Download - Mozal Project
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Investing in Mozal Project by Gencor/Alusaf
Market opportunity To rebuild some of Mozambiques damaged
infrastructureWell positioned in Southern Africa
Hillside smelter $350m under budget 5 months ahead of scheduleMozal will access the same resources Useful parallels
Competitive and rel iable electricity supply Power drawn from Eskoms SA grid Long-term and attractive electricity prices
Availability of hydroelectric power Flexible power supply options over and above contract
Support from Government of Mozambiq Investment incentives Industrial Free Zone:
tax at 1% of turnover exempt from custom duties,
tax Liberal foreign exchange regime:
Can repatriate dividends & loan reCan hold foreign exchange offsho
Rare mix of key elements in Aluminium PrAlumina import on a long term de Labor costs
Hillside suppliers
Strategic Benefits
Financial Benefits
Increase shareholder valueLME exposure of roughly 75%, decreasing toroughly 60% after 2012
IRR$1,500/tonne to earn weicost of capital
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Risks for the Project
COUNTRY RISK
Political instability.
High indebtedness and legal ineffectiveness.
Poor and under-developed country and a risk of civilwar.
Risk of expropriation.
Mitigation by government
Investment Protection and Promotion Agreement.
Government has applied for entry into HIPC debtinitiative.
Exempt from custom duties and income taxes.
External debt and inflation has decreased and FDIhas increased.
TIMING AND COMPLETION RIS
Complex bureaucratic progetting the necessary permthe construction
The conditions of the basicslow down the constructio
Mitigation
Government establishcommittee.
Infrastructure developsupply by Eskom and
Will employee the sammanagement team uagreements.
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OPERATIONAL RISK Fluctuation in aluminum prices.
Labor issues. Demand and supply uncertainty.
Currency exposure.
Mitigation
Input prices are function of LME aluminumprices.
25 year supply contract for alumina andelectricity.
Long term purchase contract with sponsors.
Initial skilled labor and management expertisefrom South Africa.
Major inputs and all outputs would bedenominated in U.S. dollars.
OTHER RISKS
DIVERSE LEGAL SYSTEMS AN
COMPLETION GUARANTEE
Expertise and experienceareas.
INTEREST RATE RISK
Subordinated debt interemitigated by linking themof sales.
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Risks adequately discussed?
LABOR ISSUES.
GOVERNMENT MAY WITHDRAW THE PRIVILEGES GIVEN TO THE PROJECT.
IF IFC BACKS OUT OF THE PROJECT THEN IT WOULD BE DIFFICULT TO FINDOTHER BANK OR FINANCIAL INSTITUTION WILL FINANCE THE PROJECT.
ROAD INFRASTRUCTURE. LOCAL SUPPLIERS
INPUT PRICES ARE NOT TOTALLY HEDGED.
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Will the sponsors be able to finance the deal?
IDC(INDUSTRIAL DEVELOPMENT CORPORATION)
$3.6BN GOVERNMENT OWNED DEVELOPMENT BANK
LONGSTANDING RELATION WITH ALUSAF
MITSUBISHI
$78BN JAPANESE INDUSTRIAL CONGLOMERATE WITHLARGE METALS GROUP
SYNERGY/ SHARED INTERESTS
EquityIFC
WORLD BANK GROUP PRPRIVATE SECTOR DEVELODEVELOPING COUNTRIES
NET INCOME OF $400MN I
10% OF ALL FINANCE COUNTRIES WITH RATING 25
MOZAL PROJECT WAS VIHAD ACCEPTABLE FINANECONOMIC RATES OF RETU
Quasi Equity
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IDC
DISCUSSION WITH CGIC, SOUTH AFRICAN ECA TO PROVIDE INSURANCEFOR $400MN OF SENIOR DEBT
PROTECT CREDITORS AGAINST LOSSES FROM COMMERCIAL INSOLVENCYAND POLITICAL RISKS
LOANS
85% COVER FOR LOANS MADE BY FRENCH BANKS
LOANS ARRANGED BY IFC AND OTHER DEVELOPMENT FINANCIALINSTITUTIONS
Senior Debt
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IFCS PARTICIPATION GIVES CONFIDENCE TO OTHER LENDERS TO INVEST IN THE PROJECT
IFCS PROCESSES PROJECT APPRAISAL, DUE DILIGENCE FOR HIGH RISK PROJECTS, ENVIRONMENT & SOCIAL IMPREFLECTS CREDIBILITY
CREATE VALUE TO ALL PARTIES BY STRUCTURING FAIRER DEALS
IFC IS A HONEST BROKERFAIR TO ALL PARTIES
REDUCTION IN THE EXPROPRIATION RISK
CONTROL THE LEGAL ASPECTS OF THE DEALINTEGRATION OF LEGAL SYSTEMS (MOZAMBIQUE & S. AFRICA)
DEAL WITH CONTENTIOUS ISSUES LIKE WHAT ALLOWED SPONSORS TO BACK OFF (INCREASING TAX RATES, EXPRO
STRUCTURE THE CONTRACTUAL TERMS TO DEFINE THE FINANCIAL AND TECHNICAL PERFORMANCE
IFC PROVIDES LOANS WITH LONGER MATURITIES MATCHING THE PROJECTS LIFE SPAN
IFCS INVOLVEMENT WILL REDUCE THE POLITICAL RISKS
IFC WOULD PREVENT ADVERSE SOVEREIGN ACTION
IFC GIVES EMPHASIS TO DEVELOPMENT UNLIKE THE OTHER SPONSORS. HENCE IFC MAKES A TRADE OFF IN THE RBENEFITTING THE HOST COUNTRY
IFC SHOULD UNDERTAKE THE ADVISORY ROLE AS WELL AS INVEST IN THE PROJECT
IFC Involvement and its effects
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MUST HAVE PRIVATE OWNERSHIPMET
BE COMMERCIALLY VIABLEMET/UNMET??
