Financing the Mozal Project Harvard Case Solution & Analysis


Should Alusaf / Gencor invest in the Mozal project*? What are the greatest risks? Have they been adequately addressed?

            The development of the Mozal project would involve the Mozambican government and it is going to require extensive automated technology for the successful completion, development and implementation of the Mozal Project. As Mozambican is an underdeveloped country therefore, the Mozal project would not only be exposed to the technological risks but also to the risks faced by the government such as causing delays for the project. Secondly, the Mozal project is a foreign investment and all the investments and the working capital costs will have to be paid in the foreign currency therefore, the project would be also exposed to the currency or sovereign risks. Acquisition of the resources would also happen which would further expose the project to operational risks.

Mitigation of Technological Risks

            Using the most appropriate technology for the success of the project is one of the significant risks faced by the firm as the project is going to require high technology. The construction of the project is also quite complicated. However, Gencor and Alusaf both have good skills in these areas. Aluminum business had been known to Alusaf and he had been involved in it and he had also used the smelter technology which had by that time proved to be one of his best decisions and the most successful one. On the other hand, Gencor had a wide range of skills regarding the construction of the project as he had also handled the smelter project at Hillside. Therefore, if the proven and the successful smelter technology are used in the project then we could say that the technological risk has been addressed appropriately.

Mitigation of Governmental Risks

            Bureaucratic procedures will have to be fulfilled by the company to undertake the Mozal project and meet all the governmental requirements for the full filament so that grants could be received for the construction of the Mozal project. Therefore, this shows that the government is involved in the project. As a result, there are risks that the project might get delayed also because the country is underdeveloped. Sufficient and the required infrastructure are not easily available in Mozambique therefore, the project would also be exposed to the construction risks and again more delays might be caused.

            However, an agreement has been signed by the company with the South African government and under this agreement a special liaison committee would be formed and the main role of this committee would be to assist the owners of the Mozal project in meeting all the bureaucratic procedures and receive the grant from the government quickly. The same staff would be recruited for the construction of the project which was recruited in the smelter project therefore; this is further going to mitigate the risks associated with construction delays.

Mitigating Operational Risks

             The project would be exposed to a number of the operational risks such as the fluctuations in the prices of the alumina and since these contribute around 33% of the total production cost so the change in prices would impact the project significantly. Availability of coke and other raw material on time is another risk. Labor issues are another one of the important risk.

            A mechanism has been set-up between the output and the input price of alumina where the price would be the function of the London Metal Exchange. Based on this mechanism, lower prices could be received by the project. Furthermore, the initial phase of the Mozal project would be handled by the South African government also and the experience of the employees would help to mitigate the risk of labor conflicts. Lastly, the same suppliers of the smelter project could be approached for the required raw materials so that consistent supply of raw materials could be provided to the project.

Investing in Mozal Project

            The IRR and the expected return of the project have been calculated to decide that whether investment should be made in the project or not. The projected cash flows as shown in exhibit 7 have been used to calculate the IRR for the project. These cash flows have been slightly adjusted because of the similarity between equity and subordinated debts s shown in the spreadsheet. Based on the adjusted cash flows the IRR has been calculated to be around 13.43%.......................

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