Financing the Mozal Project

Presented By:Vijay KrishnaPraful Anchaliya

Country Profile

• Gained its freedom from Portugese in 1974 after a civil war broke out between the Frelimo & Renamo

• The two sides signed a peace accord in 1992

• Post this, the Mozambican Govt. made constant efforts to improve the macroeconomic situation & encourages the private sector investment.

• The GDP and FDI were increasing & the inflation decreased. But still, Mozambique remained a poor underdeveloped country

Investment opportunity

Pros• GDP growth• 0.5% - growth rate (1980-91)• 6.5% - growth rate (1992-96)

• Risk rating from 7.6 – 14.0

• Power tariff

• Labor cost

Cons• Legal & approval

system

• Openness to trade

• Pessimistic approach of potential investor

Challenges faced

• No existing infrastructure

• Unskilled labor

• Logistical challenges

• Health issues

• Expectations of world standards was unlikely considering the above issues

About Mozal• It began as consortium of three entities naming

Eskom, Alusaf & Mozambican Govt.

• To built Aluminum smelter due to potential availability of hydroelectric power

• The project worth was estimated at around US$ 1.4 billion

• It’s a low cost smelter

Essentials for the project• Alumina – They hedged the alumina for 25 years

from Billitons, Australia

• Electricity – Supply of electricity was also contracted for 25 years from Eskom & Mozambican Govt.

• Labor & Misc

Who is involved?• It was a joint venture between Genecor & IDC

• Genecor became the worlds fourth largest producer of aluminum after acquiring Billiton from Royal-Dutch shell in 1994

• Alusaf(Subsidiary of Genecor) and the Industrial development corporation of South Africa each owned a share of 25%

• IDC-Government owned development bank in SA. There goal was to promote entrepreneurship and financing private sector enterprises

• In 1996-They constructed a 1.8 billion Hillside smelter

Who is involved & what is happens next?• It would appear along the Maputo corridor, a

major trading route between Johannesburg & Maputo

• Estimated time: 34 months+6 months to reach full capacity

• The average capital cost for any smelter was $4850 per ton but the Mozal Project had an overall capital cost of$4750 per ton

FinancingSources of Fund Amount (in

millions)Percentage

Cash during start-up 35 2.56%

Subordinate debt 150 10.98%

Equity 500 36.63%

Senior debt 680 49.81%

Total 1365 100%

Future of Project• Currency denomination: US dollar

• Sponsors are potential buyers

• The plant was targeted for an industrial free zone exempting it from paying tax

• Chase-Manhattan corp-trustee responsible for collecting sale proceeds, paying debt holders, remitting operating expenses & paying dividends

Average production cost $1510 per ton(Excluding depreciation & financing charges) but Mozal projected breakeven price

$1493 per ton(Including depreciation & financing charges) in the 4th year and further declining to $1070 in the 11th year

Profitability

• Selling price of the metal is higher than the Mozal cost

About IFC• A member of World bank group founded in the year

1956 and owned by 172 member countries

• Invests in private sector for social cause like reducing poverty, increasing the living standards etc.

• Provides multilateral source of debt and equity for private sector projects

• The loans provided by IFC aren’t backed by the sovereign funds

• They mainly concentrate on the green field projects

• Financial ROR-projects IRR was based on the constant price projections considering interest & tax

• For the appraisal of Mozal took a tenure of three months (Jan – March, 1997)

Anticipated Outcomes

• Increase in:• GDP by $157 million (9% compared to 6.4%)• Exports by $430 million• Net foreign exchange by $161 million

• It would generate 5000 construction jobs

• Provide critical infrastructure and investment along with Maputo corridor

• Assess environmental and social impact

Recommendations• IFC should immediately seize the opportunity

presented in the financing of Mozal.

• Investment in the project on the part of the IFC would generate valuable social, financial, and economic benefits

Recommendations• The use of the South African power supply, the

obtaining of alumina from Australia, the technology from France, and the holding of sales proceeds in a foreign bank account provide an excellent structure that will alleviate sovereign, expropriation, and operating risks.

• The Mozal Project has qualified sponsors: at $78 billion and a conglomerate such as Mitsubishi Corporation has signed in as a strong candidate with infinitesimal chance of default.

Updated status• Overall Project status: Delayed from due date

• Scheduled: Considering prior status it is now likely to be delayed

• Budget: Budget allocation has been done adequately

• Project Risk: There has been a fluctuation from the status of being “No risk” to “some risk” as there are delays in infrastructure of 4 unitsw

Thank You