Financing the Mozal

Project

Group 2
Vivek Agrawal ( 203)
Shubhra Sanghi (229)
Nimish Lahoti (257)
Asis Kumar Mandal (325)
Vivek Bhatia (356)
Mahak Mehra (427)
 Aluminium Industry – Two important
facts

luminium smelting is very energy-intensive.

Primary Al Production

-Aluminium prices are generally very volatile

$/tonne

Price Fluctuations in Al over a year

 Project Highlights
• $1.4 billion aluminium smelter in Mozambique
• Low cost, high quality operation
• 250,000 tonnes of primary aluminium a year
• Joint venture
• Alusaf
• IDC
• Aluminium Industry
• 5 million tons –new capacity required in 10 years
• LME Price – highly volatile
•
•
 Project Status
•Financing Needs
* IFC Approval (to invest $120m) in $1.4bn pending
* Investment worth $420m is still on paper i.e. w/o any lender commitment
•Operational Needs

* Construction yet to start

* Raw material supply – contract signed for another 25 years - price
agreement in place
* Electricity supply – contract signed for another 25 years – price
agreement in place
* Labour supply – certain (cheap)
•Assumptions

* Cash flow projections – too low an IRR (7% for first 15 years, 12% for
first 25 years)
* Average Al price over the last 10 years ($1650/tonne) with only less than
20% occurrences over $1750/tonne
* Political Stability
•

*
*
*
•

•
 What are the greatest risks?

HAVE THEY BEEN ADEQUATELY DISCUSSED?

Political & Sovereign Risk – Involvement of IFC (Risk Mitigation:
Exhibit #12)
Market Risk: Partially hedged by linking direct costs to the output
price
Financing Risk: Involvement of IFC (“A” Cat Loans, Subordinated
contribution as well)
Counterparty Risk: Long- established relations with the partners
Risks identified by Project Team
 Additional Risks That Exist

HAVE THEY BEEN ADEQUATELY DISCUSSED?

Political & Sovereign Risk – Involvement of IFC (Risk Mitigation:
Exhibit #12)
Market Risk: Partially hedged by linking direct costs to the output
price
Financing Risk: Involvement of IFC (“A” Cat Loans, Subordinated
contribution as well)
Counterparty Risk: Long- established relations with the partners
 Sources of Cash

Equity
Gencor/Alusaf $125
IDC 125
Others 250
Total 500 37%

Quasi-equity (subordinated debt)

IFC 65
Other development
financial institutions 85
Total 150 11

Cash generation 35 35 2

Export credit
IDC--arranged 400
Coface insured 140
Loans
IFC 55
Other development
financial institutions 85
Total Senior Debt 680 50
Total Sources 1,365 100
Sponsors-Equity
Sponsors-Debt

Mozal project was

viable and had
acceptable financial
and economic rates
of return
 IFC Goals
To fund projects having
•

• private ownership
• commercial viability
• environmental soundness
• significant development benefits for local economy
To invest in risky environments
•

•
About IFC
IFC involvement in Mozal
 * Should Alusaf / Gencor invest in the Mozal
project?
Pros Cons
Opportunity to capture increasing global Al demand, Huge investment blocked in a high risk zone
Enhance reputation for technical excellence (Expropriation + Civil War)
Proximity to Port
(Provisioning (Cheap transportation)
of doubling capacity with no+ additional 7% IRR (for first 15 years),
to its other smelter
construction @ Hillside Bay (RM Sourcing)
delays) 12% IRR (for first 25 years): too low
Competitively Priced Electricity, Labor (~60% cost of Cash flows based
Avg. Inflation for on
theambitious Price6.7%
next 10 years: levels
production achieved) for Al
Exemption from Custom and Income Tax, Low Sales Tax Funding Structure contingent on others’
(Profitability) participation
Equity Stake (25%) – Profit Sharing ContractualObligations for too long a
increases shareholder value period (25 years) : Counterparty Risk
IFC Funding Approval almost there (opening of doors to
get more partners involved)
Good Financing Structure (Lots of players, provision of
quasi-equity)

Should Alusaf / Gencor invest in the

Mozal project?
 Results
•Completed more than $100M under budget and six months
ahead of schedule
•The first aluminum was produced in June 2000

•
In 2003, expanded to double its capacity to 500,000 tons per
year
•
Roads, ports, power generation, telecommunications, water
supply, and drainage systems were built or upgraded in order
to build Mozal
•
Country's exports tripled
•Added more than 7 percent to GDP in its initial years of

operation and an estimated 10 percent in 2001

•

•
 Current Shareholder Pattern

•
BHP Billiton Limited (47%)
•Government of Mozambique (4%)

•
Industrial Development Corporation of South Africa Ltd (24%)
•Mitsubishi Corporation (South Africa) (25%)