project Mozal

Topics: Investment, Risk, Finance Pages: 28 (5532 words) Published: February 14, 2014
Financing the Mozal Project

Table of Content

1

Introduction .................................................................................................................................... 3

2

Project Valuation ............................................................................................................................ 4 2.1
2.2

3

Should Alusaf/Gencor invest in the Mozal Project? ............................................................... 4 What are the greatest risks? Have they been adequately addressed? ...................................... 8

The Role of the IFC ........................................................................................................................ 9 3.1

How does IFC involvement affect the deal? ........................................................................... 9

3.2

Will the IFC and the sponsor (Alusaf and IDC) share similar objectives? ........................... 10

3.3

Should IFC play an advisory role or should it also make an investment in Mozal? ............. 10

3.4

As an IFC board member would you approve the recommended investment in Mozal? ...... 11

3.5

What is the IFC’s competitive advantage? ............................................................................ 12

3.6

To what extent does the IFC do something that is unique, valuable and sustainable? .......... 12

4

Conclusion .................................................................................................................................... 13

5

References .................................................................................................................................... 15

2

1

Introduction

In the last forty years, a new source of financing has gained more and more popularity, the so called Project Finance. Under project finance, a new legally independent project company is created which is financed with equity coming from the sponsors on the one side and – what is much more interesting – with nonrecourse debt on the other side. Generally, project companies are created for an investment in one single capital asset which usually has a finite life (Esty, 2009). What makes Project Finance so appealing to companies is that it allows them to finance very large capital-intensive projects whereby the project assets and liabilities are not shown on the sponsor’s balance sheet and therefore, are a kind of off-balance sheet financing.

In 1997, the so called Mozal Project – the construction and operation of an aluminium smelter in Mozambique – was originated by the two sponsoring firms Alusaf and the Industrial Development Corporation (IDC) of South Africa. Alusaf was a subsidiary of the South African natural resource company Gencor Group and via its mother company it can show great experience in the construction and operation of aluminium smelters. IDC, in addition, was a $3.6 billion government-owned development bank located in South Africa whose goal was to ensure economic stability in the region by investing in new ventures. With a current GDP of $1.7 billion the $1.4 billion Mozal project represents a very large project for the country and is expected to have a significant impact on Mozambique’s GDP growth. Nevertheless, the project’s size also bears a lot of risk. Especially Mozambique’s history which looks back to a brutal civil war which dates back to the country’s independence in 1975 and which was abandoned just some years ago in 1992. However, the optimistic statement by the Economist Intelligence Unit (EIU) which sees an improving picture of Mozambique especially due to “the government’s ongoing commitment to monetary reform and prudent monetary and fiscal management” (Esty, 2009) allows for a positive, although restrained, economic outlook. Currently, Alusaf and IDC are examining their investment opportunity and within the course, they set up the project’s financial...

References: Damodaran, A. (2006). Damodaran on Valuation. 2nd edition. John Wiley & Sons, Inc.
Hobocen, New Jersey
Esty, B.C. (2003). The Economic Motivation for Using Project Finance. Working paper.
Kleimeier, S. and Versteeg, R. (2010). Project Finance as a driver of economic growth in
low-income countries. Review of Financial Economics, 19, 49-58.
Ross. A, Westerfield, W. & Jaffe, J. (2005). Corporate Finance. McGraw-Hill/Irwin,
New York.
15
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