THE MOZAL PROJECT

Sagnik Chakraborty (A015) Ashutosh Chaturvedi (A016) Sonal Choudhary (A017) Harsh Dingwani (A018) Vishal Garg (A019) Rahul Goel (A020) Varun Goel (A021)

Aluminum Industry
Aluminum
Light, resistant to corrosion, good heat and electrical conductivity Wide variety of metal forming and fabricating techniques

Extraction process
Bauxite -> Alumina Refining -> Aluminum Smelting

Why Mozambique ?
Starting new enterprise : could take 5 years Lower per-capita income High country risk High indebtness Applied for HIPC debt initiative

Attractive power tariffs Cheap labor Investment incentives

Mozal Project
$1.4 bn project Interests of Eskom, Alusaf and Mozambican government Major inputs :
Alumina : imported from Billiton 25yr supply agreement Electricity : Eskom will supply 25yr agreement Labor : Skilled -> South Africa, Unskilled -> Mozambique Other raw materials : same suppliers as that for Hillside smelter Plant for industrial free zone -> no taxes except for 1% sales tax

Combination of Equity, Sub-ordinated debt, Senior debt Banks - need of IFC

Should Alusaf/Gencor invest in the Mozal project ?

Strategic Benefits
Market Opportunity
To rebuild Mozambiques damaged infrastructure

Strong footing in South Africa

Hill Side Smelter $360 million under budget Four months ahead of schedule Mozal will access the same resources

Support from Government of Mozambique

Industrial Free Zone Exemption from custom duties and income tax Sales Tax of only 1% is levied

 Currency Exposure
All the inputs and the outputs are denominated in U.S. dollars

Competitive and Reliable Electric Supply

Power drawn from Eskoms South Africa Grid Long term and attractive electricity prices Availability of hydroelectric power

Key elements in Aluminum Production

Alumina import on a long term deal Labor costs Hill side suppliers
Based on the operating plan, the production cost of Mozal in the lowest 5% of industry capacity

Low Production Costs

Financial Benefits
Current Ratio
The current ratio for all the projected years is comfortably above 1.33
Yr CR 00 1.3 01 1.4 02 1.6 03 1.8 04 2.0 05 2.1 06 2.3 07 2.5 08 4.0 09 3.2 10 7.1 11 12. 8 12 16. 1

Debt Service Coverage Ratio

DSCR of the company for the following years is falling within comfortable limits
Yr DSC R 00 01 4.6 1.6 02 1.5 03 1.6 04 1.6 05 1.7 06 1.8 07 1.7 08 1.4 09 2.2 10 1.8 11 3.4 12 5.2

What are the greatest risks ? Have they been adequately discussed ?

Risks
Risks can be divided into 4 categories: Pre-completion risks: Technological risk and Completion risk Post-completion risks: Operational Risk Sovereign risks Financial risks

Pre-completion Risks
Technological Risk
Reliability of the technology Ability of the sponsors to handle such risks to prevent cost overruns or construction delays

Risk Mitigation
Mozal would use proven, state-of-the art smelting technology ,Pechiney technology from France, that was used in the Hillside smelter Alusaf was the subsidiary of the South African Gencor group, which was the worlds fourth largest aluminum producer Gencor had successfully completed the Hillside smelter-which was, at that time, the worlds largest greenfield aluminum smelter

Pre-completion Risks
Completion Risk
Complex bureaucratic processes in Mozambique may delay getting the necessary permits to proceed with the construction Conditions of insufficiency of basic infrastructure may slow down the construction efforts

Risk Mitigation
Establishment of a special liaison committee by government Infrastructure development for electricity supply by Eskom and EdM Employment of the same project management team ,as Hillside smelter, under similar agreements

Post-completion Risks
Operational Risk Fluctuations in prices of alumina, which accounted for 33% of total production costs Fluctuations in prices of electricity, which accounted for 25% of total production costs Availability of other raw materials such as coke, petroleum etc. Labor Issues Demand Uncertainty Currency Exposure

Post-completion Risks
Risk Mitigation
Input prices are function of LME aluminum prices, when output prices are high input prices would be high and vice-versa 25 year supply contract with Eskom and EdM for electricity supply Long term purchase contract with sponsors Initial skilled labor and management expertise from South Africa Majority of unskilled low cost labor would come from Mozambique Other inputs would be supplied from the same contractors who supplied the Hillside smelter under similar long-term contracts Major inputs and all outputs would be denominated in U.S. dollars

Sovereign Risk
Risk of Expropriation
Sovereign risk was the most important reason that Gencor/Alusaf chose to finance the project via project financing, as opposed to corporate financing, in order to minimize their risk exposure and be able to raise capital Creeping Expropriation:- Govt may remove the privileges that the smelter would be exempt from customs duties and income taxes It is likely that the Government may change the 1% sales tax, which is more critical than the income tax

Sovereign Risk
Risk Mitigation
Project was structured in a way to ensure that an expropriation would have international consequences International suppliers:- power from Eskom of South Africa, alumina from Billitons Australian operations, raw materials such as coke, petroleum etc would also be imported. Any expropriation will jeopardize its relationship with all these countries Involvement of IFC, a member of the world bank group reduces the risk of expropriation Expropriation will have impact on future flows from development fund

