Olam Sets Up $200 Million Sugar Venture in Nigeria

Olam International Ltd., a commodity supplier backed by Singapore’s Temasek Holdings Pte, plans to set up a $200 million sugar-refining venture at a port in Nigeria to tap growing demand in the nation.

Olam will have an 80 percent stake in the operation with the Lababidi Group, an African company with interests ranging from wheat milling to port real estate, holding the rest. Half the investment will be debt-funded, with the remainder contributed by each partner in line with their equity, Olam said today in a Singapore stock exchange statement.

Olam is banking on Nigeria, Africa’s second-largest sugar consumer, maintaining demand that’s grown at an annual average of 4.2 percent in the last six years to 1.6 million tons in 2009. Nigerian sugar use may jump to as much as 2.2 million tons in 2013 or 2014, while the state’s 44 percent duty on imports of the refined sweetener favors local output, Olam Chief Executive Officer Sunny Verghese said.

“There’s a very good chance we’ll even increase our capacity” in the Nigeria venture three to four years after Olam brings the 450,000-ton project on line in 2013, Verghese said today on a conference call.

The project will combine land on Tincan Island, Lagos, with the port concession rights of Lababidi. Work to reclaim three hectares of land and port development will help Olam with imports of other produce such as wheat into Nigeria, offsetting costs in other units, Verghese said.

Global sugar supplies are set to fall short of demand for a third consecutive year after bad weather damaged crops in some of the biggest producing countries, Czarnikow Group Ltd. said on Nov. 29. The deficit may be 2.8 million tons for the 12 months through September 2011, according to the London-based broker.

Sugar consumption will jump to 200 million tons by 2020, according to Lindsay Jolly, a senior economist with the International Sugar Organization. The organization estimates demand will rise 2 percent a year for the next decade.

The sugar for the refinery, with a daily capacity of 1,500 tons, will be sourced mainly from Brazil for sale in Nigeria and other West African nations, Olam said. Among potential local buyers would be PepsiCo Inc. and Coca-Cola Co.

Nigeria’s two rival sugar refiners, with about 1.2 million tons in capacity in total, may bring another 450,000 tons on line by the time Olam begins its project mid-2013, Verghese said.

Positive Impact

“The venture will have a positive impact, but I doubt that it will stand out in terms of earnings across Olam group as a whole,” Ben Santoso, an analyst with DBS Vickers Securities, said by phone.

The Nigerian venture’s operating costs are forecast by Olam at about $40 per ton, which the company estimates to be 20 percent below costs at current facilities in Nigeria. The new plant may provide a 38 percent internal rate of return on equity. It will also operate with a 27 percent margin of earnings before interest, tax, depreciation and amortization over sales, Olam said. That compares with a 5 percent Ebitda margin for the group as a whole last year.

The Singapore supplier is entering into the venture less than a year after buying Lababidi’s Crown Flour Mills. Olam has held preliminary talks with “our core banks” on raising the loans for the sugar refinery and may involve Nigerian lenders in the deal, Verghese said.

Olam rose 3.3 percent to S$3.17 by 2.45 p.m. local time on the Singapore exchange. Shares have gained 19.2 percent this year, compared with a 10.6 percent gain in the benchmark index.

South Africa is the Africa’s biggest sugar consumer.

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