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Financing the Mozal Project

Presented By:

Vijay Krishna

Praful Anchaliya

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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 themacroeconomic situation & encourages the private sector investment.

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

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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 & approvalsystem

Openness to trade

Pessimistic approachof potential investor

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Challenges faced

No existing infrastructure

Unskilled labor

Logistical challenges

Health issues

Expectations of world standards was unlikely consideringthe above issues

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About Mozal

It began as consortium of three entities naming Eskom,Alusaf & Mozambican Govt.

To built Aluminum smelter due to potential availability ofhydroelectric power

The project worth was estimated at around US$ 1.4

billion

Its a low cost smelter

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Essentials for the project

Alumina They hedged the alumina for 25 yearsfrom Billitons, Australia

Electricity Supply of electricity was alsocontracted for 25 years from Eskom &Mozambican Govt.

Labor & Misc

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Who is involved?

It was a joint venture between Genecor & IDC

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

Alusaf(Subsidiary of Genecor) and the Industrial developmentcorporation 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

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Who is involved & what ishappens next?

It would appear along the Maputo corridor, a majortrading route between Johannesburg & Maputo

Estimated time: 34 months+6 months to reach fullcapacity

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

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Financing

Sources of Fund Amount (inmillions)

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%

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Future of Project

Currency denomination: US dollar

Sponsors are potential buyers

The plant was targeted for an industrial free zoneexempting it from paying tax

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

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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 andfurther declining to $1070 in the 11th year

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Profitability

Selling price of the metal is higher than the Mozalcost

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About IFC

A member of World bank group founded in the year 1956and owned by 172 member countries

Invests in private sector for social cause like reducingpoverty, increasing the living standards etc.

Provides multilateral source of debt and equity forprivate sector projects

The loans provided by IFC arent backed by thesovereign funds

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They mainly concentrate on the green fieldprojects

Financial ROR-projects IRR was based on theconstant price projections considering interest &tax

For the appraisal of Mozal took a tenure of threemonths (Jan March, 1997)

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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 withMaputo corridor

Assess environmental and social impact

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Recommendations

IFC should immediately seize the opportunitypresented in the financing of Mozal.

Investment in the project on the part of the IFCwould generate valuable social, financial, andeconomic benefits

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Recommendations

The use of the South African power supply, theobtaining of alumina from Australia, thetechnology from France, and the holding of salesproceeds in a foreign bank account provide an

excellent structure that will alleviate sovereign,expropriation, and operating risks.

The Mozal Project has qualified sponsors: at $78billion and a conglomerate such as MitsubishiCorporation has signed in as a strong candidatewith infinitesimal chance of default.

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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 thestatus of being No risk to some risk as there aredelays in infrastructure of 4 unitsw

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Thank You