Sources say officials at one of Syed Mokhtar’s companies are keen on putting up a smelter to take advantage of the power produced by the Bakun hydroelectric dam, which is expected to start generation next year.

It is believed that a proposal, which is at the preliminary stage, is being worked on via Malakoff Bhd, which comes under the umbrella of Syed Mokhtar’s MMC Corp Bhd.

This is not Syed Mokthar’s first attempt to set up a smelter in Sarawak, nor is it his first brush with Bakun.

In 2002, Syed Mokhtar’s company Smelter Asia Sdn Bhd, put forward a proposal to build a plant with a production capacity of 500,000 tonnes per annum, at a cost of about US$1.5 billion to US$2 billion.

In September that same year, another Syed Mokhtar vehicle — GIIG Capital Sdn Bhd — put forward a proposal to Ministry of Finance-owned Sarawak Hidro Sdn Bhd to buy its 60% stake in the dam.

However, neither proposal panned out as Syed Mokthar’s partners from Dubai pulled out and the proposal to gain ownership of the Bakun dam was allowed to lapse. There is also no telling how successful Syed Mokhtar will be this time around as there is already a proposed smelter in the works.

In 2007, mining giant Rio Tinto Alcan tied up with influential Cahya Mata Sarawak and announced plans to build a smelter in Sarawak with an annual capacity of 720,000 tonnes, expected to cost some US$2.7 billion. 

Earlier, the smelter had been expected to be operational by 4Q2010. However, a combination of the global financial crisis and trimming the fat at Rio Tinto has left the project in limbo. But, Rio Tinto’s spokesman says the project is still ongoing.

At the moment, Bakun’s current owners — Sarawak Hidro Sdn Bhd, a Ministry of Finance (MoF) outfit — has its hands full, funding the much-touted high voltage undersea cable project, estimated to cost RM9 billion.

While it is admittedly still early days yet for the consortium behind the cable project — which comprises Tenaga Nasional Bhd (TNB), Sarawak Energy Bhd and the federal government — this has not stopped speculation as to what form the funding will take.

Among the questions posed are whether the government will issue local bonds, opt for a loan from the Japan Bank of International Cooperation (JBIC) or from another export credit agency.

According to sources, the consortium’s priority is on securing funds from the local market but then the concern is whether there is sufficient liquidity to absorb a funding need of this size.

It should be pointed out that the offer from JBIC was among the earliest funding options when the proposal to wheel power from the 2,400mw Bakun dam to Peninsular Malaysia turned serious after the Cabinet gave its go-ahead for the project early last month.

But speculation is rife that the consortium was not looking at taking up the JBIC loan, which comes with a number of strict requirements and the likelihood that the job will be given to a Japanese company.

However, a TNB official refutes this, stating that the JBIC loan is very much on the table.

“The consortium, at this point, is still weighing its options and the JBIC loan is always an option,” says the spokesman. The spokesman adds that representatives from the organisation have been asking the consortium for documentation concerning the project, such as pre-feasibility studies.

According to an industry source, financing sourced from the domestic banking sector would boil down to the cost of electricity when it lands in the peninsula.

Previously, TNB was looking to buy power from Bakun if the landed power cost is below 18 sen to 20 sen per kWh, a rate it feels makes the project bankable. However, this view is not shared by all in the power sector.

While the cost of electricity will be one of the deciding factors as to whether the consortium will take the JBIC loan, there are other requirements to consider. According to reports, JBIC has said it would need to be involved directly in any project that it finances, with strict guidelines on environmental and social concerns.

The TNB spokesman dismissed the notion that the JBIC loan is unattractive because it comes with restrictions. The official says the issue of foreign exchange (forex) could become a concern.

“As with any foreign currency loan from an export credit agency like JBIC, there is always that element of forex risk. Saying that, there are ways of managing it,” says the spokesman.

Of the three parties in the consortium, none is more aware of the consequences of having high exposure to foreign currency debt than TNB. For 1HFY2009 ending Aug 31, the national power provider chalked up some RM1.56 billion worth of unrealised forex losses, which resulted in the company being in the red in its first quarter.

An industry observer notes that funding the project through bonds is looking like the more attractive option, given how rates have dropped over the past few months.

The good news is that the multibillion ringgit project is unlikely to put a strain on the balance sheets of either TNB or Sarawak Energy. Both state power providers are only taking associate stakes in the undersea cable project.

To recap, the high voltage undersea cable project will be operated by the yet unnamed consortium, with no one party holding more than a 50% stake. As for the dam itself, TNB and Sarawak Energy will lease the dam from its owner, Sarawak Hidro. The Bakun dam is due to turn on its first turbine by the end of 2010.

This article appeared in the Corporate page of The Edge Malaysia, Issue 757, June 1-7, 2009.