Mozal Project

8/10/2019 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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Mozal Project

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