International Finance Corporation

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Financing the Mozal Project
Executive summary

We have assessed the various risks involved in the Mozal project. The construction risk, operating risk and financing risk are relatively small but the political risk is very high. Creeping expropriation and moral hazard are realistic threats to the project. The high sovereign risk is reflected in the hurdle rate. The hurdle rate amounts to a much higher value than the internal rate of return. Therefore, it is not feasible for the sponsors to undertake the proposed investment in the project. Regarding the financing gap of $250m; participation of the IFC is quintessential as commercial bankers refuse to provide funding without its involvement. IFC involvement could be very beneficial for the project but the IFC's board should not go through with the recommended investment of $120m as the high sovereign risk does not justify making the IFC’s largest investment yet.

Summary of facts
The Mozal project, a $1.4b aluminum smelter in Mozambique, is a joint venture between Alusaf, the aluminum subsidiary of the Gencor group, and the Industrial Development Corporation (IDC) of South-Africa, a government owned development bank. Mozambique is one of the poorest countries in the world and only recently emerged from a 17-year civil war that had destroyed the country’s infrastructure. Both parties would each own 25% of Mozal by an equity investment of $125m. Ownership of the remaining equity stake of $250m is still to be determined. To be able to attract additional funding, the sponsors require needed to involve the International Finance Corporation (IFC), a member of the World Bank Group. The IFC has a good reputation and solid experience in structuring deals in emerging markets. The IFC board has received a recommendation by its team to participate in the project with a $55m senior debt and $65m subordinated debt investment.

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