Taxpayers face £20m loss from Scot Gov's massive power-purchase guarantee to tycoon Sanjeep Gupta's firm

Pre-tax losses soared to £4.05m with the firm blaming it partly on the soaring cost of raw materials in the cost of living crisis.

There are continuing concerns over the cost to the taxpayer over the state intervention in the deal to allow Mr Gupta's GFG Alliance save the smelter and hydro plant over five years after Nicola Sturgeon said it was an “exciting new chapter” for Scottish manufacturing.

Smelting aluminium needs prodigious amounts of electricity, and water from the hills has been used to turn the turbines at the Lochaber plant Built in the 1930s, it is said to churn out 48,000 tonnes of aluminium a year and, according to its owners sustains nearly 200 jobs.

It was once judged to be one of the most efficient and environmentally sustainable aluminium plants in the world.

Alvance British Aluminium, which was bought from Rio Tinto by Gupta’s GFG Alliance in 2016, is the company at the centre of the controversial £586m guarantee in which ministers agreed to buy energy from the Lochaber hydro plant - used to power the smelter - for 25 years should it a shut down. The sum varies between £14 million and £32 million per annum over the 25 year life of the guarantee.

The Scottish Government say that so far there has been no call on the guarantee.

The government said earlier this year the remaining exposure sits at £284m with 20 years of the guarantee left to run.

It also says it has taken a series of securities over assets of the GFG Alliance at Lochaber "plus other protections in support of the guarantee".

The Herald can reveal that the Scottish Government is due to receive an annual 'insurance' premium for the guarantee throughout the 25 years.

The premiums were valued at £21.4m at the time of the agreement, but it has been confirmed that in 2019/2020 and 2020/21, ministers have valued it at 'nil'.

Scottish Liberal Democrat economy spokesperson Willie Rennie has written to the finance secretary Kate Forbes to ask for clarity over what will happen to the Scottish Government's financial guarantees in the event that the Lochaber aluminium smelter stops becoming going concern or is sold by Mr Gupta and has called for a statement to parliament.

Mr Gupta sounded concerns over the ability of the smelter company to continue in its latest accounts for the year to March 31, 2021.

He said that losses have been the result of combination of higher prices for its raw materials and lower demand for what it produces due to the Covid pandemic.

He said: "In assessing whether the financial statements should be prepared on a going concern basis, the director has considered the outlook of the company and in doing so considered the future expected operating results, cash flows and likely availability of external and internal funding facilities."

He said the future availability of funding is based on several external factors which are "beyond the management's control" like getting improvements in the prices of alumina - the chemical compound that is mainly used to produce aluminium.

He also indicated it was affected by "sufficient energy supply" with the smelter "dependent" on the hydropower plant.

"Also given the company's past financial performance results arranging an external funding is also expected to be difficult," he said.

Last year GFG was forced into an urgent financial restructuring while the UK government in March rejected its request for a £170m bailout because of its opaque corporate structure.

Mr Gupta said that in the past the company had relied on funding from fellow subsidiaries and related companies.

But the "major funder" of the group, Greensill Bank, has entered into administration.

He said: "These conditions suggest that there are material uncertainties that cast significant doubt on the company's ability to continue as a going concern.

"However the director is optimistic that the company will be able to arrange required funding through better performance results and borrowings. Hence the director continues to prepare the accounts on a going concern basis."

The assumptions were made without the benefit of an opinion from an auditor, independent specialists who conduct external scrutiny on company accounts.

Mr Rennie said details of the company's financial state was "another worrying sign about the underlying health of the Lochaber smelter".

“Despite flashy promises of 2,000 jobs and a new billet plant nothing has materialised even though the SNP Government has provided hundreds of millions of pounds of financial guarantees. Given Mr Gupta’s record it is looking more and more like the government were duped.

“There is now a significant risk that the firm is either sold or collapses as a result of the losses at Lochaber and the wider group’s financial difficulties. The Scottish Government will need to set out what will happen to the financial guarantees that it has provided, what will happen to the workers at the plant and whether it will be taking an active role in securing new ownership and the future of the site.

“The SNP Government must finally be open about the financial agreements with Sanjeev Gupta and report to parliament with urgency.”

The 25-year deal involved ministers guaranteeing the power purchase obligations of the smelter if the new owners did not fulfil obligations to pay for contracted power from the Scottish hydro power station.

The power purchase guarantee would enable the GFG Alliance to raise finance and according to Scottish Government papers discussing the takeover in 2016, the plans for Lochaber focused on operating the smelter and building a new on-site factory which was to be capable of supplying at least one fifth of all alloy wheels required by UK vehicle makers.

Mr Gupta told ministers it would be established within 18 months of getting planning approval.

A spokesman for GFG said that despite the latest accounts, the Lochaber smelter was now "performing profitably despite the impact of high energy prices".

It said plans to nearly double capacity on site with a new recycling and billet casting plant remain firmly on track.

The firm said the submission of the accounts was impacted by the "disruption caused by the collapse of our main lender Greensill Capital and that the submission of unaudited accounts was an "interim step".

"As plans to expand progress, with the project already in front-end design and engineering, this will drive further spend in the local and national economy, and enable us to target rising demand for Lochaber’s low carbon aluminium. We will continue to invest to improve productivity, upgrade existing facilities and safeguard jobs for the long term," he said.

He added: "We continue to negotiate a consensual debt restructuring in the best interest of all stakeholders, not least the thousands of employees that rely on our businesses in the UK and around the world. We are making good progress towards this goal as evidenced by our refinancings in Australia and the US and the standstill agreement with Greensill Bank, our largest creditor by far. We expect to provide a further progress update very soon."

Asked about the 'nil' value of the premiums, a Scottish Government spokesman said: "For budget planning purposes, the Scottish Government takes a prudent approach to how future fee income is valued.”

The spokesman added: “Like many businesses, the Fort William smelter was impacted by the Covid-19 pandemic in 2020 but with world markets in recovery, the business is now trading profitably.

“The Scottish Government’s intervention to support the Lochaber aluminium smelter has preserved strategic industrial capacity and supported the livelihoods of hundreds of people.

“The Scottish Government receives a commercial fee in respect of the Lochaber guarantee and guarantee fee payments are up-to-date. There has been no call on the guarantee and the Scottish Government holds a comprehensive suite of securities over the assets at Lochaber that have been valued at more than the outstanding amount guaranteed."