The scope of Ma’aden and Alcoa’s $7.5 billion Ma’aden Alu­minium project is unprecedented in the sector. The deal is part of a $10.8 billion joint venture to develop the GCC’s first vertically-integrated mine mouth to milled end-product complex. But despite its size the project was largely placed within the local lending market and was twice oversubscribed, with lend­ers allocated an average of just 40% of their commitments.

The overall complex includes a bauxite mine with an initial capacity of 4 million tpa, an alumina refinery with an initial capacity of 1.8 million tpa; an aluminum smelter with an initial capacity of ingot, slab and billets, of 740,000 tpa, and a rolling mill, with initial hot-mill capacity of between 250,000 and 460,000 tpa.

Phases 1a and 1b of the scheme com­prise the $5 billion smelter and the $2.5 billion rolling mill. The smelter will pro­cess alumina bought at market prices from Alcoa, initially, and then a vertically-in­tegrated bauxite mine owned by the joint venture. Bauxite feedstock for the refinery will be transported by rail from the new mine at Al Ba’itha, near Quiba, in the north. Lenders are taking price and margin risk on both alumina and the aluminium produced, which the sponsors will buy under a long-term agreement at the spot London Metal Exchange (LME) price. Both the feedstock and offtake contracts were negotiated on an arms-length basis.

Power for the smelter will be provided by the Saline Water Conversion Company (SWCC) from what was going to be the 2,400MW Ras al Zour independent power and water project, but which the Saudi government, through SWCC, decided to procure directly, in April 2009 after rejecting the winner’s bid.

Lenders were comfortable with the SWCC power plant because its owner is an arm of the state and because the plant has an extremely high level of redundancy. That is, there is sufficient power for the projects if three generating units are off line – the normal level of redundancy is one or two units. The projects could draw power from the grid in the event of an outright power plant failure, although most banks did not seriously entertain this in their base case.

The deal compares favourably with previous smelter financings as the completion support is time-limited and there is no debt buy-down guarantee, which significantly reduces the sponsors’ contingent liabilities.

The beverage-can grade rolling mill was more challenging for lenders, because of the long proving period in which consumer products must be tested before mass production. This means that while the plant may be technically complete there can be a long ramp-up period with minimal project income.

To overcome the repayment concerns during ramp-up, the financing introduces the concept of opex support whereby sponsors support operating cash flows of the borrower until the prove period has passed, allowing for limited recourse financing despite the protracted ramp-up period.

The mill uses aluminium from the smelter bought at market prices and the output is fully merchant. The economics are strong given the scale, the proximity to feedstock, other low input costs and the fact that it is the only beverage-can grade rolling mill in the region and has a strong import-substitution cost advantage.

The $2.5 billion rolling mill is financed on a debt/equity split of 50/50. It is the first ever beverage-can-stock-focused rolling mill financed on a limited recourse basis. The debt financing of the mill consists of a $278 million riyal Islamic procurement tranche, $821 million loan from the Saudi Public Investment Fund (PIF) and a $160 million equivalent loan from Saudi Industrial Development Fund (SIDF). The debt is based on a sculpted 16-year repayment profile with an average life of around 12-years. Cost overrun support from the sponsors will re­main in place until the earlier of tech­nical completion and a technical completion longstop date.

The $5 billion smelter is financed with a debt/equity split of 65/35 – higher leverage than the market benchmark of around 55/45. There is $1.7 billion in equity and $3.3 billion in debt. The debt consists of a $1.3 billion loan from PIF, two facilities worth a combined $320 million from SIDF and a $1.636 billion conventional debt tranche. All non-SIDF facilities have a 16-year tenor, and, unlike the rolling mill, a 25% balloon and a 30% cash sweep starting at year 8. The average life of the loan is around 12 years.

The $1.636 billion commercial debt breaks down into five tranches: a $140 million dollar conventional tranche, a $143 million dollar Islamic procurement, a $50 million dollar Islamic wakala, a $943 million riyal Islamic procurement, and a $160 million riyal Islamic wakala.

Pricing on the deal remains undisclosed, although the riyal-denominated debt is priced more cheaply than the dollar tranches, and the rolling mill debt is slightly more expensive than the smelter debt. The sponsors looked carefully at the trade-off between riyal and dollar debt, between cheaper debt and the natural hedge of dollar-price LME aluminium prices. PIF, which owns 50% of Ma’aden, was a large and natural provider of dollar debt for both projects. 

Ma’aden Aluminium smelter and rolling mill
Status: Commitments signed June 2010, financial close 30 November 2010
Description: Limited recourse financing of aluminium smelter and beverage can stock rolling mill
Sponsors: Saudi Arabian Mining Company (74.9%), Alcoa (25.1%)
Financial advisers: Standard Chartered and Riyad Bank (project advisers), BNP Paribas (Alcoa)
Mandated lead arrangers for the smelter: Standard Chartered, Riyad Bank, BNP Paribas, Alinma, Aljazira, Al Rajhi, Apicorp, Arab National Bank, EDC, Emirates Bank, Saudi Fransi, Saudi Hollandi, NCB, Samba, SABB 
Mandated lead arrangers for the rolling mill: As above plus Saudi Investment Bank
Public lending institutions: Saudi Public Investment Fund and the Saudi Industrial Development Fund
Sponsor legal counsel: Baker & McKenzie
Lender legal counsel: Clifford Chance
Market consultant: CRU
Technical consultant: Hatch
Insurance consultant: JLT