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Hydro Aluminum Consolidated (HAC)

Hydro Aluminum Consolidated (HAC)

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Hydro Aluminum Consolidated (HAC)

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  1. Hydro Aluminum Consolidated (HAC) FINA 7360 Dr. R. Susmel Presented by: Natalia Mora Aamir Nomani

  2. Case Information • HAC, engaged in production & distribution of Aluminum • CVRD (Companhia Vale do Rio Dolce) • Alunorte, sub-division (Aluminum)

  3. Objectives • Determine the investment opportunity with CVRD • Determine under what terms and conditions should HAC accept CVRD’s offer

  4. Country Report - Brazil • Checklist method • Risk is assessed based on: • Economic Indicators, to evaluate the country’s financial condition • Debt Management, to measure the country’s ability to repay debt • Political factors, to evaluate political characteristics and political stability • Structural factors, to measure socio-economic conditions

  5. Ratings Table

  6. Brazil Risk Analysis

  7. Calculating βi • βiW=βi * βcw • βi = Domestic beta for Alcan and Alcoa • Βiw = Sensitivity of the assets to the world market • βcw = Sensitivity of the domestic market to the world market Domestic Markets: S&P and BVSPA World Market: MSCI World Index

  8. Calculating project’s Beta

  9. FEASIBILITY DATA • 1999 USD/BRR 1.2105 • Costs: USD 160M, USD 22.85/year • Tax rate: 8.78% (From CVRD 98 financial statements) • Long-term Gov. Securities 98: 18.06%

  10. NPV CALCULATION • Discount rate = Long-term Brazilian securities rate + 2.75% (given) • NPV of the project = $7.23M • Since NPV = +ve, we advice HAC to invest

  11. FUNDING POLICY • HAC should borrow as much funds as it can in Brazil to cover the economic exposure. • Debt payments should match with revenues. • Better balance between inflows and outflows denominated in foreign currency (BRR). • Borrow from Brazil’s Government in BRR. • Finance from investors and suppliers in BRR.

  12. HEDGING POLICY i) 5% deposit of the proposed investment: Buy forward BRR for paying the deposit. If we know when CVRD is giving us the money back in case of loosing the contract buy a BRR put option for that time T. ii) In case HAC's bid is accepted it needs to make a substantial investment in BRR denominated assets: For the net revenue amount after paying debt denominated in BRR. Sell 7-year BRR forward and Roll it over, or sell BRR forward today for each of the revenues from 99 to 05.

  13. OPTION’S VALUE The Option: Convert credit to equity by acquiring CVRD’s common shares at a discount of 30% from the price. CVRD's Infromation BRR USD EPS 1998 2.67 3.23 Stock price Dec 98 9.32 11.2 Stock's SD 0.815

  14. TO FIND THE STRIKE PRICE

  15. OPTION’S VALUE P ’05 = P/E ratio * EPS ’05 Strike Price using 1 USD165.4 Strike Price for HAC USD115.8 Strike Price using 2 USD102.2 Strike Price for HAC USD71.6