Financing the Mozal Project

Case Study: Financing the Mozal Project

Reasons for Alusaf/Gencor to invest in the Mozal project and what return would be required.  Risks involved and level of being adequately addressed:

Understanding and weighing all risks, we believe an investment from Alusaf and Gencor would be a rather risky decision, however would provide great financial and societal rewards. The project offers the opportunity to rebuild Mozambique’s damaged electricity infrastructure and to develop inexpensive hydroelectric generating capacity on the Zambezi River. Also, because the plant was targeted for an Industrial Free Zone, it would be exempt from customs duties and income taxes (though it would be subject to a 1% sales tax). Again, with this construction and operating plan, Mozal would be a low cost producer. Where the average production cost for the world’s 164 aluminum smelters was $1,510 per ton, Mozal’s break-even price including depreciation and financing charges in almost $100 less per ton at $1,493, declining to $1,070 in the eleventh year. Financially, current assets over current liabilities never falls below 1.3, and ends at 16.1 as projected by 2012. This goes to show that the Mozal Project is projected to consistently make enough money to cover their debt over this 15 year period. Not only does their current ratio make this a rather comfortable investment, but their cash flow to principal plus interest for both their senior debt and total debt is at a comfortable level, showing enough cash flow to cover their total debt over 5 times over by 2012.

The greatest risks for the Mozal Project include time to completion, technological downfalls, and cost of production. In terms of time to completion, according to a study done by the World Bank, starting a new enterprise entailed 12 procedures, 151 steps, and 70 government bodies. This process could take up to five years. However, Mozambican government was actively trying to improve the macroeconomic situation and climate for private sector investment for projects like this one. A specific measurement taken was the establishment of a special liaison committee to shepherd the Mozal project through these intensive regulatory procedures. In terms of production, the costs rely predominantly on the cost of Alumina, and with market volatility and speculation, it is difficult to get an accurate read on prices.

Starting with the initial investment of $1.4 billion, and following with 13 years of cash flows (starting with $170 in 1997 up to 2012), we can solve for an IRR of 8.3%. This means that the Mozal Project would require a return of XXX% to be profitable. However, it is important to consider that with IFC investment compared to private lenders, the IFC can either accept a lower financial rate of return for the same risk, or could accept more risk for the same financial rate of return.

[pic 1]

Sponsors capability in financing the deal: