FIIG Research
Mackay Sugar Limited
27 March 2014
Mackay Sugar Limited
Key financials – HY to 30 Nov 2013 (A$m)
Executive summary

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Mackay Sugar Limited (MSL) is the second largest producer of
raw sugar in Australia. In addition to raw sugar, the company
earns revenue from sugar refining, electricity sales and other
sugar bi-products
The company traces its roots back to 1883 with the construction of
the Fairleigh Mill. Its key assets are located in the region
surrounding Mackay in Central Queensland. In 2012 the company
added the Mossman Mill in Far North Queensland to its production
base
With operations throughout the sugar value chain, Mackay Sugar
services a range of customers, from supplying raw sugar to the
largest names in the Australian food and beverage sector and its
refining business which produces both branded and generic sugar
products, to servicing the growing Asian export market where a
structural deficit exists
Overall, sugar should enjoy continued demand growth as
developing nations and particularly those in the nearby Asian
region, increase their levels of consumption of sugar as they move
increasingly towards a western style diet. Sugar consumption
levels in India, China and Indonesia are all significantly lower than
western nations or even comparable Asian nations
Revenue
299.5
Gross profit
147.3
NPAT
37.2*
Total assets
730.8
Net assets
311.9
Total debt
178.9
Gearing (D/D+E)
36%
* Due to the seasonality of this business, half year
profit may overstate some balances including profit.
Per the half year accounts management estimates a
full year profit of appx. $12m. Refer to latest results
section on pg 5 of this report for detailed analysis
Operating revenue ($ million)
450
400
350
300
250
200
150
406.69
400.82
315.22 297.00
313.94 299.71
299.51
100
50
0
2008
2009
2010
2011
2012
2013
1H14
Source: Company report
The recently constructed cogeneration plant, which will run
predominantly off the bagasse waste product from the Mackay
Mills provides a diversified revenue stream for the company from
both the sale of energy and the related renewable energy
certificates. The plant will provide power into the Mackay town grid
and supply around 33% of Mackay’s energy needs
Mackay Sugar maintains a very strong balance sheet with a
significant asset base not easily replicated. The assets of Mackay
Sugar include several investments which could be divested to
provide note holders protection during times of financial stress
Operating profit ($ million)
45
35
25
44.28
37.20
15
5
16.31
5.52
6.25
0.50
-5
(12.52)
-15
2008
2009
2010
2011
2012
2013
1H14
Source: Company report
As an agricultural company, commodity risk and weather events
are the key risk for investors in Mackay Sugar. These risks arise
from the company’s exposure to market prices and the volume risk
associated with its chief input being weather reliant
Investors in the senior unsecured bonds rank behind the secured
lenders, however have protection both through covenants specific
to the unsecured issue, as well as covenants present in the senior
bank facility
Offering a high fixed return paid semi-annually, Mackay Sugar
Limited senior unsecured bonds provide investors the opportunity
to diversify their exposure whilst earning an attractive fixed rate of
return
Net assets ($ million)
350
300
250
200
150
258.95
100
214.32
181.34
278.98
311.86
230.92 223.81
50
0
2008
2009
2010
2011
2012
2013
1H14
Source: Company report
a
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Page 1 of 14
FIIG Research
Mackay Sugar Limited
27 March 2014
Background
Mackay Sugar is the second largest producer of raw sugar in the Australian market, accounting for approximately 20% of
Australia’s raw sugar production. In addition to producing raw sugar, MSL also receives revenue from refined sugar sales
(through its shareholding in Sugar Australia), sales of bi-products like molasses and from energy sales from the
cogeneration plant located at its Racecourse Mill.
MSL is an unlisted public company with its shareholders consisting of approximately 900 sugar cane growers who also
provide the raw product for the mills. Only cane growers are able to be shareholders of the company. Whilst MSL has
existed in its current (unlisted private company) format since 2008 when it converted from a co-op, MSL traces its roots
back to the construction of the Fairleigh Mill in 1883. The Fairleigh Mill remains in operation today and along with the
Racecourse, Marian and Mossman Mills form the backbone of MSL’s operations.
The Racecourse, Fairleigh and Marian Mills service the Mackay cane industry whilst the company’s Mossman Mill,
purchased in 2012, services the surrounding cane farms in Far North Queensland. MSL employs around 540 permanent
employees with up to 340 seasonal staff joining the payroll during the cutting season.
Operations
a

Racecourse Mill – is located approximately 2km west of Mackay. The Racecourse Central Mill Company Limited
was formed in 1887 with initial crushing occurring the following year. Upgrades of the mill have been undertaken
regularly throughout its history and currently it has a crushing capacity of 510t/hr. Racecourse is also the site of
MSL’s corporate offices, the Racecourse refinery and the cogeneration plant.

Marian Mill – is located 25km west of Mackay and is the largest of MSL’s mills with a crushing capacity of
750t/hr. The Marian Central Mill was erected on the current site in 1894.

Fairleigh Mill – is located 10km north-west of Mackay and has a crushing capacity of 505t/hr. The Fairleigh Mill is
the oldest of MSL’s assets with the mill constructed in 1883.
FIIG Research
Mackay Sugar Limited
27 March 2014

Mossman Mill – is located in the town of Mossman
70km north of Cairns and is the smallest of MSL’s
mills crushing 300t/hr. The Mossman central mill
began crushing in 1897. In 2012 MSL purchased
the milling assets from Mossman Central Mill
Company Limited, the company which first
tendered for the construction of the mill 116 years
earlier.
Refining market segments
2% 1%
9%
Food & beverage
BIBO export
10%
Export
Retail
Food services
17%
61%

Blends
Mill related assets – in addition to the mills
themselves, MSL owns a substantial assortment of
mill related assets including 930km (850km in
Source: Company presentation
Mackay, 80km in Mossman) of private narrow
gauge railway (and easements), 587 railway sidings, 50 diesel locomotives and 61 residential properties across
its Mackay and Mossman operations. MSL also holds land (and some equipment) at closed mills in Preystowe,
North Eton Mill and Cattle Creek.

Sugar Australia (SAJV) – is a JV between MSL and Sucrogen Limited (formerly CSR) which operates refining
assets in Australia; MSL holds 25% of the JV. SAJV supplies 65% of the refined sugar produced in Australia.
SAJV, in conjunction with New Zealand Sugar Company (NZSC) also export refined sugar to Asian and Pacific
markets via a dedicated (and SAJV owned) bulk-in-bagged-out (BIBO) bulk carrier. SAJV and NZSC refine and
market a full range of liquid and crystal sugar products for the industrial market in addition to supplying branded
product to the consumer market. In addition to the refineries and the bulk carrier, SAJV and NZSC also own port
facilities.

New Zealand Sugar Company – is a JV between MSL (25% holding) and Sucrogen Limited which operates the
Auckland sugar refinery which produces the Chelsea branded sugar products. NZSC supplies 90% of New
Zealand’s refined sugar.

Cogeneration – a 37MW steam turbine generator located at the Racecourse Mill which produces energy fueled
by either bagasse or coal. MSL has entered into a Power Purchase Agreement with Queensland government
owned corporation Ergon to purchase both the energy generated and the associated green certificates.

Sugar Terminals Limited (STL) – holds the bulk sugar terminals and long term leases with the port authorities
with facilities located at seven ports. Shares in STL are divided between cane growers and millers with the
shares allocated at the time of incorporation (1998) based on previous year volumes. The net book value of
STLs assets at 31 December 2012 was $326m, STL charges Queensland Sugar Limited rent for the use of the
terminal facilities. Mackay owns 30 million (~25%) of the ‘M’ class shares allocated to millers.

