Emal moves up a gear

PFI Middle East & Africa Report 2013
13 min read

Emirates Aluminium is a major joint venture of the two largest Emirates of the UAE, Abu Dhabi and Dubai. It is located in Taweelah in the Emirate of Abu Dhabi approximately halfway between the two capital cities on a 6km2 site containing two potlines, 756 reduction cells, a casthouse, and a power plant. By Markus von Haniel (adviser) and Natalia Bajerlajn (associate) in Mubadala’s structured finance and capital markets team.

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In 2010, with Phase I of Emirates Aluminium already in full operation, the Emal team, supported by shareholders Mubadala and Dubal, began writing the second chapter of the Emal story – a US$4.5bn Phase II expansion.

One to start with

Emal (a US$6bn company with just under 2,000 employees for Phase 1 alone), is already a major producer and supplier in the global aluminium market. The smelter was designed to produce 742,000 tonnes of aluminium per annum, which was exceeded in its first full year of operation. Approximately 1.4m tonnes of alumina per year are supplied to Emal from leading suppliers from which Emal, with the benefit of Dubal’s highly efficient DX technology, produces high purity aluminium products for export around the globe. Emal’s access to long-term competitively priced gas supply helps put it comfortably in the first quartile of the world’s smelter fleet.

Dubal, with more than 30 years of experience in the sector, acts as Emal’s exclusive agent in the marketing, distribution and sale of all of Emal’s aluminium products. In June 2013 Emal had reached cumulative production of 2.2m tonnes of aluminium – the shortest period from start-up that a new smelting operation has reached this milestone.

The Phase I project was financed from the proceeds of debt facilities provided by a syndicate of commercial banks in December 2007 and loan facilities subsequently arranged with three export credit agencies in July 2010. Raising ECA facilities at this stage in the construction phase and post close of the commercial loans was, as far as the sponsors are aware, the first time multiple ECA tranches were added to a fully documented limited recourse financing.

As can be imagined, this process was not without its challenges but by the middle of 2010 the capital structure of Emal was secured. The long-term debt facilities, which benefited from sponsor completion undertakings, were complemented by funds provided by the shareholders (initially bridged with a six-year US$2.8bn equity bridge loan) as well as net cashflows generated by Emal’s own operations.

In October 2012, the final five pieces of the Phase I puzzle were put together and, as a result of passing a rigorous set of physical, operational, environmental, legal and financial tests and assessments, Phase I achieved financial completion.

Growing stronger

Emal had always been envisaged as a two-phase development and design, documentation, commercial and financing agreements were all crafted to allow for expansion. Completed ahead of schedule, under budget, and operating above nameplate capacity, Phase I was a great success and the perfect base from which to launch Phase II.

In early 2010, Emal and the sponsors started to focus their efforts on the second phase of the project, designed to bring total production capacity to approximately 1.3m tonnes of aluminium per annum. In June 2011, the investment decision was taken and contracts started to be put in place.

Based on the experiences of Phase I, Emal targeted to achieve the commissioning of the first and last reduction cells in December 2013 and August 2014 respectively. Upon completion of the expansion, Emal will be one of the largest single-site aluminium smelters in the world and will employ Dubal’s latest DX+ technology to optimise its production.

The expansion not only involves the growth of smelting capacity through the longest potline in the world (1.7km) but also associated infrastructure including an expansion of the power generation capacity by 1,100MW and the ability to provide liquid as well as cast metal products to satisfy growing demand from the developing downstream industrial sector in the Khalifa Industrial Zone in Abu Dhabi (KIZAD).

The knowledge gained in delivering Phase I is already reflected in the current status of the Phase II, which is progressing very well – first hot metal was achieved on September 15, approximately three months ahead of schedule, with the project achieving an impressive 40m man-hours without a lost time Injury.

Once fully operational, Phase II will produce a combination of value-added products including billets, slabs and foundry ingots.

Emal has repeated its approach from Phase I of securing long-term alumina supply for Phase II at competitive prices that are substantially linked to LME aluminium prices. Emal’s position as one of the lowest cost producers in the world means that it will have a greater ability than most other aluminium producers to withstand any short-term margin squeeze. With Emal’s strong cost position, and with global aluminium demand expected to grow by approximately 4%–5% per annum between 2010 and 2030, the company is well positioned to maintain its leading position in the market.

Round 2

To finance Phase II, Emal and the shareholders had to face a new reality – it was no longer the heady days of 2007, with ample liquidity and banks generously lending at low margins. The new financing was subject to a detailed due diligence process and a tightened market. But Emal was already a well-recognised name, a brand the financial community was interested in supporting. To achieve its financial targets, Emal and the sponsors’ plan was to use only third-party funding and pre-completion revenues to fund the completion of Phase II.