As per Exhibit 5, world cost curve of alumnium smelters, avg. production cost is$1510/ton (ex.D&A, financing charges)
Mozalsbreakeven price is $1493 per ton & will decrease to $1070 in 11thyr
As per Exhibit 2, sellling price is greater than Mozal cost
WACC vs IRR??
Environmentally sound Provide significant development benefits to local economyYes
Increase in GDP by $157m; exports by $430m; net forex by $161m
5000 construction jobs
Critical infrastructure & investment along with Maputo corridor
IFCs investment criteria are they met?
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LARGEST MULTILATERAL SOURCE OF DEBT AND EQUITY FINANCING IN EMERGING MARKETS
OFFERED LOANS WITHOUT THE NEED FOR SOVEREIGN GUARANTEES
PROVIDED PAID-IN CAPITAL RATHER THAN CALLABLE ON DEMAND-MORE ATTRACTIVE FOR A BORROWER
MEMBER OF WORLD BANKTRUST FACTOR
AAA RATINGS: CAN BORROW AT LOW COST FROM MARKET
PREFERENTIAL TREATMENT: OFTEN THEY ARE THE ONLY SOURCE OF LENDING TO COUNTRIES IN FINANCIAL DISTRESS
Govt.seldom put their loan into soverign rescheduling or debt service moratorium
EXPERIENCE-HAD CREDIBILITY AS A PROJECT APPRAISER OWING TO ITS VAST EXPERIENCE IN DEVELOPMENT PROJECTS AN
WITH LOCAL GOVERNMENTS THROUGH ITS WORLD BANK ASSOCIATION
REPUTATION- AN HONEST BROKER. WAS CAPABLE OF REDUCING OPPORTUNISTIC BEHAVIOR BY ENSURING PROJECT GOAALIGNMENT WITH THE COUNTRYS DEVELOPMENT GOALS
CATALYST FOR INVESTMENT- IT HAD THE ABILITY TO BRING MORE LENDERS TO FUND PROJECTS. COUNTRY RISK RATINGS WOIFC STARTED FUNDING PROJECTS THERE
With IFC involvement project might be slightly less worth to sponsors, but more to local govt. so probality of exproconsequently expected value to sponsor increases
Refer to pg 8 3RDPARA of case
IFCS COMPETIVE ADV.
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Willingness to lend with longer maturities-Provided better matching for long-lived project assetsWillingness to greater risks-Provided more of subordinated debt thus exposing itself to greater risks thanborrowerValuing development benefits-it was not totally focused on the projects financial rate of return .Believgap could be bridged by the projects economic rate of return Capable of Reducing Political Risk-Governments gave priority to its obligations towards IFC due to its mnature and the fact that it was often the only lender in case of financial distress
Fair Deal Structuring- IFCs ability to create value for all parties . Reduces risk of expropriation by makingmore attractive to the government
Quality of due diligence: This further attracts investments from other lenders
Handling Complex Legal Settings- South Africa-Common Law System while Mozambique has civil law syIntegration of legal aspects- Made easier due to past experience
Formulating Exit Options-Is capable of formulating such definitions of completion guarantees such thatevents do not unfairly impact a sponsor on its obligation. Has the expertise to design such exit clauses
IFC involvementunique, valuable & sustainable
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