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 Mozambique’s 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 Eskom’s 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
• Low Production Costs
– Based on the operating plan, the production cost of Mozal in the
lowest 5% of industry capacity
 Financial Benefits
• Current Ratio
– The current ratio for all the projected years is comfortably
above 1.33

Yr ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12
CR 1.3 1.4 1.6 1.8 2.0 2.1 2.3 2.5 4.0 3.2 7.1 12. 16.
8 1

• Debt Service Coverage Ratio

– DSCR of the company for the following years is falling within
comfortable limits
Yr ‘00 ‘01 ‘02 ‘03 ‘04 ‘05 ‘06 ‘07 ‘08 ‘09 ‘10 ‘11 ‘12
DSC 4.6 1.6 1.5 1.6 1.6 1.7 1.8 1.7 1.4 2.2 1.8 3.4 5.2
R
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 world’s fourth largest aluminum producer
– Gencor had successfully completed the Hillside smelter-which
was, at that time, the world’s 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:- Gov’t 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 Billiton’s 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 world’s 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 Bank—the
“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.
• World’s largest multilateral source of debt and equity
financing for private sectors project.
• Promoted Pvt. Sector investment in developing countries
• Unlike other multilateral development institutions, IFC’s 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 ?
 Alusaf Eskom
IDC
Govt of Moz Returns from the Wanted to
Sustainable
was actively trying project, proximity to expand its
development of
to improve climate Hillside smelter, operations
SA by promoting
for private sector inputs at attractive outside SA and
private
investment rates utilize its excess
enterprises
capacity

IFC
Promotion of private Mitsubishi French Export
sector investments in Equity provider Credit Agency
developing countries and will share the Supporting the use
as a way to reduce output (large metal of Pechiney
poverty and improve group) technology
people’s lives
 Objectives of IFC

• Mission statement – promoting private sector investments in

developing countries as a way to reduce poverty and improve
people’s 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