Financing the Mozal Project Case Solution

Other development banks and lending corporations lack the resources to conduct extensive research on the project, its sponsors and host government. Thus, these authorities are unable to assess the feasibility of the projects completely. IFC is also known as the “honest broker” as it makes sure that the project is structured such that it is fair for all parties. IFC has gained investors’ faith due to these competitive advantages. Thus, IFC investment in any venture gives comfort to the potential investors, and it becomes easy to get financing for the venture. In this way, IFC acts as a catalyst for investment in a country.

2. How does the IFC involvement affect the deal?

The IFC involvement in Mozal project is vital to attract financing for the project. As Mozambique has low ICRG risk ratings, no investor wants to invest in Mozambique. All the investors will invest only if IFC gets convinced that the venture will be profitable. If, IFC invests it will give a signal in the market that appraisal gave positive results, which will add confidence in the investors to take on the risk. IFC involvement will also result in improvement in country’s risk ratings which will increase FDI in the private sector in Mozambique.

Furthermore, IFC will give leading advisory role in structuring the project and in dealing with legal complexities. The Mozambique has a civil law system as illustrated in the case whereas South Africa has a common law system. IFC experience will help reconciling both laws in single legal documents. The IFC will also help in defining technical and financial completion by the sponsors well enough so that there is no ambiguity in the completion of the contract.

Moreover, IFC involvement in the project will deter the sovereign actions as IFC before investing into the projects makes sure that the project is fair with all involved parties, and it is consistent with the government’s long term plans.

For the Mozal project, IFC involvement is necessary also because it is the institution which extends loan with longer maturity matching the long term project’s lives. It is willing to lend on subordinate basis. It gives greater emphasis to developmental benefits thus increasing the value of the project for the local government.

3. Is the return to Alusaf/Gencor from investing in the project adequate?

By investing in Mozambique, Alusaf will be able to produce aluminum at a low cost of $1493/ton in the fourth year and at $1070/ton in the eleventh year. Whereas, the industry average cost is $1510/ton. As, the industry demand for aluminum is 20 million tons per year, and it is expected to grow by 2 to 3% per year, Mozal will have large market to cater. Alusaf just completed its Hillside smelter in South Africa, which completed 4 months before schedule and which was 360 million under budget, thus Alusaf can employ the same resource for the construction of Mozal project. Currently Mozambique is struggling for economic growth, thus it is supporting Alusaf in Mozal project by exempting the project from custom duties and income taxes. The projected cash flows from operations remain at least $170 million. The current ratio for the project remains at 1.3 or above, and the DSCR (senior debt) is at least 1.6 and DSCR (total debt) is at least 1.4, thus the project is providing enough returns to cover the debt.

Furthermore, the yield on 10-year U.S. Treasury bonds was 6.56% thus risk free rate is 6.56%. The yield on the Nigerian Brady Bonds was 13.35%, and its risk rating 14.8 is similar as of Mozambique, thus 13.35% can be assumed as the expected market return. The average asset Beta for the industry was 0.78. Thus, the CAPM gives the required rate of return = 0.0656 + 0.78*(0.1335-.0656) = 11.8% (constant prices). The NPV of the project remains positive even at extreme 25% interest rate. This implies that the IRR needs to be way too high to bring NPV to zero.

4. What are the greatest risks? Have they been adequately addressed?

The technological risk has been mitigated as Alusaf is setting up the same technology which it did for Hillside smelter South Africa. Alusaf will also employ the same management team for successful execution. The risk of slow completion of the project has been accounted for as electricity infrastructure will be provided by Eskom, and speedily permits will be granted by special liaison committee, established by the local government.

The risk of increase in cost of raw materials has been reduced by entering into long term agreements with suppliers.75% of the inputs’ cost is linked to LME aluminum rates creating natural hedge against inflation. The main raw materials, alumina and electricity, will be supplied under 25 year contract. Alumina prices are linked to LME aluminum and electricity prices are expected to be linked with LME aluminum prices in later years. Unskilled labor is much cheaper in Mozambique; one-fifth of the labor cost incurred by other aluminum smelters in the world.

Mozal will be able to make sales once it starts operations because sponsors have contracted to purchase its output at market prices. Mozal will not be affected by currency foreign exchange trends as its key inputs, and all output is denominated in U.S dollars.    

The Mozal project is structured in a way that it has a number of international stakeholders. If the government will expropriate, it will badly affect Mozambique international image hampering future FDI in Mozambique. Thus, expropriation risk is mitigated.