Ma'aden Aluminum Project Oversubscribed As Saudi Banks Step Up

Ma'aden Aluminum Project Oversubscribed As Saudi Banks Step Up

The second phase of the Saudi Arabia Mining Company’s (Ma'aden’s) $10.8bn integrated aluminum project has come in four times oversubscribed after domestic banks stepped up with big commitments, MEES understands. The second phase, which includes a bauxite mine and alumina refinery, follows a smelter and rolling mill which secured funding last year (MEES, 6 December 2010). It is not surprising that the Saudi banks showed strong appetite for the transaction, because they remain liquid. For the sector, the loan to deposit ratio fell to 76% in April, which is its lowest level in six years.

The Saudi banks’ enthusiasm for the transaction contrasts with that of international banks, which are struggling to secure approvals internally for project finance, because it generates long term illiquid assets at a time when they are preparing for the Basel III banking regulations (MEES, 11 August). These are pushing up capital requirements and will come into force in 2015-18. Banks are finding it cheaper to adjust downwards their risk weighted assets, rather than continue to add long term assets and at the same time have to hike their capital.

“They are becoming allergic to project finance, not because the credit is bad, but because the assets it generates are illiquid when they are wrestling with what the regulators are doing,” commented one banker. He said that the world has “turned upside down” since 2004 when the international banks could lend at wafer thin margins of 50 basis points (bps) to the Sharq petrochemical project in Saudi Arabia, which was cheaper than the local banks could manage. Now international banks are still facing elevated funding costs after the global financial crisis, and with Basel III looming on the horizon, cannot match the low pricing of the Saudi banks on transactions, he noted.

Many international banks were continuing to de-leverage in the wake of the global financial crisis, and while things had been improving from the immediate aftermath of Lehman Brothers’ collapse in September 2008, which hit all markets hard and led to a constrained 2009, lenders are now facing Basel III. This means that many international banks will not come into transactions unless a long term relationships is at stake, said bankers. On phase one of Ma'aden’s aluminum project the margins (profits made by banks) on the Saudi riyal tranche were 165-245 bps and on the dollar tranche were 205-275 bps (MEES, 12 July 2010). The phase two pricing is lower for both tranches, MEESunderstands. The project is expected to reach financial close in late September, given the usual quiet summer holiday period, and slow-down for Ramadan in August.

Phase two of the project will cost $3.6bn, with the financing split into 60% debt and 40% equity. Saudi institutional lenders the Public Investment Fund (PIF) and Saudi Industrial Development Fund (SIDF) are expected to provide $1bn and SR600mn ($160mn) respectively, and banks will contribute $1bn.The project will initially produce 1.8mn tons/year of alumina, ramping up over three years to 2.1mn t/y, while bauxite production is pegged at 4.25mn t/y. The bauxite will be transported by rail from the mine in Zabirah to the refinery at Ras al‐Zour on the east coast. The railroad is the same one being used by Maʹaden’s phosphate operations. Under construction for some time, it was recently completed. The integrated nature of the aluminum complex and the kingdom’s low energy costs put the average cost of alumina production in the bottom half of the lowest quartile worldwide (MEES, 16 May). However, bauxite consumption to make the alumina will be slightly up on average levels due to the ore’s higher silica content.

Copyright MEES 2011.