Queensland Sugar Limited (QSL) – is a not for profit company that provides storage, handling, logistics, trading,
financing and hedging services to the Queensland sugar cane industry. QSL handles 90% of Australia’s raw
sugar exports. Despite being a not for profit company QSL holds a number of assets including a 9.6% interest in
STL.

Australian Molasses Trading (AMT) – a private JV between seven sugar millers established for the purpose of
exporting molasses from Queensland. AMT has no assets and only takes ownership of the molasses once on
ship, rebating the proceeds to the shareholders.
Refining
The refining JVs which MSL is party to holds the number one position in their respective markets. The first 450,000t of
raw sugar produced by MSL annually is allocated to the refining JV. The JV operates in the following segments:

a
Food and beverage – providing sugar to manufacturers
FIIG Research
Mackay Sugar Limited
27 March 2014

Retail – production of branded product (CSR and Chelsea) as well as producing house brand product for major
retailers

Food service – supplying hotels, café’s, hospitals etc.

Export – supplying both containerised and bulk exports to key markets in the region including Indonesia,
Singapore, Hong Kong and Fiji.
The diversity of market segments which the refinery business services helps reduce the company’s reliance on any one
sector and ensures the sugar market avoids the threats of dominate purchasers which have affected other agricultural
sectors such as the milk industry. Both SAJV and NZSC sell their refined product at a margin above the prevailing
international raw sugar price, as such, the refining business is not affected by the volatility of the commodity market,
providing a more stable income stream for MSL.
Assets
Core to MSL’s business is the extensive asset base upon which the business operates. These assets include the four
mills, the extensive rail network connecting the surrounding farms to their respective mills, the newly developed
cogeneration plant and equity investments in other key related businesses like SAJV (25%) and NZSC (25%). A large
portion of these assets have been in place for many years and the cost of replication would be a significant barrier to
entry for any new competitor to enter the Australian sugar sector. The rail system in particular has the duel effect of being
the most cost effective method of transport for cane growers while also, to a large extent, locking in cane growers to
supplying their respective mills regardless of the cane supply contract. Growers could, at the end of their supply contracts
decide to stop supplying MSL mills and choose to supply another (non-MSL) mill, however the cost of road transport
would make this a less profitable option. Growers/millers are also limited in their options due to the limited time frame
required between cutting and milling the product.
With a book value of $336.20m in property, plant and equipment and $134.4m in associated investments helping
contribute to a net asset position of $311.9m, there remains a significant asset base which is marketable should MSL
come under economic stress. In particular, a number of valuable assets in the group are easily divestible, including the
equity holdings in the refining and marketing businesses as well as the cogeneration plant without impacting the core
milling assets business.
The marketability of MSL assets as a whole remains strong with sugar assets continuing a trend of the broader Australian
agricultural sector in attracting strong investor interest both from domestic and international sources; MSL is the only
large producer still owned by Australian shareholders. There is significant recent transactional evidence of the popularity
of Australian sugar assets in the market even for assets which may be under stress. The breadth of interest in these
assets has ensured a competitive bidding market, resulting in strong pricing for the assets transacted. The table below
shows recent market transactions in the industry and is indicative of the current pricing environment.
Date
Target
Acquirer
Consideration for milling
assets A$m
EV/EBITDA (x)
Feb-12
MSF
Mitr Phol
270
10.0
Nov-11
Proserpine
Wilmar
108
10.9
May-11
Tully Sugar
COFCO
103
10.3
Jun-10
Sucrogen
Wilmar
1,059
11.0
Oct-07
Mulgrave Central Mills MSF
40
9.6
Source: Media releases, Bloomberg, Lonergan Edwards report for MSF, company reports
Cogeneration
Over the last couple of years MSL has been constructing a cogeneration facility at their Racecourse plant (now
complete). The 37MW steam turbine generator exports around 27MW of renewable electricity into the Mackay City
electrical grid (with the remainder powering the Racecourse facility). MSL has entered into a Power Purchase Agreement
(PPA) with government owned corporation, Ergon which sets out the terms of the sale and purchase of energy exported
a
FIIG Research
Mackay Sugar Limited
27 March 2014
from the plant. The contract covers the plant from the period it is connected through to 31 December 2018. The contract
covers both the ‘black and green’ energy products, that is, in addition to the actual energy produced, Ergon has also
contracted to purchase Large-scale Generation Certificates (LGCs) and Greenhouse Abatement Certificates. These are
the tradable green energy products which are created by operating a renewable energy plant. MSL has contracted to
produce a minimum of 150,000 LGCs per annum for sale under the PPA, though the plant expects the production of
around 180,000 LGCs.
The cogen plant at Racecourse benefits MSL in a number of ways. Firstly it provides a stable revenue and profit stream
for the business which can help smooth financial performance during times of lower sugar pricing; using bagasse as a
fuel stock decreases the company’s coal costs; and the reduction in coal usage decreases the carbon tax liability of the
company.
The plant will run for 50 weeks per year (with maintenance undertaken for the other two weeks) with the majority of the
year seeing it operate under bagasse (through a 23 week crushing season and 13 weeks after the crushing season) with
the rest of the year operating as a coal generator. Bagasse is the fibrous waste which remains after the juice has been
extracted from the sugar cane.
In addition to funding from MSL’s banks (in the form of construction and other facilities), the plant also received $9m in
government support for its development via the Queensland Renewable Energy Fund. The cogen plant began
contributing to the 2013 financial year performance and will make a full year contribution in FY14. Under the contract with
Ergon, the market risk (price risk) is taken by Ergon, the volume risk (energy produced) is taken by MSL.
Latest trading results – half year to 30 November 2013
The financial performance of MSL is particularly reliant on the volume of cane processed, the yield of that cane and the
market price prevailing for any given crop year, as a result the financial result tends to fluctuate, however the balance
sheet of the company generally remains strong.
MSL reported a $37m profit for the half year to November 2013, a decrease of 10% from the corresponding 2012 period
despite higher revenues of $299.5m (up from $287.1m). The result was significantly affected by rainfall at the start of the
crushing season in the Mackay district resulting in lower season cane volumes (down 12%) which was partially offset by
better sugar content. The much smaller Mossman operation improved volumes from last year. Revenues were also
negatively affected by the sugar price – down 6.2% from the prior comparable period at AUD412.68 per tonne.
Due to the seasonality of revenues, with the vast majority of the revenues booked in the first half of the financial year but
expenses spread out over the full financial year (including plant maintenance), the second half will achieve a loss.
However, management forecast a full year profit of $5.4m for the 2014 financial year (down from $16.3m profit in FY13).
The company retained significant cash at bank at the half year end ($51.4m up from $20.5m) and retains a very strong
net assets position of $311.9m. Gearing remains relatively low at 36.5% (Debt / Debt + Equity) and cash flows from
operations improved compared to the first half of FY13; $71.8m vs $50.4m
a
FIIG Research
Mackay Sugar Limited
27 March 2014
Financial summary
For full year period ended 31 May (in '000)
1H14
FY13
FY12
