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Financing the Mozal

Group 1 Team
Prashant Gupta
Vaibhav Gupta
Vinayak Harer
Uday Jaipuria
Deepak Kidiyoor
Saran Markan



About the Project

Objectives of IFC & other sponsors
Risk Assessment
IFC involvement
Financial analysis
Current status of Mozal

Mozal Project
South African Power utility
95% of countrys & 50% of Africas power

Mozambique govt.
Build damaged electricity infrastructure

Industrial and electrical infrastructure
Access to competitively-priced power

$1.4 billion aluminium smelter

Takes upto 18 months to finalize the deal

About Mozambique
1975 1992: Civil war broke out
Post 1992 : Socialism to Capitalism;
Economic reforms; Privatization ;
Removed price control
Sub Saharan : Indebtedness, Country Risk
World Economic Forum : Road infrastructure,
Legal effectiveness, Time to complete, Trade

Mozal through countrys Byzantine

administrative and regulatory procedures

Aluminium Production
Industry demand 20 mn tons/year
Demand growth 2-3% increase/year
Aluminum Prices
Low : $1040/ton Nov.1993
High: $ 3645/ton June 1988
Average : $1500/ton

Major inputs for Aluminum

Alumina- Billiton
Electricity EdM
Labor and other raw materials

Mozal Execution and


Maputo -> Capital of Mozambique

34 month + 6 month Full capacity
Annual capacity 250000 capacity
Overall capital cost:$ 4750/ton (others:$4850)
Free from custom duties and income taxes
1% sales tax applicable

Currency Exposure
All denominations in $ Less risk

Low cost producer(lowest 5% costs)

Objectives of IFC and other Sponsors

Will the IFC and the sponsors share similar

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

French Export
Credit Agency
Supporting the
use of Pechiney

development of
SA by


Wanted to
expand its
outside SA and
utilize its excess

Promotion of
private sector
investments in
countries as a
way to reduce
poverty and
peoples lives
Returns from
the project,
proximity to
smelter, inputs
at attractive

Govt. of Moz
Was actively
trying to
improve climate
for private sector

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.

Objectives of Planned sponsors

Objectives of IDC Sustainable growth in South Africa by promoting
entrepreneurship .
e.g. Hillside smelter and financing private sector enterprises.
Economic stability maintaining economic stability in the
South African region

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.

Risk Assessment
What are the greatest risks and have they
been adequately discussed?

Risks for the Project

Country Risk

Political instability.
High indebtedness and legal ineffectiveness.
Poor and under-developed country and a risk of civil war.
Risk of expropriation.

Mitigation by government
Investment Protection and Promotion Agreement.
Government has applied for entry into HIPC debt
Exempt from custom duties and income taxes.
External debt and inflation has decreased and FDI
has increased.

From Financial to Structural

approach in Risk Management
The sponsors assembled a group of international
lenders comprised of
IFC as major financial institution
Industrial Development Bank
Export Credit Agencies (Coface and CGIC).

South African power supply, alumina from Australia,

technology from France, and holding of sales
proceeds in foreign bank account.
Highly leveraged capital structure to discourage
The project is set up as an independent entity.
The establishment of infrastructure, training of local
human resource, awareness camps for AID/HIV,

Risks for the Project

Timing and completion risk
Complex bureaucratic processes that may delay getting
the necessary permits to proceed with the construction
The conditions of the basic infrastructure may slow down
the construction efforts

Government established a special liaison committee.
Infrastructure development for electricity supply by
Eskom and EdM.
Will employee the same project management team
under similar agreements.

Risks for the Project

Operational risk

Fluctuation in aluminum prices.

Labor issues.
Demand and supply uncertainty.
Currency exposure.


Input prices are function of LME aluminum prices.

25 year supply contract for alumina and electricity.
Long term purchase contract with sponsors.
Initial skilled labor and management expertise from
South Africa.
Major inputs and all outputs would be denominated in
U.S. dollars.

Other Risks
Diverse legal systems and Completion
Expertise and experience of IFC in these areas.

Interest rate risk

Subordinated debt interest risk is mitigated by linking
them to the amount of sales.

