Mr President, in the interests of greater transparency and accountability I would like to update the house on the current status of the financing arrangement for Nyrstar’s redevelopment project of its smelter in Port Pirie.
The upgrade of the smelter occurred under a financing arrangement agreed with the former government. As part of the financing arrangement, the former government issued a “Counter-indemnity” (in effect a State government guarantee) for the $291.25 million in external finance raised by Nyrstar for the redevelopment, which is recorded as a contingent liability in the State's accounts. I will refer to this indemnity as the government guarantee.
Nyrstar has completed construction and begun the two-year process of ramping up the new multi-metals facility.
Nyrstar publicly reported in its interim management statement of 3 May 2018, that the ramp-up and operational performance of the new smelter was progressing significantly better than expected, and that the earnings uplift was anticipated to start flowing from the project, with at least $60 million expected in the second half of this year, $145 million expected in 2019 and $190 million expected in 2020.
This significant redevelopment will steadily improve environmental outcomes especially reductions in lead-in-air levels, which would not have been possible using the ageing assets. This is a welcome outcome for Port Pirie and South Australia – for employment and the community.
Earlier this year, prior to the March election, Nyrstar’s Board of Directors and senior management were in Port Pirie to celebrate the completion of construction and stated that the upgrade to the Port Pirie Smelter was absolutely critical to the company’s future
Mr President, the redevelopment is welcome and is reported by Nyrstar as progressing well.
However, the terms of the external financing arrangement for the redevelopment, which includes the government guarantee issued by the former government for the external finance raised, are unusual. To accommodate requirements of the Nyrstar consolidated group, Nyrstar Port Pirie has the discretion, but no obligation, to make repayments under the external financing arrangements.
The repayment of the $291.25 million to the external financiers, and the government guarantee of this repayment occurring, is a major exposure for the taxpayers of South Australia.
A targeted repayment schedule was documented and the structure includes various economic compulsions to incentivise repayment.
On 28 May 2018, Nyrstar is scheduled to make the first repayment in accordance with this schedule. The Government has been advised that Nyrstar’s Board of Directors has decided this payment will not be made, due to cost overruns, delays in completion of the project and reaching full production, and the consequential impact on earnings uplift from the project, to Nyrstar.
Nyrstar has notified the Government that the payment of $37 million scheduled for 28 May 2018 will be deferred.
The deferral of this $37 million payment was surprising as Nyrstar, through its financial disclosures, has repeatedly and publicly indicated it intended repaying the funding arrangement in accordance with the agreed schedule of payments.
In the company’s 2017 audited financial statements released in February this year, and in the latest quarterly interim management statement, released two weeks ago, Nyrstar clearly indicates an intention to adhere to a five-year schedule of repayments, beginning in 2018 and concluding in 2022.
It is also surprising as Nyrstar last year gave a written commitment to the former government that Nyrstar did not, at the State's expense, seek to take advantage of the unusual financing terms and that it was Nyrstar’s intention to redeem the Perpetual Securities in accordance with the targeted amortisation schedule.
Nyrstar’s Board of Directors has taken this action, when Nyrstar Port Pirie has the financial capacity to make this $37 million payment.
Mr President, Nyrstar’s decision to defer the first of these repayments has prompted the State Government to demand in writing that Nyrstar Group members comply with their obligations under the transaction documents, including an obligation on Nyrstar Australia, another of the group’s Australian entities, to ensure that an amount of money, equal to any deferred amount, is transferred to and held in Nyrstar Port Pirie.
Nyrstar Australia has not honoured this obligation and the Government has issued a demand on Nyrstar NV in Belgium, the ultimate parent company, to pay those funds directly to Nyrstar Port Pirie.
Nyrstar has advised that it considers that it is not compelled to transfer this money, a position the State does not accept. As such we find ourselves in dispute with the real prospect of litigation.
It is of significant concern that Nyrstar advised the State of its deferral of this payment three days before its quarterly interim management statement disclosure to the market showing the opposite.
Nyrstar has also indicated it is likely to defer additional payments until November 2019, estimated at around $81 million, that is, $118 million in total, which is likely to compound the exposure of South Australia’s taxpayers to the guarantee issued by the former government.
As Treasurer, I intend to defend the State’s position and we as a Government reserve our right to take all steps that may be necessary to ensure Nyrstar meets its contractual obligations.
I will provide further information to Honourable Members as it becomes available.