Mozal’s Projected Cash Flows
The Mozal project will generate positive financial returns and strategic options for the sponsors. Alusaf could obtain the following benefits: to reach economies of scale, to access a cost competitive source of energy, to position itself as a world-class low-cost producer, to diversify its centers of production, etc. On the financial side, the project will generate 15% IRR for equity and quasi-equity holders in the next 25 years (for further details of assumptions please refer to Appendix 1).
The most appropriate discount rate should incorporate factors such as industry and political risk but also the potential benefits from strategic options and the participation of the IFC. Since it is difficult to incorporate all these factors into methodologies such as the CAPM or APV, it is a good alternative to use a hurdle rate. Assuming that the IFC will participate in Mozal, Alusaf can use the average investment return obtained by the IFC as the hurdle rate. This benchmark is appropriate given the following: 1)IFC could significantly reduce the political risk, 2) it has a large track record of investing in projects with similar risk profiles and 3) the Mozal project will have a similar structure as previous projects of the IFC. According to Exhibit 11, the ex-post rate of return (ROR) of IFC projects is 12%.
Mozal’s projected cash flows assumed aluminum price of $1750 per ton compared to current market price of $1560 in June 1997. During the past 10 years, the aluminum prices fluctuated between a low of $1040 per ton and a high of $3645 per ton. However, from 1992 to 1993, the average real price of aluminum price fell below $1500 in 1997 dollars. The case did not suggest the mean reverting average price of aluminum, but a projected price of $1750 appears to be optimistic compared to the current price of $1560. There are futures contract for aluminum traded in the London Metal Exchange (LME), the futures price goes out to X years and Mozal’s