Natural resource curse

GE3Adhering to the idea of resource nationalism that characterises the beginning of the Northern plant’s industrial and human adventure, then that of Gwangyang, like some of you I’ve been complicit in what has gradually become a theatre of illusions, at least until I finally asked myself these three questions. Do we have the right to remain silent when we know? Is it legitimate to lie by omission? Are we constrained by a duty of truth? More specifically, isn’t New Caledonia overtly dependent on nickel and internationally fixed commodities prices? To which extent capital structure differs from the financing of industrial projets?
Result of introspection. The ensuing answers took the form of a series of dedicated articles (written in French), all desperate and despairing pieces of writing, but terribly lucid and pessimistic about New Caledonia ability to develop its nickel wealth for the benefit of its inhabitants. From the Northern to the Southern part of a main land blessed with natural wealth, multinational companies built and pay for the processing plants, and therefore control the exploitation of mining resources. They train workers and almost ultimately colonise the minds by bribing the bodies. They secure the contracts for the supply of fuel and raw materials that are necessary for the production of metal for which they hold the exclusive industrial processes and patents. They control both factoring and marketing circuits, cover losses but intend to cash in on the debts of their subsidiaries – and to do so will allow a plundering of the resource based on blackmail to employment. Whether or not it is called a “country’s project” because of the fact of holding 51% equity shares, from North to South, even if it is not elected, it is the world of finance that governs the industry. And it is unfortunately too late to turn back, hit the road and stop the process of turning mining operations into financial liabilities – less than taxing financial profits more than the dividends that are currently exempted by tax stability agreements.
I – A COLLECTIVE FAILURE
Lack of finance and poor governance. This failure is first due to the financial logic that has insidiously undermined resource management to gain control over the real economy. The failure is also due to some brilliant and influential entrepreneurs, now fallen into a state of total megalomania and who think – or rather suggest – that with majority equity of mining companies, Caledonians can simply control expensive industrial projects and maximise benefits for the community. Poor governance is the consequence of exacerbated political rivalries and harsh power struggle which make impossible the implementation of a concerted, effective and coherent industrial strategic model. This failure is due to the cynicism that governs the institutions of New Caledonia on behalf of the general interest, to widely embedded journalism refusing to write in the margins of conventional wisdom, to all of us, because of our lack of vigilance and poor understanding. Indeed, from North to South, whether POSCO and SOFINOR discreetly provide financial aid to cash faltering NMC and SMSP, or the occult nature of Prony Pernod agreements to save SPMSC from bankruptcy, the governing methods are much the same. And if the promises of transparency and consultation remain unimplemented, it is because New Caledonia has definitely lost the means to assert its strategic guidelines on nickel.
The Southern plant. Vale Nouvelle-Calédonie operator (thereafter VNC) continues its production ramp-up and hopes to reach by the end of this year half of its rated capacity which is 30,000 tons of nickel metal in the form of finished and intermediate products. The company has accumulated significant losses and is therefore unable to absorb them so to distribute dividends to its shareholders before several years. This situation explains some of the difficulties encountered by the local shareholder SPMSC, which holds 5% equity associated with a debt, capital and interest, estimated at some XPF 38 billion. SPMSC must pay XPF 8.7 billion to BRGM which sold its shares, XPF 6.2 billion to the French banks that allowed the company to finance its share of capital advances, and XPF 23.4 billion to Brasilian Vale to cover extra funding. Regardless of the political party in power since the opening of and entry in VNC capital in 2006, the three Provinces must rely on the multinational Vale to pay the processing plant but also to make sure the local shareholder can cope with its financial installements. To save it from bankruptcy, the President of the South Province holding the majority in equity, has no other choice but to negotiate further funding from Vale. For what counterparties? This is a case to follow…
