Financing the Mozal Project Case (Hbs 9-200-005)

International Finance Corporation |

The Mozal Project |

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Jacqueline HamersLin JiangLita Astuti NapitupuluSuyang ZhouHamed Yazdani |

June 1997

Executive summary

Mozal is a $1.4 B aluminum smelter project in Mozambique. The sponsors are Alusaf, a subsidiary of a South African natural resource company, and IDC, a government-owned South African development bank with long-standing relationship with Alusaf. Since, amongst different conceived risks, Sovereign risk was the most important one, Gencor/Alusaf chose to finance the project via project financing, as opposed to corporate financing, in order to minimize their risk exposure and be able to raise capital. Project was structured in a way to ensure that an expropriation would have international consequences, and also lenders would be comfortable enough to participate in the project. Namely, existence of international commercial partners (e.g. Eskom), involvement of multilateral/bilateral agencies (e.g. IFC), and involving foreign trustee to keep the sales proceeds. In this way, any expropriation would have impact on future flow of development funds and jeopardize as well the trade relationships with these countries as they were at the same time Mozambique’s important trade partners.

The analysis of Free Cash Flow to Equity, shows that although, most of Mozabique’s Sovereign risk is mitigated due to specific characteristics of Mozal project, the NPV of the project becomes positive only after considering the real option for doubling the capacity of the project. Nevertheless, existing historic data shows that there is a significant difference between ex-ante and ex-post financial and economic ROR calculations by IFC in Africa region which justifies not completely eliminating the sovereign risks.

However, the final recommendation for IFC is to undertake the investment because in the end this project is in line with IFC’s strategy. Besides, this project has huge positive impact on economy of...