Nyrstar Waves Stick at Australian State Over Smelter Repayments

The South Australian state government is threatening legal action against global metals-processing company Nyrstar (EBR:NYR). The company has said it will miss a AU$37-million loan repayment for the Port Pirie smelter redevelopment.

But the Belgian metals processor has quickly hit back, claiming it is within its rights to defer payment — it says it’s honoring its agreement with the previous government and has pointed out how many people it employs in the Australian state, which historically lags behind others economically.

Under a previous government, South Australia agreed to underwrite a guarantee for the AU$291.25 million in external finance raised by Nyrstar for the AU$660-million redevelopment of the facility, which is one of the world’s largest lead-processing facilities and the third-largest silver producer.

The facility was redeveloped to convert it to an advanced metals recovery and refining facility with the capacity to process a wider range of feed materials, including zinc, and to improve air quality in the South Australian city, which has struggled with lead pollution in the past.

Treasurer Rob Lucas told South Australian parliament on Thursday (May 17) that Nyrstar has informed the government that it plans to defer repayments to its financiers until November 2019 — 18 months after the South Australian government expected the first repayment.

“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,” said Lucas.

“The deferral of this AU$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,” he added.

Nyrstar was quick to respond, announcing that it is well within its rights to push back repayment.

“In line with the funding agreement with the South Australian Government, Nyrstar has full discretion to defer payment of the perpetual securities,” the company said in a statement.

“… The project construction was delayed by 18 months and was also subject to significant cost overruns that were funded entirely by Nyrstar. The delay in the start of the ramp-up is impacting the realization of cash flows from the project relative to the timeline contemplated at the time the financing arrangements were finalized in 2014,” it added.

“Nyrstar has not breached any agreements by delaying the payment and is in full compliance with its contractual obligations relating to the financing arrangements.”

According to Nyrstar’s most recent management statement, Port Pirie — one of seven metals-processing plants around the world operated by the company — was ahead of schedule with its ramp up following its opening in January this year.

Nyrstar CEO Hilmar Rode said in the statement that the company has made “substantial progress” with the ramp up.

The statement also says the company expects increasing returns from the smelter as the two-year ramp up continues. “Earnings uplift in-line with guidance provided at the start of 2017 against a 2016 basis, with at least EUR 40 million expected in H2 2018, EUR 100 million in 2019  and EUR 130 million in 2020.”

According to Lucas, this means there was no reason the company should defer repayments to the South Australian government, with the underwritten loan sitting in the government’s budget as a liability.

“Nyrstar has advised that it considers that it is not compelled to transfer this money, a position the state does not accept,” he said, adding that there is a chance the government might have to enact litigation to secure the repayments.

The tiff has set South Australian politicians off, with the agreement between the government and Nyrstar signed by a political party that is now in opposition following a state election in March.

In parliament, Lucas described the deal with Nyrstar as unusual for not requiring a set schedule for repayments to the government — something his predecessor as treasurer, Tom Koutsantonis, rebuked.

Koutsantonis also said that the government is risking a battle with a company that employs hundreds of South Australians “to try and make a political point.”

Nyrstar appears to be in agreement with Koutsantonis, who signed the deal with the company. In its response to the government, the company not-so-subtly points out that its Port Pirie operation “directly employs more than 700 people,” and that money invested in the project by the company “will ensure the long term sustainability of the operation for the people of South Australia.”

The Port Pirie smelter has been in operation for 150 years and is a key employer in the state’s Spencer Gulf region. Port Pirie is one of three industrial cities that form points of the “iron triangle” — a region dependent on mining and refineries.

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Securities Disclosure: I, Scott Tibballs, hold no direct investment interest in any company mentioned in this article.