Impact on the Economy

Increase exports by $430 million Increase GDP by $157 million(by 9%) Increase net foreign exchange by $161million per year 5000 construction jobs and 873 permanent jobs Develop human capital through managerial, health and other skills training Improve infrastructure and spur investment along Maputo corridor AIDS awareness program Additional housing Commercial ties with local businesses to bolster Mozambican economy Due to the a large number of benefits to the economy , the government would not act against the interest of the project

Political Instability Risk of war: not completely eliminated Bureaucratic hurdles Underdeveloped infrastructure

According to the World Economic Forum, out of the 20 African countries surveyed, Mozambique ranked last in terms of road infrastructure, legal effectiveness and second to last in terms of openness to trade and time and expense needed to obtain permits and licenses

Financial Risk
It was uncertain from where the 50% of equity would come and who would buy 50% of the output None of the lenders had committed any funds even though the sponsors had held preliminary discussions with a series of banks and development agencies Lot of dependence on the involvement of IFC
Risk Mitigation

A French ECA supporting the use of the French technology was expected to provide 85% insurance for loans from French banks, and IDC was in advance discussions with the South African ECA for insurance for $400 M senior debt The French ECA may be more willing to bear the political risk than banks do because it attaches a higher value to the project in order to be able to export the technology The South African ECA may be more willing to bear the political risk than banks do because it attaches a higher value to the project in order to be able to promote the south African exports The appraisal from IFC concluded that the project was viable and had financial and economic rate of return

Will the sponsors be able to finance the deal ?

Structure of the deal

Equity structure
Mozal was a joint venture between Alusaf and IDC of South Africa
Alusaf $125 million

The aluminum subsidiary of the Gencor group, a South African natural resource company Built worlds largest greenfield aluminum smelter, Hillside smelter in South Africa
IDC(Industrial Development Corporation) $125 million

$3.6bn government owned development bank of South Africa Longstanding business relationship with Alusaf
Prospective Participant Mitsubishi Corporation ------

$78bn Japanese industrial conglomerate with large metals group

Subordinated Debt
IFC $65 million

World bank group promoting private sector development in developing countries Finance projects which have private ownership, are commercially viable, environmentally sound and provide significant development benefits to the local economy 10% of all project finance deals occurred in countries with rating less than 25 Also acts as a development lender by appraising prospective projects, structuring the legal and financial documents, providing long-term capital, and deterring sovereign interference
Other development Institutions $85 million

Senior debt
Export Credit $540 million

IDC and Coface arranged ECA (Export Credit Agency) covered finance IDC in discussion with CGIC, South African ECA to provide insurance for $400mn of senior debt $140 million Coface insured finance
Loans $140 million

IFC to provide $55 million Other Development institutions to provide $85 million Coface to provide 85% cover for loans made by French banks

Favourable factors
Sponsors assembled a group of international lenders comprised of
major financial institutions, development banks, export credit agencies, and multi-lateral agencies [e.g. the IFC and the World Bankthe lender of last resort for developing countries] as a deterrent against expropriation Thus, the structural and institutional approach to risk management by the sponsors discourages sovereign interference. This would encourage lenders to be a part of the deal. Thus, the structure of the deal seems to be viable and favourable for the success of the project. And thus, sponsors will be able to finance the project

How does IFC involvement affect the deal ?

About IFC
A member of World bank group founded in the year 1956 and owned by more than 172 member countries. Worlds largest multilateral source of debt and equity financing for private sectors project. Promoted Pvt. Sector investment in developing countries Unlike other multilateral development institutions, IFCs loans were not backed by sovereign guarantees and the capital was paid-in rather than callable on demand.

The Affect
IFC brings credibility to the project and provides reassurance to potential lender
Project Appraisal Environment and Social Impact Assessment Due diligence high risk projects

Honest Broker IFC had a reputation for being fair to all parties in the deal by reducing the incentive for short term opportunistic behaviour Help in other aspects of the deal like the integration of the diverse legal system followed in Mozambique and other countries Completion guarantees: They could also help to structure the contractual terms to define financial and technical performance

 From the financing angle:

IFC provided loans with longer maturities matching the long project lives. It was willing to lend on subordinated basis. IFC gave greater emphasis to development benefits

IFC played a big role in preventing adverse sovereign action and its involvement reduces political risk

Will the IFC and the sponsors share similar objectives ?

IDC Govt of Moz Sustainable was actively trying development of to improve climate SA by promoting for private sector private investment enterprises

Alusaf Returns from the project, proximity to Hillside smelter, inputs at attractive rates

Eskom Wanted to expand its operations outside SA and utilize its excess capacity

IFC Promotion of private sector investments in developing countries as a way to reduce poverty and improve peoples lives

Mitsubishi Equity provider and will share the output (large metal group)

French Export Credit Agency Supporting the use of Pechiney technology

Objectives of IFC
Mission statement promoting private sector investments in developing countries as a way to reduce poverty and improve peoples life. High risk projects invest in those projects which nobody else wants to finance. Developing human capital among Mozambicans through managerial , health and other skills training. Providing critical infrastructure and spur investments along the Maputo corridor. Generate future investments in other private sector ventures.

Objectives of Alusaf
New Smelter at competitively priced power Profit motive cheap availability of inputs like alumina, raw materials, electricity and labor Risks mitigation risks had been identified and had been dealt with appropriately Establishing commercial ties with local businesses