The sponsors always envisaged multiple sources of liquidity for the Emal Phase II financing, including ECAs, commercial banks and, subject to market conditions, an international capital markets issuance. The work on the financing documentation started in February 2011, building on the relationship established with the Phase I ECAs, Coface, Hermes and US Ex-Im, around the same time as the sponsors executed the Phase II engineering, procurement and construction management agreement with SNC Lavalin.

It was viewed as key to the success of the transaction to approach the bank market only once a deal had been struck with the ECAs, as banks could take comfort from the robustness of the proposed financing structure and comprehensive ECA due diligence process. The exception was the late entry of K-Exim, which joined the existing ECA group for the Phase II deal almost a year later, working quickly and efficiently to catch up with the other three. As the discussions with the lender community progressed and other mega-deals reached close, it became apparent that Emal could benefit from yet another liquidity pool – Islamic finance, which eventually formed part of the final financing.

Early signs of success

A market sounding was undertaken at the end of the first quarter of 2012 that demonstrated significant appetite for the transaction, with liquidity offered by local, regional and international commercial banks and Islamic finance providers exceeding the Phase II’s total financing needs of US$4bn. The less expected outcomes of this process were the re-emergence of appetite from some European-based banks, which had effectively exited the project finance market post the 2007 crisis, the quantum of support from individual local banks, and true incremental liquidity from Islamic finance providers.

Following a launch to the bank market with a full suite of documents and due diligence, commitment letters with 22 institutions were signed in December 2012 for a total of almost US$5bn. The goal – to leverage Phase II, and effectively the full project, without shareholders having to inject new equity – was within reach. Affirming the sponsors’ strong belief, and validated by the lenders themselves, good projects with robust economics and strong sponsors will always be supported by local and international institutions, particularly if at the time of launch there are few large, quality projects in the market.

The constraint

The structure of the Phase II financing had to meet the requirements of the existing Phase I finance documents. These required that Phase I and Phase II each be ring-fenced for cashflow and security purposes until Phase II completion. As a result, the Phase II lenders have no recourse to any Phase I project assets or cashflows until Phase II completion. Instead, they benefit from several completion guarantees provided by the shareholders until Phase II completion.

Prior to Phase II completion, the Phase II lenders also have first priority security interests over certain Phase II assets. From Phase II completion, the Phase I and Phase II financings will merge into one, with all debt ranking pari passu and sharing pro rata in a common security package. The Phase II transaction also bears some residual characteristics of pre-crisis times, having managed to retain some of the financing parameters agreed back in 2007.

One aspect of the Phase II financing that was impacted by the experience of Phase I was the Phase II completion-testing, where lenders and their advisers leveraged the smelter experience they had gained first hand to define a significantly more prescriptive process and stricter standards for technical completion.

Despite built-in flexibility allowing for Phase II financing, and the commencement of sponsor funded construction before the second financial closing, substantial amendments to the Phase I documentation were unavoidable. The substantial overlap of the lender groups on Phase I and Phase II allowed a holistic view to be taken by most parties.

Emal signed a US$4bn Phase II financing in March (US$3.4bn commercial and Islamic tranche) and May (US$0.6bn ECA tranche) and Emal and the sponsors’ will continue to assess the capital markets for attractive opportunities to further optimise the project’s capital structure.

The complexity of the Phase II financing set it apart from other deals. The Phase I financing documentation, with 30 banks and three export credit agencies, had to be revised to accommodate a slightly different lending group, with an additional export credit facility, a 17-bank conventional facility and a three-bank Islamic facility. Emal and the sponsors’ desire to retain the flexibility for a possible project bond issuance made achieving alignment with all lender groups even more challenging.

One of the key challenges and critical success factors in such a complex transaction was efficient management among shareholders, financial and legal advisers, various lender groups, lenders’ consultants and other stakeholders. In every multi-party project, particularly of this size, it is a significant task on its own, but with continuous dedication and support, Emal achieved another great result. Commitment from all parties helped Emal continuously succeed on both fronts – Phase I operations and Phase II construction while managing to remain dedicated to its world-class safety record.

What the future holds

A significant element of Abu Dhabi’s long-term economic strategy involves the expansion of its industrial base, including building basic, export-oriented large-scale industries. In that regard, Emal is an important strategic initiative for the UAE and is a cornerstone of Abu Dhabi’s economic diversification and industrialisation policy. Emal represented the first major industrial joint venture between the Emirates of Abu Dhabi, through its investment and development firm Mubadala, and Dubai through Dubal.

In June 2013 this initiative took on a new form – Abu Dhabi and Dubai announced that they were combining forces through a merger of their aluminium manufacturing capabilities into a new company, Emirates Global Aluminium (EGA), with plans for significant local growth and international expansion, creating the world’s fifth-largest producer with an enterprise value of US$15bn. Stay tuned…