FY11
FY10
FY09
FY08
Income statement extract
Total revenue
299,878
407,425
297,877
316,204
401,665
300,435
316,083
Cost of sales
(220,076)
(255,377)
(169,742)
(173,710)
(240,201)
(186,401)
(188,259)
147,282
181,856
125,670
135,366
160,361
121,514
131,743
51,606
38,696
3,524
14,628
58,451
21,095
21,636
Depreciation
(8,298)
(13,571)
(8,847)
(8,929)
(9,516)
(8,901)
(9,248)
Finance costs
(6,106)
(8,814)
(7,197)
(5,197)
(4,656)
(5,943)
(6,871)
37,202
16,311
(12,520)
502
44,279
6,251
5,517
37,136
46,633
(6,739)
(27,779)
73,032
(32,973)
Gross profit
EBITDA
(Loss)/profit before income tax
Total comprehensive (loss)/profit for
the period
Statement of financial position extract
Cash and cash equivalents
51,509
20,543
24,746
20,601
39,834
12,365
231,730
99,382
56,204
88,016
101,036
76,990
68,466
336,192
330,240
262,575
214,863
193,056
183,220
175,612
Total non-current assets
499,035
463,301
378,563
326,283
301,556
283,518
274,117
Total assets
730,765
562,683
434,767
414,299
402,592
360,508
342,583
21,707
38,942
67,752
67,839
30,036
43,631
61,103
229,595
120,106
122,146
130,783
102,826
126,414
111,932
10,752
Total current assets
Property, plant and equipment
Interest bearing liabilities
Total current liabilities
Interest bearing liabilities
27,237
157,177
136,023
54,432
15,497
31,626
32,998
Total non-current liabilities
189,311
163,596
88,808
52,596
40,816
52,751
16,335
Total liabilities
418,906
283,702
210,954
183,379
143,642
179,165
128,267
Net assets
311,859
278,981
223,813
230,920
258,950
181,343
214,316
Total equity
Source: Company accounts
311,859
278,981
223,813
230,920
258,950
181,343
214,316
It is worth noting that half year results in a seasonal business are not directly comparable with full year results (in that the
full year result is not simply a case of doubling the half year result) as the crop is crushed in the first half of the financial
year.
Strong balance sheet
MSL’s balance sheet remains a particular strength of the business with assets growing each of the last six years. Gearing
has fluctuated over this same period however total assets to total liabilities has remained in a very strong position over
this period.
Total assets v gearing*
800,000
45.0%
40.0%
700,000
35.0%
600,000
30.0%
25.0%
500,000
20.0%
400,000
15.0%
10.0%
300,000
5.0%
200,000
0.0%
FY13
FY12
FY11
Total Assets
Source: FIIG Securities;
* Gearing = D/D+E
a
FY10
FY09
FY08
Gearing
FIIG Research
Mackay Sugar Limited
27 March 2014
As noted in the ‘Assets’ section above, there is both a market for the business as a whole and the potential to sell
individually significant assets to protect bond holders during times of stress without affecting the core milling business.
Market
Trading sugar
MSL’s raw sugar is sold either to the domestic or export market with revenues generally referenced to the international
commodity price markets. In particular MSL’s raw sugar supplied to Sugar Australia is contracted in US dollars at the
prevailing market price however the revenue received by MSL is defined by the price MSL has hedged in the futures
market (in particular the ICE#11 futures contract). There is some export volume which is sold at a specific contract price
negotiated with the purchaser without reference to the futures market.
MSL is contractually obliged to deliver its first 450,000 tonnes of raw sugar to the Sugar Australia refinery located at the
company’s Racecourse facility. MSL’s domestic volumes are sold via a mix of short and long-term pricing pools with
hedging restrictions placed on specific pools. Any raw sugar in excess of the company’s domestic sales is offered to QSL
under a supply agreement. MSL utilises financial instruments to hedge its commodity and FX exposures with reference to
its raw sugar price risk management policy; it is worth noting that no employee has incentive based pay related to the
performance of the hedging strategy, reducing the risk of “trading” type activity.
MSL exports its raw sugar via an agreement with QSL. At the beginning of each crushing season MSL estimates its
expected export volumes based on the production forecast (MSL and its farmers generally have a decent understanding
of crop expectation at the beginning of the harvest season) and QSL allocates volumes from its suppliers to a number of
