Sao Paulo, 22 december 2010

Brazilian sugar and ethanol group Cerradinho, which sold two mills to Noble Group earlier this week, plans to expand its cane operations in Goias state, a new cane frontier, a member of its board or directors said. The injection of around 600 million reais ($354 million) from Noble will enable the Sanches Fernandes family, owner of the group, to resume investments in expanding the only mill it kept.

The company was one of several in Brazil's cane sector that were hit hard by the global credit crisis in late 2008, when it was already struggling with low sugar and ethanol prices and had leveraged to fund expansion.

"The Goias mill can now be expanded, and we intend to resume plans of setting up, in the medium and long term, a new cluster of mills with our own resources and renewed access to other sources of financing," Joao Nogueira Batista, member of Cerradinho Holding's board of directors, told Reuters. He added, however, that it was too early to say when investments would be restarted.

Asia's biggest commodities trader, Noble , said on Monday it would pay $950 million for the two of Cerradinho's mills located in the state of Sao Paulo. Of those funds, about $600 million will be used to pay off Cerradinho's debt, Batista said.

Founded in 1964, the group was bought in 1973 by its current owners, the Sanches Fernandes family. The deal with Noble allowed the family to keep its newest mill, considered a state-of-the-art unit that was inaugurated in 2009 in a promising region for cane. The Porto das Aguas mill has an annual cane crushing capacity of 3.3 million tonnes, producing ethanol and generating electricity by burning cane bagasse.

CREDIT DIVERSIFICATION

The group, which also owns a company that manages land and other agricultural activities, was looking for an investor as part of a broader corporate restructuring. Brazil's ethanol and sugar industry is still quite fragmented and dominated by family-owned businesses, despite an unprecedented increase in the number of mergers and acquisitions over the last two years.

Many companies borrowed heavily prior to 2008 in a period of euphoria about the sector's prospects but struggled during the global financial crisis. The situation left a handful of distressed players that had previously been considered overvalued, and larger companies with more cash snapped up some of the mills no longer able to carry out their ambitious expansion plans.

Investments in Porto das Aguas were at their peak in late 2008, when the crisis dried up financing. The company now expects to regain access to credit on better terms after paying off its debts. Batista said the typical financing model for Brazil's sugar industry, which involves heavy leverage and strong reliance on bank loans, is too risky considering the sector's high volatility. But he added this is gradually changing.

"We'll opt for more diversified sources and lower leverage," Batista said, adding that other companies in the sector are already doing that by becoming public and looking for other credit sources.

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