Noble to inject over $178m into loss-making alumina refining firm

But there are positive catalysts in the near term.

After successfully divesting its agribusiness arm, Noble revealed that it will acquire a 55% interest in a currently loss-making alumina operation in Jamaica for $178.23m (US$140m).

According to Barclays, the operation has two catalysts to improve medium-term economics: first, Atlantic alumina prices are rising, and second, use of self-owned power could reduce production costs in the next three years, for which Noble will supply the coal.

“Apart from the planned operational turnaround, the increase in alumina prices is likely to offer a near-term boost for the profitability for Jamalco. While we expect the overall alumina market to see pricing tailwinds in the medium term, alumina prices in Atlantic markets are likely to see a higher increase due to the ongoing trend of a narrowing discount to Pacific prices and increase in alumna prices,” stated Barclays.

Here’s more from Barclays:

Jamalco acquisition is an attractive deal: US$140mn for 0.8 million tonnes of attributable capacity implies an acquisition price of US$180/t, which is much lower than the replacement cost for alumina (US$500-800/t, on our estimates). Additionally, Jamalco has plans to set up a self-owned power plant where Noble will provide financing help and also supply coal.

A reduction in power costs – which currently constitutes 50-60% of total costs – could significantly improve the operation's cost competitiveness in next three years, in our view. A key longer-term optionality for Noble is access to the bauxite trading market with over 1.5-2 billion tonnes reserves, which could be economically exported in the medium to long term.

Alumina market has attractive dynamics in medium term:Attractive investment case at compelling valuation: We believe Noble has multiple catalysts for a valuation- and earnings-led rerating; the recently closed agri disposal deal was one such catalyst. Debt reduction of US$3.4bn could lead to an estimated cost saving of US$175-185mn. We regard valuation at 8.6x 2015E P/E as attractive.