fixed and variable pricing pools depending on volumes available. QSL manages the export of all Queensland raw sugar
and operates a standard form of agreement with all of its suppliers.
The graph below shows the current forward contract prices for sugar in US c/lb and the weighted average AUD per tonne
based on the futures contract and AUD/USD exchange rate over the period as provided daily by QSL.
Quensland Sugar Limited daily market pricing
27 March 2014
19.3
19.1
490
18.9
480
460
18.5
450
18.3
440
18.1
A$ per tonne
470
18.7
US ¢/lb price
500
430
17.9
420
17.7
410
17.5
400
US ¢/lb price
A$ per tonne weighted average
Source: QSL
The global sugar market
As with all commodities, there is inherent volatility in the price of raw sugar with the price impacted by numerous factors
including: global consumption patterns, significant weather events in key growing areas, policy movements (in particular
the interaction of sugar based ethanol fuel production with world raw sugar supply) and general market sentiment for soft
commodities.
a
FIIG Research
Mackay Sugar Limited
27 March 2014
Whilst recent years have seen a global surplus in the raw sugar market, the long term trend for the market is demand
growth. This expected growth is being driven by the same trend which is driving demand for food resources globally; the
development of the middle class in emerging economies. There remains a significant structural deficit of raw sugar supply
in the Asian region. Whilst the Australian sugar sector’s ability to increase land under cane will remain somewhat
restricted, existing market participants should none the less enjoy the benefits of any increase in demand through higher
pricing.
Key to the growth in demand from emerging economies is the adoption of more western style eating patterns as well as
the general increase in energy rich food products as affluence increases. The figure below shows the direct correlation
between sugar consumption and affluence and notes the relative low position (both in affluence and sugar consumption)
of three large emerging regional economies, China, Indonesia and India. The figure on the right also shows the level of
existing consumption in these three economies falling well short of the levels consumed by more affluent, comparable
cultures in the region.
Source: Wilmar
The growth in demand from emerging economies should more than offset any softness in developed economy demand
driven by a change in eating habits, and in particular an increased focus on healthier diets. The emergence of highfructose corn syrup as a cheap sweetener alternative for food manufacturers has also had a negative effect on demand,
particularly in the US where corn production is highly subsidised, however increasing concerns over its use and its link to
obesity related health issues, may see sugar emerge as a healthier sweetener option.
a
FIIG Research
Mackay Sugar Limited
27 March 2014
Senior unsecured bond issue and structure
Senior unsecured bond offering
Summary terms
Issuer
Ranking
Minimum parcel size
Maturity date
Change of control
Interest rate
• Mackay Sugar Limited (unrated)
• Senior Unsecured
• A$10,000
• April 2018 (five years)
• Investor has option but no obligation to put the bonds back to the issuer @101
• Fixed rate
• Interest will be 7.25% p.a. semi annually
Covenants
Event of default
• Yes (see below)
• Failure to pay (i.e. non-payment of interest or principal on bank facility or senior unsecured bonds )
• Unrectified breach of senior unsecured bond covenant breach
• Cross-default to existing secured lender's covenants
Source: Preliminary Information Memorandum
These unsecured notes will act to diversify Mackay Sugar’s capital structure with recently renegotiated senior bank
funding also in place. Further liquidity for Mackay Sugar remains in the undrawn bank facility, however it is worth noting
the undrawn seasonal and margin facilities are utilized in the course of normal operations through the season and as
such would not be available for strategic or longer term funding purposes.
Bondholders benefit from an incurrence based covenant package, offering investor protection in three primary areas:

