INSTITUTE OF MANAGEMENT TECHNOLOGY, DUBAI

Project Appraisal and Financing

FINANCING THE MOZAL PROJECT

SUBMITTED TO:
DR. RAJESH KUMAR
(PROFESSOR FINANCE, IMT DUBAI)
SUBMITTED BY:
GROUP: 6
MANAN SANGHI 180201074
PRANJAL SRIVASTAVA 180201082
SHATUL BANSAL 180201089
SHIVANG BHAGAT 180201091
SHUBHAM MITTAL 180201143
 Finnacing the Mozal Project

Table of Contents

PROJECT DESCRIPTION .................................................................................................... 3
HISTORY OF MOZAMBIQUE ............................................................................................ 3
FINANCING ............................................................................................................................ 4
RISKS ....................................................................................................................................... 4

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 Finnacing the Mozal Project

PROJECT DESCRIPTION

In June 1997, a project team from the International Finance Corporation (IFC) was
recommending that the board approve a $120 million investment in the Mozal project, a $1.4
billion aluminum smelter in Mozambique. The Mozal project was a joint venture between
Alusaf and the Industrial Development Corporation (IDC) of South Africa. According to the
feasibility study, Alusaf and IDC would each own 25% of Mozal; ownership of the remaining
50% had yet to be determined. Mitsubishi Corporation was the leading candidate at the time.
The Mozal project began as the confluence of interests among three entities: Eskom, Alusaf,
and the Mozambican government. It was estimated that it would take 34 months to complete
the project and another six months to reach full capacity. Although Mozal, a single potline
smelter with annual capacity of 250,000 tons, was half the size of the Hillside smelter, a
double potline smelter with annual capacity of 500,000 tons, it would be constructed with all
of the necessary infrastructure to double capacity at some point in the future. Based on these
projections, Mozal would have an overall capital cost of $4,750 per ton compared to an
average capital cost of $4,850 per ton for other recently constructed smelters. It was going to
use the smelting Technology from France. Skilled labour was to be used form South Africa,
Unskilled from Mozambique at low cost.

HISTORY OF MOZAMBIQUE
It gained Freedom from portugese in 1974. Shortly thereafter, a civil war broke out between
Frelimo and a rural-based rebel group known as the Resistencia de Moçambique. Between
1975 and 1992, the war claimed the lives of over 700,000 people. Most of these were victims
of the Renamo. Besides the human toll, the war destroyed most of the country’s
infrastructure. The two sides signed a peace accord in 1992 that ushered in a period of
transition from war to peace, from socialism to capitalism, and from one-party rule to
democracy. Govt. made constant efforts to improve macroeconomic conditions & encourage
private sector investments. After this the GDP was increasing and inflation was decreasing.
Despite all these efforts, the country remained poor and under-developed.

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 Finnacing the Mozal Project

FINANCING

The sponsors planned to finance the $1.4 billion project using a combination of equity
(including $35 million of cash generated during start-up), subordinated debt, and senior debt.
Alusaf and IDC each planned to invest $125 million while one or more additional equity
partners would invest another $250 million. The deal would contain $150 million of 15-year
subordinated debt, with $65 million coming from the IFC and $85 million coming from other
development institutions. Senior debt holders would provide $680 million, or 50% of total
capital. Development institutions, including the IFC, would provide the final $140 million.

RISKS

• Construction risk: Low with experienced players the industry, but possibility of Force
Majeure.
• Operating risk: Cost of production heavily depends on cost of raw materials.
• Technology Risk: Risk of handling project, which has, requires technology and skills.
This risk could be mitigated as alusaf has already used a technology in its hillside
project, which turned out to be successful.
• Sovereign risk: High. Civil unrest, threat from rebel groups.
• Other social risk: Human rights issues from resettlement of local residence

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