The Mozal project involved constructing a $1.4 billion aluminum smelter in Mozambique through a joint venture between Alusaf, IDC, and the Mozambican government. IFC played a key role in financing the project by providing long-term loans, attracting other lenders, and helping address political and environmental risks to make the project viable. IFC's involvement helped develop Mozambique's economy and infrastructure while generating jobs and training opportunities.

1. FINANCING THE MOZAL PROJECT
CASE ANALYSIS
CORPORATE FINANCE
BY-
VIVEK KUMAR
1

2. CASE BRIEF
• Time period- 1997
• Location- Mozambique
• Project- $1.4 billion Aluminium Smelter
• Joint Venture between- Alusaf and Industrical Development
Corporation(IDC)
• Born out of common interest among Eskom, Alusaf and
Mozambican Govt.
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3. ALUSAF
• Aluminium subsidiary of Gencor Group.
• Gencore acquired Billiton from Royal Dutch Shell in 1994.
• Gencor- 4th largest Aluminium producer.
• $1.8 billion dollar Hillside Smelter in Richards Bay, South
Africa.
• Build Aluminium smelter in Mozambique using hydroelectric
power.
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4. INDUSTRICAL DEVELOPMENT
CORPORATION(IDC)
• $3.6 billion Govt. Owned bank in South Africa.
• Mission- contribute to sustainable growth in South Africa by
promoting entrepreneurship and financing private sector
enterprises.
4

5. ESKOM
• South Africa Power- 95% of country
50% of continent
• Saw opportunity in Mozambique to generate Hydroelectricity
on Zamberi River.
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6. LONDON METAL EXCHANGE(LME)
• The world centre for industrial metals trading.
• The prices discovered on its trading platforms are used as the
global reference price for both the metal and investment
communities.
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7. HISTORY OF MOZAMBIQUE
• Gained freedom from Protugese in 1974.
• Civil war broke out between Frelimo &
Renamo
• The two sides signed peace treaty in 1992.
• Govt. Made constant efforts to improve
macroeconomic conditions & encourage
private sector investments.
• GDP was increasing and inflation reducing.
• Yet still remained poor and under-
developed.
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8. THE MOZAL PROJECT
• Aluminium Smelter
• Provide Mozambique with electrical and industrial
infrastructure.
• 34 months to complete.
• Additional 6 months to reach full capacity.
• Smelting technology from France.
• Skilled labour from South Africa
• Unskilled labour from Mozambique at low cost.
• Raw materials from current suppliers at Hillside.
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9. NEGOTIATIONS
BILLITON’S
AUSTRATIAN
OPERATIONS
ESKOM & EdM
PECHINEY OF
FRANCE
SKILLED
LABOUR
UNSKILLED
LABOUR
SUPPLIERS AT
HILLSIDE
SMELTER
TAXES & FEES
Smelting Technology
Electricity under 25yr contract
Alumina imports
under 25 yr
contract
South Africa
Mozambique at cheap cost Raw materials
Industrial Free Zone
No Custom duties
1% sales tax
MOZAL PROJECT
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10. PROJECT POTENTIAL
• A Low cost producer, among lowest 5% of the industry.
• World average cost of production & financing- $1510 per ton.
• Mozal project- $ 1493 per ton in 4th yr, declining to $1070 in 11th yr.
• Cost of Capital $4750 per ton, compared to the recent average of $4850.
• Mozambique GDP growth rate- 0.5% (1980-91) to 6.5%(1992-96)
• Attractive Power tariffs, favourable investment incentives.
• Labour cost 1/5th of western world smelter.
• Risk rating from 7.6 to 14.0
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11. CHALLENGES OF PROJECT
• Legal and Approval system- Mozambique followed civil law
based system with contrasted with common law system of
South Africa.
• Pessimistic picture of Economist Intelligent Unit(EIU)
• Pessimistic approach of investors.
• No existing infrastructure.
• Logistical challenges.
• Unskilled labour.
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12. FINANCING
ALUSAF
$125
IDC
$125
EQUITY
PARTNERS
$250
START-UP
CASH
$35
SUBORDINATE
DEBT
$150
SENIOR DEBT
$680
$ - In million
THE MOZAL PROJECT
$1365
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13. INTERNATIONAL FINANCE CORPORATION (IFC)
• A member or world bank group.
• Founded in 1956.
• 172 member countries.
• Rich experience in emerging markets.
• Invested in private sector in poor countries with the aim to reduce
poverty and improve standard of living.
• Projects must have- private ownership, commercial viability,
environmentally sound and provide developmental benefits.
• Provided long term multilateral source of debt and equity.
• Valued developmental benefits.
• Provided lower financial rate of return for same risk.
• Appraisal of Mozal project took 3 months (Jan-Mar 1997)
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14. OUTCOMES
• Increase exports by $430 million.
• Increase GDP by $157 million (6.5% to 9%).
• Increase net foreign exchange by $161 million.
• 5873 jobs for Mozambicans.
• jobs for Mozambicans.
• Job training, AIDs awareness, housing.
• Provide critical infrastructure and spur future investments.
• Social and environmental impact.
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15. Q.1 a) Should Alusaf/Gencor invest in
the Mozal project
Market Opportunity
o To rebuild Mozambique’s damaged infrastructure
They already have a strong footing in South Africa, where they completed Hill Side
smelter, $360 million under budget and four months ahead of schedule, Mozal can
access the same resources
Support from Government of Mozambique
o Offered to create an Industrial Free Zone and exempted from custom duties and income tax,
levying a sales tax of just 1%
Competitive and Reliable Suppliers network
o Eskom’s offered long term and attractive electricity prices and also the availability of cheap
hydroelectric power
o The key elements of production was internationally sourced from reputed companies
Low Production Costs
o Very low Labor and overall production costs compared to the rest of the industry
Financial benefits
o The current ratio for all the projected years is comfortably above 1.33
o DSCR of the company for the following years is falling within comfortable limits.
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Exhibit 6

