Financing the Mozal Project
Financing the Mozal Project
SUBMITTED T
SUBMITTED TO: DR. ANUP
O: DR. ANUPAM RASTOGI
AM RASTOGI
Submitted
Submitted
By:-TEAM 3 - GROUP II TEAM 3 - GROUP IIPROJECT FINANCE
PROJECT FINANCE
1. Should Alusaf/Gencor invest in the Mozal project?
• The IRR (Internal Rate of Return) for the Mozal project has been calculated using the projected cash flows (pre interest) in base case and expected case.
• The base case has been considered at sales price of $1!" and expected case is at sales price of $1#"".
• The IRR calculated using the projected cash flows returns a ield of 1%& in base case and 1!& in expected case.
• The ' and *I were increasing + the inflation decreased. The Moza,bican 'o-t. ,ade constant efforts to i,pro-e the ,acroecono,ic situation + encourages the pri-ate sector in-est,ent.
• The I'R ris/ rating for the group changed fro, .0 to 1%."
• ttracti-e power tariffs and attracti-e labor cost were a-ailable in Moza,bi2ue • The alu,ina suppl was contracted for 3! ears fro, 4illitons5 ustralia
• The suppl of electricit was also contracted for 3! ears fro, 6s/o, + Moza,bican 'o-t.
• The a-erage capital cost for an s,elter was $%#!" per ton but the Mozal roject had an o-erall capital cost of $%!" per ton
• -erage production cost $1!1" per ton (6xcluding depreciation + financing charges) but Mozal projected brea/e-en price $1%78 per ton (Including depreciation + financing charges) in the %th ear and further declining to $1"" in the 11th ear
Cost of equity Calculations
• The ris/ free rate has been ta/en as 0.!0& as this was the ield on 1"9ear :; Treasur bonds
• The ,ar/et return for a period of 17#9177 was 18& ('R) • The e2uit beta has been calculated as 1.!70
• The countr ris/ pre,iu, is 0.7&
• The total cost to e2uit has been calculated as 31.80&
4ased on just the IRR the co,pan would generall not in-est in such a proposal. 4ut gi-en the other econo,ic benefits and the fact that the ha-e entered into long ter, contracts5 ,a/es the project see, doable. <ence the co,pan can loo/ to in-est in such a project if it considers other benefits. 4ut based on onl the IRR calculated5 the project doesn=t see, ,uch attracti-e.
2. hat are the !reatest ris"s? #ave they $een adequately discussed?
The Mozal project in-ol-es the establish,ent of a -enture between three entities 6s/o,5 lusaf and Moza,bican go-ern,ent. It will be exposed to a nu,ber of ris/s such as >
%echnolo!y ris"
The project in-ol-es use of technolog and so its success would largel depend on the technolog being used. Thus a ,ajor ris/ would be the use of inappropriate technolog. <owe-er5 lusaf has been in-ol-ed in the alu,iniu, business for so,e ti,e now and so the judge,ent of appropriate technolog should not be ,uch of a concern.
%i&ely Co&pletion of the 'roject
;ince the go-ern,ent of Moza,bi2ue is directl in-ol-ed in this project5 therefore5 it would in-ol-e bureaucratic procedures to co,pl all the legal and legislati-e re2uire,ents of the state and the Mozal project is subject to appro-al b the go-ern,ent of Moza,bi2ue thereon. <ence5 the project would be exposed to extensi-e delas in the ,eanti,e. In contrast5 Moza,bi2ue exists as a wea/ econo, and lac/s sufficient infrastructure to pro-ide a fa-ourable sight to the project therefore5 the project would probabl stuc/ with delas in its co,pletion
<owe-er5 in order to a-oid unconditional delas the co,pan is see/ing prior per,ission of the state to grant construction per,it. Thus an agree,ent has been signed with the ;outh frican go-ern,ent to address ris/s associated with delas. lso there has been infrastructure
de-elop,ent for electricit suppl b 6s/o, and 6dM.
(perational )is"s
*urther5 the Mozal project would be exposed to operational ris/s5 because 88& of the total production cost will be the alu,ina and the prices of alu,ina are readil fluctuating which will
lead to high -olatile cost of production5 hence5 the operations would be exposed to fluctuations in the price of alu,ina. Meanwhile5 the a-ailabilit of other raw ,aterials such as petroleu, and co/e5 would carr a considerable operational ris/ and si,ilarl the labor issues in a new cou ntr would result in operational ris/s.
?perational ris/ has been ,itigated through a ,echanis, between input prices of alu,ina and the output price where the input prices are function of @ondon Metal 6xchange alu,iniu, prices. lso 3! ear contracts ha-e been ,ade for suppl of alu,ina and electricit. ;/illed
labour and ,anage,ent expertise issues will also be sol-ed b bringing people fro, ;outh frica.
Co&&odity 'rice )is"
In case a si,ilar project of such a large scale is underwa in so,e other part of the world5 this can result in excess suppl of lu,iniu, in the ,ar/et resulting in a suppl glut and causing prices of alu,iniu, to fall5 contrar to its historical prices (s has happened in steel industr.)