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 find other bank or financial institution
will finance the project.
Road infrastructure.
Local Suppliers
Input prices are not totally hedged.

IFC involvement
How does IFC involvement affect the

About IFC
A member of World bank group founded in the year
1956 and owned by more than 170 member countries
Promoted private sector investment in developing
countries for social cause
Worlds largest multilateral source of debt and equity
financing for private sector projects
The loans provided by IFC arent backed by the
sovereign funds

How Does IFC Involvement Affect The Deal?

IFC participation had a catalytic effect on other

IFC brings credibility to the project and provides
reassurance to potential lenders.
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.
Reducing the incentive for short term opportunistic

Help in other aspects of the deal like the integration

of the diverse legal system followed in Mozambique
and other countries.

How Does IFC Involvement Affect The Deal?

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
It was willing to lend on subordinated
IFC gave greater emphasis to
development benefits.
IFC played a big role in preventing adverse

Financial Analysis

Mozal : Costs and Pricing

Avg. prod. Costs (excluding depr and financing)
$ 1510/ton

Mozals prod cost( including depr and financing)

$ 1493 ton in 4th year
$1070 by 11th year

67% of production cost was variable

47% of production cost varied with LME prices
Aluminum Prices
Aluminum price assumed - $1750/ton
Existing aluminum price - $1560/ton
Average Aluminum price - $1500/ton

Sensitivity analysis
Fluctuation in aluminum prices
Due to speculations

Cost components
33% alumina (function of LME aluminum
25% electricity (function of LME
aluminum prices in later years)
Remaining labor + other raw material +

Should Alusaf/Gencor invest

in the Mozal Project?

Strategic Benefits
Market opportunity
To rebuild some of Mozambiques damaged infrastructure

Well positioned in Southern Africa

Hillside smelter

$350m under budget

5 months ahead of schedule
Mozal will access the same resources
Useful parallels

Competitive and reliable 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

Strategic Benefits
Support from Government of Mozambique
Investment incentives
Industrial Free Zone:
tax at 1% of turnover
exempt from custom duties, sales and circulation tax

Liberal foreign exchange regime:

Can repatriate dividends & loan repayments
Can hold foreign exchange offshore

Rare mix of key elements in Aluminium Production

Alumina import on a long term deal
Labor costs
Hillside suppliers

Strategic Benefits
Reliable transport
Port and Maputo Corridor
Enhance reputation for technical
Group synergy
IDC, IFC funding
Indirect benefits

Financial Motivation
Increase shareholder value
LME exposure of roughly 75%,
decreasing to
roughly 60% after 2012
$1,500/tonne to earn weighted average
cost of capital

Financial Motivation
Current Ratio


Mozal is a big project in a poor country
weak legal rules, lots of bureaucracy,
and a
history of civil war

Will the sponsors be able to

finance the deal?

Deal Structure

IDC(Industrial Development
$3.6bn government owned development
Longstanding relation with Alusaf
$78bn Japanese industrial conglomerate
with large metals group
Synergy/ Shared interests

Quasi Equity
World bank group promoting private sector
development in developing countries
Net income of $400mn in 1997
10% of all finance deals in countries with
rating less than 25
Mozal project was viable and had
acceptable financial and economic
rates of return

Senior Debt
Discussion with CGIC, South African ECA to
provide insurance for $400mn of senior
Protect creditors against losses from
commercial insolvency and political risks
85% cover for loans made by french banks
Loans arranged by IFC and other
development financial institutions

Current Status of the


Completed near Maputo, Mozambique in 2000
Project Management Institute's 2001 "Project
of the Year" Award
$100M under budget
6 months ahead of schedule
Phase II construction project at Mozal
Mozal is owned by BHP Billiton, 47.11%;
Mitsubishi, 25%; the Industrial Development
Corp. of South Africa, 24.04%; and the
government of Mozambique, 3.85%.

In Mozambique, there has been an
imbalance of trade
The price of Aluminium fell from
US$2,621 per ton (2008) to
US$1,383 per ton (2009)
Fall in tax revenue received from
Mozal uses a lot of energy

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