The Northern plant. The ramp-up operation of the plant presented as a “national project” poses multiple technical problems. Koniambo Nickel (KNS) systematically revises downward its production targets and hope this time to achieve a quarter of its nominal capacity by the end of this year. As its Capex increases, economic profitability appears less likely and its financial viability will be almost exclusively for the benefit of the partner who provides warranty and safety of the project. It is actually far away from being « the world most competitive processing plant ever » as it has long been described by SMSP Chairman, Mister Dang. In the best cases scenario, this processing plant, whose cost is expected to reach $8 billion (XPF 850 billion), will not generate dividends before 2020. However, taking into account the financial agreements and its low contribution, the local shareholder SMSP will not receive 51% of dividends until 2036. Indeed, it has only financed 3.5% of the construction cost and to do so, has now to reimburse XPF 26.7 billion it borrowed from French banks. SMSP will therefore not be able to pay back its debt with the dividends from the Northern plant. Indeed, KNS is mainly indebted to Glencore which will then finance up to 96.5% of the construction cost and the production ramp-up. Therefore, the majority of cashflows generated by KNS operation will be used to primarily pay back Glencore. This is to say that over the next two decades there will be very little financial returns for SMSP, which nonetheless likes very much to praise itself for not being indebted to his partner…
The integrated offshore plant. The integrated partnership between SMSP and POSCO is not as financially efficient as it seemed to be in the financial projections of the promoters. During the last three accounting years, mining activity has lost exactly XPF 8.8 billion, while manufacturing has generated a net profit of Won 66 534 million, that is around XPF 6 billion. The outcome is actually far from being the « metallurgical goodwill » it was supposed to be, especially since a good portion of the past SNNC profits have not been distributed and are thus not coming back to New Caledonia. In fact, it is also far from being the “unsinkable profitability thresholds « peddled by accredited journalists who become used to exotic press trips, since the consolidated (mine-mill) showed a loss of XPF 2.8 billion over the three last years. The recent distribution of XPF 2 billion dividends coming from Korea will allow SMSP to cope with its 2015 financial deadlines amounting to some XPF 2.5 billion, but not to carry out the burden of its corporate taxes.
The Doniambo plant. Without building a new coal fired power station (once again postponed), there is hardly any earth shattering news under the Sun for State-controlled SLN with a cost structure that will not allow the main New Caledonian company to generate profits for a few years to come. In 2012, with a $7.95 per pound of nickel, SLN had generated a loss of XPF 4.1 billion. In 2013, at $ 6.8 per pound it had generated a loss of XPF 23.5 billion. In 2014, at $ 7.6, the loss was XPF 4 billion. Currently, given the relentless decline of nickel price and the fact that there is no fundamental reason to support higher prices before next year, it is clear that the local shareholders will not get dividends during the next few years – while small-scale miners and contractors will live continue to live dark hours.
II – THE CONTROVERSIAL GUIDELINES
Taking majority shareholding in SLN? Even if it was still possible, the majority of equity by STCPI will not solve the real problem that is the competitiveness and survival of SLN which owns nonetheless 53% of the territory’s licensed mining area. With nickel price ranging between $4.5 and $5.5 per pound, the company will lose a lot of money, probably between XPF 25 and 30 billion this year. The rise in equity from 34% to 50.1% would therefore provide no more dividends for New Caledonia but would rather impose the obligations of a responsible and solvent shareholder. But despite the incantations of some elected officials citing the benefits of resource nationalism, the territory can neither force ERAMET (SLN’s mother company) to proceed with the exchange option of shares, nor expect the French State to purchase these shares in order to transfer them to New Caledonia.
Developping a synergy between SLN & SMSP? Fostering a win-win situation between SLN and SMSP is a wishful thinking though, very difficult to implement because of heightened antagonisms and total lack of trust. Even if SLN helps SMSP subsidiary NMC to provide low grade nickel ore to Korea, which it does, the ore supply contract between NMC and SNNC is benefiting the Korean partner. The original commercial cut-off grade on which price has been calculated is 2.3% (compared to 2.1% for the Gogokai, now applicable to nickel contents up to 1.8%). Also, taking into account penalties payable by NMC for supplying lower grades, the Caledonian based company buying ore from other local mining companies is forced to sell nickel ore to SNNC at a loss compared to the similar one sold in Japan. And even if the integrated partnership is apparently more profitable than the local transformation of high nickel content, or the export of low grade raw nickel ore to Japan, it is in fine for the benefit of POSCO, not SMSP. Despite its 51% equity, the majority of profits from the Korean processing plant has not returned in New Caledonia. So it’s effectively a bottomless pit!
