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Published byMerry Cross Modified over 9 years ago
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Privatization of Siderurgica del Orinoco John Blake Ken McNish Sean O’Brien Phil Thorogood Lew Zaretzki
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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SIDOR’s History 1926Cerro el Pao iron mines discovered 1955Siderurgical plant constructed 1964State-owned SIDOR is established 1972Capacity is 1.2 million tons 1989Capacity is 3.0 million tons 1997Gov’t announces privatization
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SIDOR’s History Two types of basic steel products are produced: “flat” and “long” SIDOR is attractive due to: –proximity to iron mine –access to cheap hydroelectric power and natural gas Production costs are 26% lower than in US
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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Industry Fundamentals Global forces are driving consolidation within the region –Strong customer relationships, natural geographic barriers and cultural aspects supported segmentation... –But, threat from international producers and effect of recent privatizations are spurring competition and rationalization of capacity
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Industry Fundamentals SIDOR is last significant producer to be privatized Its cost advantages are attractive in a mature industry Strategically attractive to regional rivals
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Industry Fundamentals What is fair value?
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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Basic DCF Model $US millions 1998 Price per ton $ 310 Volume (thousands of tons) 3,000 Revenue $ 930 Fixed Costs 120 Variable Costs 727 Total Costs 847 EBITDA $ 83 Debt Service (87) Taxes (21) Capex (130) Cash Flows to Equity $ (155)
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Basic DCF Model Available –Commodity prices –Production targets –Projected margins –Capital expenditures –Debt terms Assumed –Product mix –Cost structure –Taxes –Capex timing
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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Risks and Discount Rates Systematic –expropriation –inflation –wage/price controls –exchange controls –political instability –extra-sovereign risks Project-specific –price level –volume demanded –achieve operating improvements –disputes among partners –leverage
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Risks and Discount Rates
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Goldman Country Spread: 13.3% ICCRC Adjusted: 32.7%
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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Amounts Bid Amount Bid Bidder ($billions) Amazonia Consortium $ 1.2 Aceros del Orinoco1.1 Ispat1.0
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Amounts Bid
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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Our Valuation Bid$ 1.20 ($billions) GoldmanICCRC Spread ModelModel Our Valuation0.670.10 Implied Real Option0.531.10
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Our Valuation
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Overview SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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Strategic interests of consortium members Potential synergies between SIDOR and consortium members Real options - Further expansion - Flexibility in sources of energy
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Conclusion Some uncertainty can be modeled in a rigorous, quantitative and conceptually sound manner On the other hand, some uncertainty can only be evaluated in a highly subjective manner
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Subsequent Events SIDOR operated according to projections for first half of 1998 Venezuela’s oil-dependent economy continued to struggle Domestic sales fell 45% in 2H98 Product prices have declined 30% Annual production has been halved
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QUESTIONS?
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