Negative Pledge – bondholders enjoy the benefit of a negative pledge limiting MSL’s ability to pledge its assets as
security. The level has been set as a % of MSL’s Total Tangible Assets. Secured financial indebtedness cannot
exceed 0.6:1.

Limitation on Debt Incurrence – the covenant limits the total amount of secured, unsecured and subordinated debt
that the company may incur over the life of the bond, and like the Negative Pledge, is set as a % of MSL’s Total
Tangible Assets. All financial indebtedness cannot exceed 0.75:1.

Restricted Payments to Equity – the covenant limits the ability of cash to be paid to equity holders through
dividends and prohibits any share buyback or capital management actions
The senior secured lender receives a priority payment only in the event of a wind-up, but all ongoing obligations for
payment of coupons and principal are pari passu with bondholders and will incur an Event of Default if not paid.
Bondholders also benefit from cross default to secured bank covenants which include: Total assets/total liabilities; total
tangible assets; and interest coverage. Bondholders receive circa 2.0% - 2.25% more per annum than the senior secured
lenders.
There is also value in the change of control in place for the bonds. With the significant levels of M&A activity in the
Australian sugar production sector over the past three years, investors have the right to be paid back at 101% of par if
any one party gains over 50% of MSL.
The Information Memorandum contains the full terms and conditions, including the full covenant package for the offering
for investors to review.
Strengths
a

Mackay Sugar Limited maintains a key position in the Australian sugar industry producing around 20% of the
sector’s raw sugar

In addition to its raw sugar business the company maintains significant strategic positions throughout the sugar
value chain including refining and the sale of refined product, exporting and equity positions in key associated
companies
FIIG Research
Mackay Sugar Limited
27 March 2014

The recently developed cogeneration facility provides Mackay Sugar with a new revenue stream for the sale of
both the energy produced and the associated green energy certificates as the plant qualifies as a renewable
energy source. In addition to providing a revenue source the cogeneration decreases costs associated with any
carbon impost and decreases the company’s energy expense

The cogen facility has entered into a Power Purchase Agreement with the Queensland government owned
corporation Ergon whereby Ergon will take both the power and the associated green certificates from Mackay
Sugar Limited removing the price risk for MSL

Mackay Sugar Limited is underpinned by a significant physical asset base

The sugar industry should benefit in the long term from the growing middle class in developing economies,
particularly those in our region, as per capita affluence is directly related to sugar consumption. This is driven by
more ‘western’ style diets being adopted as these emerging economies grow

The core sugar business remains an attractive one for investors with a number of transactions undertaken in the
industry in recent years at strong multiples; evidence of demand for sugar (and agri-businesses in general)
amongst both domestic and international investors

Mackay Sugar’s customer base is diverse with raw sugar sold to some of Australia’s leading food and beverage
brands as well as being exported internationally, whilst its refined product (through the SAJV) is sold under both
strong private brands in addition to retailer generic brands

Significant barriers to entry exist in the Australian market that any new competition would have to overcome.
Replicating MSL’s business would prove an expensive exercise for any new player in the existing
labour/engineering market and the issue of suitable farm land to supply any new entrant would be a significant
hurdle

Mackay Sugar traces its history back to 1883, displaying a long track record of survival through economic,
commodity and agricultural cycles

Investors in the senior unsecured bonds enjoy protection both through covenants specific to the unsecured issue,
and also to covenants present in the secured facilities. The senior bank facilities will reduce on a pro-rata basis
with the size of the unsecured bond offering
Risks
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
Whilst Mackay Sugar retains a significant position in the Australian sugar industry, by its nature, the company
faces commodity risk. These risks arise predominantly from the unknown nature of future prices of its product
which are driven by factors beyond the company’s control and subject to world markets and the volume risk
associated with its chief input being weather (and price) reliant. To mitigate these risks Mackay Sugar has taken a
number of direct (eg. increasing land under cane) and indirect (eg. diversifying revenues through cogeneration)
measures however ultimately, financial performance will be dependent on the performance of sugar markets
including the associated finance (hedge) markets for sugar

In addition to the risk that weather places on the MSL, other risks may affect the crop on an annual basis including
the availability of water (through weather or irrigation), changes to environmental standards or government
regulation, disease and pests. These may have an ongoing affect on the quality of cane supplied to MSL with
issues in one year often having a flow on effect in future years. The small geographic area over which MSL’s key
cane supplies originates from further exacerbates these risks