Forcing small miners and SLN to supply the offshore plant? This latest action plan is increasing POSCO’s competitive advantage, which makes it possible for its subsidiary to reinvest a large part of the profits from the Caledonian ore processing into industrial infrastructures built in Korea. This also allows SMSP and the Northern Province to call a halt to export nickel ore other than those intended to supply the offshore plant, which is a real nonsense. The previous High Commissioner had a poor understanding of the situation, unless his hierarchy  has already incorporated the fact that it cannot be any decolonisation within the nation of France, which would explain the lack of neutrality of the State representatives in the last provincial elections. Forcing other mining companies to supply the offshore plant allow to continue with the illusion of a “win-win partnership » dear to the North Province President. This convenient fiction allows avoiding putting an end to the integrated-though-unbalanced partnership and to get back the old exhausted and polluting mines. Such a situation would seriously undermine his political credibility, along with the one of its allies newly worn within the institutions. It would have been politically incorrect, at least until May 2017 election, as the Northern plant that was able to miraculously work and hold on the line until the presidential visit, cannot not yet survive the test of performance.
III – A CLEAR PROGNOSTIC: FORGING AHEAD
Unfavorable conditions and risky strategic choices. Taking into account the current market conditions, the negatively geared situation induced by mining and metallurgical activities as well as the poor guidelines proposed by conflicting New Caledonian officials, the coming years will be extremely difficult. The Caledonian industry is indeed strongly dependent on an international market deliberately saturated by overproduction in a market where demand is largely controlled by China. Its operating costs are very high and the political climate deleterious. The next few years are going to be particularly difficult for SLN due to sagging demand, low nickel price and the prospects of development of Chinese industry in Indonesia. Difficult also for the two high Capex projects, VNC and KNS, which are struggling to ramp-up and register very important losses. Besides, the situation is particularly difficult for the local shareholders. To avoid the non-repayment of loans, SPMSC will probably be forced to make other occult compromises that will come at a cost of giving up some more natural resources. SMSP is indirectly, but surely affected by the additional costs of the processing plant and the uncertainty that is facing its financial partner. Glencore should indeed sell some of its fixed assets and to reassure both financial and stock markets must undertake a drastic debt reduction of $10 billion before the end of next year. The underlying question is who will take control of Glencore’s nickel assets and therefore of the Northern plant? Because of the delay in KNS ramp-up operation and the poor financial returns from SNNC, SMSP will not get the dividends it once expected, which according to its very optimistic projections would have enabled it to cope with its own financial deadlines under its voluntary although minimal funding in the Northern plant. Getting SOFINOR cash from the last so-called « skimming of SLN mines” will not suffice! Therefore, the willingness of taking over SLN’s mining domain as well as banning exports of raw nickel ore to China and Japan so that to supply Korea, have become requirements for those do-gooders who proclaim the urgent need to nationalise the flight of the territory to better sell its natural resource to foreign interests. That Nickel Doctrine is merely a romantic lie – a flight forward – to fill the latest financial gaps associated with new risky strategic choices. In any case, you will not be able to say anymore that you did not know!
Empty shell or neo-colonialism? Pending the ultimate takeover of SLN’s mining resource by the rise in equity to up to 50.1% or banning export of raw nickel ore to supply Korea, the stakeholders imagine to achieve a hypothetical « economic sovereignty » from the crust of resource nationalism. Instead of proclaiming a moratorium so the Caledonian population could finally digest and appropriate as much as possible a nonetheless relative control of existing industrial projects, the orthodoxy of 51% equity shares try instead to provide SMSP with new mining titles in order to revive a third project with Jinchuan. As with the Korean partnership, this would allow to bring to a joint venture new mining resources for cash under the guise of a mythical participation majority. The purpose is not of course to control the natural resource for the sake of general interest, but to get some cash advance to help the struggling holding company and its subsidiaries. Despite the restrictions imposed by the Bercy Protocol, SMSP could also try to export nickel ore from the Koniambo massif. Politically praised for its pro-independent stance, from a financial point of view, this would however appear to be nothing more than a kite flying practice for the benefit of foreign multinational corporations and their local intermediaries. It would subsequently look like a neo-colonial strategy carried by the institutions for which future generations will pay a high price in terms of financial debt and environmental damage. Land of sharing with the underground littered with blood-colored holes… Our children would then simply need to question ourselves, our junk nationalism, our legendary collaboration and our lack of courage hidden behind the refusal to know!

 

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