Financing the Mozal Project Case Solution

Homework 4: FINA 6214 International Financial Markets

Sebastian (Dongye) Jin

Question 1：Should Alusaf/Gencor invest in the Mozal project?*

Yes, Alusaf/Gencor should invest in the Mozal project for the following reasons:

1. There is strong growth potential of aluminum demand, at about 2% to 3% per year. Analysts projected a need for five million tons of new primary capacity over the next ten years.

2. Mozal project is an opportunity for Alusaf to build another smelter making use of the potential availability of hydroelectric power in Mozambique and getting a win-win cooperation with a power provider through an access to its competitively-priced power. The plant would also benefit from access to Maputo’s harbor and proximity to the Hillside smelter in Richards Bay.

3. The new plant would have a potential to expand its capacity to be 500,000 tons in the future based on constructed necessary infrastructure. Besides, Alusaf/Gencor has a strong experience in investing in South Africa where they completed Hillside project. The new project could use the same smelting technology, construction team and contractors as the previous Hillside project and therefore lower its capital cost through the advantages of backwardness.

4. Most of unskilled labor would come from Mozambique, which means a much lower labor cost.

5. Policy support: Being located in Industrial Free Zone would exempt the project from customs duties and income taxes and all transactions would be executed through USD, which means less risky in currency exporsure.

6. It is optimistic to see the aluminum price would rise in the future based on historical track record.

7. Better investment environment: Political risk turns down for a signed agreement to honor and protect cross-border investments, the macroeconomic data in Mozambique got better after reformation, and a better monetary fiscal management emerged, which all result in a higher ICRG risk ratings and lower sovereign...