A key risk remains the land available for the production of sugar. Whilst this is an issue across the industry, MSL is
subject to pressures from the continuing mining boom, with Mackay being an industrial base for the mining sector.
Farms close to the Mackay town centre will continue to face pressure to convert into industrial land whilst other
existing farms may see production decrease as owners and industry employees concentrate on chasing higher
wages in the nearby mines rather than optimising farm output. To counter this urban encroachment MSL has
proactively engaged with the local council, focusing on ‘giving up’ lower grade farm land first. More importantly,
MSL have undertaken to increase land under cane through a series of actions including providing forward price
certainty to growers, aligning properties with underutilised farm land with farmers with excess harvesting capacity
FIIG Research
Mackay Sugar Limited
27 March 2014
and seek to increase land by returning fertile cane land from other farm uses (like small scale cattle farms) and
expansion beyond MSL’s traditional catchment area

Sugar, whether sold domestically or internationally is traded on US dollar based pricing, Mackay Sugar’s financial
performance will reflect fluctuations in the Australian-US dollar exchange rate and the company’s ability to hedge
this risk

The result of MSL’s exposure to commodity, FX and crop risk is fluctuating financial performance over any
particular period which at times has resulted in losses. However we note that MSL’s long history will give investors
some comfort in its ability to continue as a going concern through the commodity cycle. MSL’s significant asset
base, attractive long term sector for equity investors and moderate gearing levels will provide some comfort.
Further comfort is gained from the completion (or near completion) of significant profit generating capital projects
including the cogeneration plant and cogeneration efficiency projects undertaken at the company’s other mills
which should provide some financial headroom through both the extra revenue generated and the removal of the
capital drain of building the projects

Whilst the cogen plant provides revenue diversity for the business the agreement with Ergon Energy creates a
liability for Mackay Sugar in relation to the delivery of Renewable Energy Certificates (RECs) which MSL must
deliver regardless of whether the cogen plant is operating. Were there to be a period of significant downtime or
inability to operate using ‘green’ fuel, MSL would be contractually required to buy RECs in the open green energy
trading market at the prevailing price. That said, as a brand new turbine, once any teething problems are
overcome we would expect the generation plant to operate within expectation for the period of the maturity of
these notes

Despite MSL being subject to international pricing, the vast majority of MSL’s product is sold domestically with key
customers including local food and beverage manufacturers. Domestic demand may be negatively affected by
changing tastes of the domestic market and in particular the move towards low or no sugar beverages and the use
of other sweeteners (such as corn fructose) in manufactured food products. Demand may also be affected by
further deterioration in the domestic food manufacturing industry with any move to offshore product unlikely to see
MSL supply contracts continued. Offsetting this risk is the continued expected growth in sugar demand
internationally. MSL’s (and other Australian sugar producers) geographic proximity to key developing markets in
Asia should leave the company well positioned for any expansion in the Australian sugar export market
Conclusion
Mackay Sugar Limited is a significant player in the Australian sugar industry producing around 20% of the countries raw
sugar product. With a history dating back to 1883 the company is an integral part of the Mackay landscape and the
Australian sugar industry.
The newly developed cogeneration plant located at the company’s Racecourse Mill will provide an ongoing and relatively
stable revenue stream for the business which will help offset some of the volatility which results from the core milling
activities. The cogeneration plant receives revenues both from the sale of energy and also the sale of associated green
energy certificates which result from the burning of the bagasse waste product. The cogeneration plant will also act to
offset any potential carbon imposts.
A key plus for investors in the bonds is the strength of the company’s balance sheet with a significant level of fixed assets
and a strong market for the company’s core assets. The long term trend of the developing middle class in emerging
markets remains an attractive story for investors globally and we have seen a number of transactions in the sector at
encouraging prices and within a competitive environment.
Paying a high fixed coupon for five years, the Mackay Sugar Limited senior unsecured bonds are an attractive investment
for those looking to fix in a high rate of return and/or looking to diversify their portfolio into an agricultural sector set to
enjoy the growth in the middle class of emerging economies.
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FIIG Research
Mackay Sugar Limited
27 March 2014
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FIIG Research
Mackay Sugar Limited
27 March 2014
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