the aluminium industry, the then RUSAL CEO predicting an aluminium price of US$4000 per tonne for 2008. Since that time RUSAL’s controlling shareholder and now UC RUSAL’s CEO, in a February 1, 2009 statement predicted that demand for aluminium is expected to fall 25% this year and the price which has fallen 60% since the middle of 2008, is expected to remain around those levels for the next seven to ten years. The company has since announced zero profits for 2008 and first quarter 2009, an 11% cut in aluminium and a 30% cut in alumina production for 2009 and hinted a revision of its investment programme. This appears to be setting the scene for a crash of the ambitious programme and a radical change in the timing – 2020 rather than 2013/14 looking suspiciously like the new end date. This does not bode well for Guyana; even Kurubuku could be further delayed and any possible downstream development (alumina, aluminium and hydro) destined for their 2020-2030 investment folder. But the current and projected state of the aluminium industry is not the only, and probably not even the major impediment to RUSAL’s ability to implement its medium-term development programme.
Reports on the company’s financial position present a depressing picture of a company mired in debt which even its controlling shareholder admits cannot be paid at this time, a company engaged in several costly lawsuits, and threatened with repossession of assets it acquired through privatization deals with at least three governments. Statements by executives of the company admit indebtedness of between US$14 and US$17B, while one analyst estimates the indebtedness (principal, interest, possible penalties, and lawsuit and contingency provisions) to 70 international and several Russian banks and private investors, well in excess of US$20B. RUSAL is currently involved in all forms of debt restructuring negotiations, including extending the repayment period by seven to eight years and the pledging of assets to the Russian government, measures that could result in a dramatic change in its ownership and financial structure and consequently negatively impact its future investment plans. RUSAL’s controlling shareholder is also engaged in a lawsuit with one of his former partners who is claiming US$2B billion for a 20% share of the company’s assets and also a claim of US$2.8B for damages from the BFC group, the competitor in the privatization bid for the ALSCON aluminum smelter in Nigeria, a claim which is reported to have the backing of the Nigerian government.
The company’s ability to access financing for its projects and even proceeding with some of them could, further, be seriously jeopardized by the current problems surrounding its acquisitions in Guinea, Nigeria, and Ukraine. The Guinea government has already detained Guinean officials and has decided to initiate legal proceedings against RUSAL to repossess the Friguia alumina refinery, alleging illegality and fraud by Guinean officials involved in the privatization process and accusing RUSAL of paying only US$19M for the facility which was valued by reputable consultants at US$257M and failing to undertake investments in accordance with the terms of the agreement for the privatization of the refinery. Simultaneously with this development, the Nigeria government is investigating the acquisition of a 77.5% share in the ALSCON aluminum smelter by RUSAL for US$250 million together with a plethora of tax and fiscal concessions, in favour of a competitive bid of US$410 million and accusing RUSAL of failure to honour the investment conditions in the privatization agreement.
Further, the status of the Nikolaev alumina refinery in which RUSAL acquired a majority shareholding in 2000 is still in question, with the prospect of repossession by the Ukraine government when the current re-negotiated agreement expires at the end of this year. With expansion of the Friguia refinery and attendant mine, the Kindia bauxite project, and construction of the Dian Dian greenfield alumina refinery in Guinea, and recommissioning and improving the efficiency of the ALSCON smelter in Nigeria included in its medium-term expansion programme, the ongoing investigations, possible protracted negotiations and litigation, could negatively impact RUSAL’s creditworthiness and delay the implementation of those projects, if not lead to some of them being abandoned, to say nothing about the possible repossession of the Friguia and Nikolaev alumina refineries and the ALSCON smelter.
While all these issues could negatively impact on Rusal’s development plans over the next decade, two pronouncements by UC RUSAL’s CEO give serious cause for concern about the prospects for any major developments in Guyana. In a February 2009 statement the CEO said: “I believe in the next nine months we will see a completely different landscape for the aluminium industry, which will stay for the next seven to ten years.” This statement, coming in the context of the developments in Jamaica where the company has since announced the closure of its three alumina refineries and attendant mines in the country, ostensibly for one year, could be just the start of a substantial exit from Jamaica which they and the Jamaica authorities have conceded are uncompetitive in the current market environment.
The more profound statement, however, appears in his April 2008 interview with a Times newspaper correspondent who stated that, despite his group’s rapid overseas expansion, RUSAL’s chief is bullish about Russia, and is quoted as saying: “I see the company expanding mostly in Russia over the future. There are better opportunities here. I’ll invest abroad only in very specific cases, for instance to get into a good coal or bauxite deposit, but when you compare the prices with the same opportunities in Russia, it’s much easier to do it here… Do people really know what’s going to happen in the future in emerging markets in terms of business? Here we feel there is predictability and stability. In my view Russia is the best place to invest in the world right now.”
These statements should not be taken lightly. I fervently hope that Guyana in general, and Kurubuku in particular, would not become casualties of this complex calculus.
Yours faithfully,
Sylvester Carmichael