16. Q. 1 b)What are the greatest risk? Have
they been adequately addressed?
• Technology:
Risk of handling construction of a project that require technology and skills.
Alusaf had already used the smelter technology in hillside smelter project that turned out to be a
meaningful decision.
• Timely Completion of the project:
Since government is directly involved in this project, therefore it would involve bureaucratic
procedure to comply all the legal and legislative requirement of the state.
Company is seeking prior permission of the state to grant construction permit. Thus an agreement
has been signed with the South African government to address risk associated with delays.
• Operation:
Cost of production heavily depend on cost of raw material(Alumina)
Agreement by which rate of Alumina is the function of final product.
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17. Q.2 Will the sponsors be able to
finance the deal?
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18. Equity:
IDC(Industrial Development Corporation)
• $3.6bn government owned development bank
• Longstanding relation with Alusaf
Mitsubishi
• $78bn Japanese industrial conglomerate with
large metals group
• Synergy/ Shared interests
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19. Quasi Equity
IFC
• 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
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20. Senior Debt
IDC
• Discussion with CGIC, South African ECA to
provide insurance for $400mn of senior debt
• Protect creditors against losses from commercial
insolvency and political risks
Loans
• 85% cover for loans made by french banks
• Loans arranged by IFC and other development
financial institutions
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21. 3.1 How does IFC involvement affect the deal?
• It would generate interest among banks to finance the project.
• Outcomes appraisal would generate confidence in the project.
• Will ensure the project is fair to all parties.
• It would be a catalyst and increase the likelihood that others would
participate in the deal and generate future investments.
3.2 Will IFC and sponsors(Alusaf & IDC) share similar objectives?
• Yes, going by the mission of IDC, it is similar to the ideology of IFC.
• Alusaf will be benefited as IFC will provide comfort to potential
lenders.
• IFC will reconcile the different legat system of Mozambique & south
Africa into a single set to simplify dispute resolutios.
• Specify sponsor’s completion guarantees- What kind of political
events would release the sponsors from contractual obligations.
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22. 3.3 Should the IFC play an advisory role only or should it also invest
in the Mozal project?
• IFC should also invest in the Mozal project.
• It was willing to make loans with longer maturity for long lived
asset.
• Could offer lower financial rate of return for same risk.
• IFC involvement could help change the country’s risk rating as
evident in history.
• Would lead to overall development and growth of Mozambique and
could be a good opertunity of them get over hard times of war and
move towards a better future.
• It would help IFC live out it’s mission.
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23. 4. As an IFC board member, would you approve the recommended
investments in Mozal?
• Yes, Selling price of metal is higher than the Mozal cost, thus their
is the potential for Profitability.
• Investment in the project would generate valuable social,
economic and financial benefits.
• Mitsubishi Corporation, worth $78 billion is a participant to join
the deal.
• Industry demand for aluminium is 20 million tons is expected to
grow by 2-3% each year.
• Projected growth of 5million tons of primary capacity for the next
10 yrs.
• Outcomes of the project appraisal depict a positive potential of
the project towards Mozambique’s growth and development as
well as profitable for the sponsors.
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24. Q.5) What is the IFC`s competitive
advantage?
• Good governance.
• Better Accountability.
• Increased lender liability are relevant to
financial institutions.
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25. To what extent does the IFC do something
that is unique, valuable, and sustainable?
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Longer maturity period loans
given
• Senior debt for 7-12 years
• Subordinated debt for 8-15 years
Presence of IFC increases the
likelihood of other lenders to
finance the project
IFC was willing to lend on
subordinate basis thereby
exposing itself to higher risks
As compared to commercial
banks, IFC was willing to
accept lower returns for the
same level of risk because of
the development policy
IFC structured deals in such a
manner that sovereign risk is
mitigated
IFC helps the sponsors in
improving the corporate
governance and make them
more sustainable
IFC also makes the
companies adopt better
environmental practices
IFC’s association with the
World Bank helped in
reducing the political risk
IFC helps in developing
human capital among the
Mozambicans through skills
training