This is a significant ris/ posed to the future re-enue of Mozal project. Country ris"
The countr is poor and underde-eloped. There is high ris/ of a ci-il war. olitical instabilit is also high. Ahen this project was being conceptualised5 the 'o-ern,ent was onl 8 ears old and was inexperienced. There was high indebtedness and legal ineffecti-eness. This exposed the project to high countr ris/.
The go-ern,ent was ta/ing steps to ,itigate this ris/. It had applied for entr into <ighl Indebted oor ountries (<I) ebt Initiati-e. It also signed the In-est,ent rotection and ro,otion gree,ent with the ;outh frican go-ern,ent.
*undin! ris"
lusaf and I were funding onl !"& of the project and ownership of the re,aining !"& was et to be deter,ined. The were still loo/ing for an industr participant to join the deal and share the output.
In addition to these>
• Moza,bi2ue ran/ed last in ter,s of road infrastructure a,ong 3" frican countries. • *unding fro, I* is essential and if I* bac/s out of the project then it would be
+. ill the sponsor $e a$le to finance the deal?
;ponsors planned to finance the project using a co,bination of e2uit5 subordinated debt and senior debt. ,-hi$it pro-ides details of planned sources and uses of funds.
,quity lusaf planned to pro-ide $13!,n in e2uit. ;a,e a,ount was planned b Industrial e-elop,ent orporation (I) of ;outh frica. lusaf was the alu,iniu, subsidiar of the 'enorp group5 a ;outh frican natural resource co,pan. I was a $8.0bn go-ern,ent owned de-elop,ent ban/ of ;outh frica.
4oth sponsors were loo/ing for one or ,ore e2uit partners to in-est another $3!",n.
Mitsubishi orporation5 $# bn Bapanese Industrial onglo,erate5 was a prospecti-e cand idate at the ti,e.
Su$ordinated 0e$t $0!,n of subordinated debt would co,e fro, I* and $#!,n fro, other de-elop,ent institution.
Senior 0e$t ;enior debt holder would pro-ide $0#",n. I and oface5 a *rench export credit agenc (6)5 would arrange $!%",n of finance. 6 were bilateral organization that insured creditors in an effort to pro,ote do,estic exports. I was in discussion with 'I5 ;outh frican 6 to pro-ide insurance for $%"",n of senior debt. oface to pro-ide #!& co-er for loans ,ade b *rench ban/s.
e-elop,ent institution li/e I* will pro-ide the final $1%",n in loa ns. *inancin! the deal
eal was structured in a wa to protect creditor=s in-est,ent. I was tring to pro-ide 6 insurance for lenders. This tpe of insurance would protect creditors against losses resulting fro, co,,ercial insol-enc and political ris/ li/e war5 expropriation5 breach of contract etc.
;till5 ban/s were not interested in financing the Moza,bican project5 speciall a li,ited recourse deal. *or the, I*=s in-ol-e,ent was reall necessar. I*Cs appraisal unco-ered infor,ation=s about the project5 sponsors and host nation that ,ight not be easil a-ailable to other lenders. Therefore5 it was critical for sponsors to ha-e Mozal on board.
I*=s appraisal of the Mozal project concluded that it had acceptable financial and econo,ical rate of return. ccording to appraisal project would increase exports b $%8" ,n and ' b $1!,n (b 7&). roject would also generate jobs and de-elop the infrastructure
The structure of the deal see,s to be -iable and fa-ourable for the success of the project as also appraised b I*. The structural and institutional approach to ris/ ,anage,ent b the sponsors discourages so-ereign interference which would encourage lenders to be a part of the deal. ;till5 ha-ing I* on board was critical for sponsors for financing the deal.
. #o does *C involve&ent affect the deal? ill the *C and the sponsors share si&ilar o$jectives?
*C effect on the deal
• I* brings credibilit to the project and pro-ides reassurance to potential lenders. • 6n-iron,ent and ;ocial I,pact assess,ent during the project appraisal stage. • I* is /nown for the 2ualit of due diligence in high ris/ projects.
• It has plaed leading role in structuring the legal and financial contracts and ac2uired the reputation of C<onest 4ro/er=9 4eing fair to all parties.
• <elp in other aspects of the deal li/e the integration of the di-erse legal sste, followed in Moza,bi2ue and other countries.
• o,pletion guarantees> The could also help to structure the contractual ter,s to define financial and technical perfor,ance.
• *ro, the financing angle>
o I* pro-ided loans with longer ,aturities ,atching the long project li-es. o It was willing to lend on subordinated basis.
o I* ga-e greater e,phasis to de-elop,ent benefits.
• I* plaed a big role in pre-enting ad-erse so-ereign action and its in-ol-e,ent reduces political ris/.
($jectives of *C and the sponsors
• Govt of Moza&$ique> It was acti-el tring to i,pro-e cli,ate for pri-ate sector
in-est,ent and ta/e the countr on the path of growth after se-eral ears of ci-il war.
• 0C ;ustainable de-elop,ent of ;outh frica b pro,oting entrepreneurship and
pri-ate enterprises
• *C ro,otion of pri-ate sector in-est,ents in de-eloping countries as a wa to reduce
po-ert and i,pro-e people=s li-es
• Alusaf Returns fro, the project5 proxi,it to <illside s,elter5 inputs at attracti-e rates • ,s"o& Aanted to expand its operations outside ; and utilize its excess capacit as an
