Transcript Fuqua School of Business Emerging Markets Corporate Finance Contents 1. 2. 3. 4. 5. Industry Overview WTC Wood Project Country Overview Risk Analysis Project Appraisal.

Fuqua School of Business
Emerging Markets Corporate Finance
Contents
1.
2.
3.
4.
5.
Industry Overview
WTC Wood Project
Country Overview
Risk Analysis
Project Appraisal
1. Industry Overview
The Tropical Wood Industry
U$ M
7000
6000
– a) lower trade barriers
– b) increasing demand for wooden
furniture
– c) buoyant construction and renovation
activity in developed markets
5000
• Demand growth expected at 9-10%
per annum in the medium term (ITC)
• Gradual tendency to substitute wood
for non-wood materials (biocomposite, plastic, aluminum)
0
World Exports of further
processed wood products (ITTO)
4000
3000
2000
Source: International Trade Center, 2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1989
1000
1990
• U$ 6.6 billion industry
• Vigorous growth in the past decade
due to:
The geography of the tropical wood industry
91%
As-mkt-share
87%
83%
16%
LA-mkt share
7%
Asia: 83%
12%
LA: 16%
Source: International Trade Center, 2002
Africa: 1%
Forestry Potential
IND IND PNG MYN MAL THA CAM PHI FIJ
Asia
Saturation
Deforestation
1
Extinction of wood species
Latin America
0
100
200
300
400
500
Area (M of hs.)
600
700
800
900
Larger potential
1
More sustainable
forest practices
BRA
PER
Source: International Trade Center, 2002
COL
Bolivia
VEN
GUY
SUR
ECU
HON
PAN
T&T
The Bolivian Tropical Forest
• 7th largest in the world (49 M hs.)
• Over 360 wood species
• Operating at less than 1% of its full
potential
• 1,000,000 hs. recently certified for
sustainable exploitation
• Currently low value-added
commercial timber only
2. TWC Wood Project
The Tropical Wood Consortium
• Created in 2004 to explore investment
opportunities in the Bolivian forestry sector
• Spearheaded by Tahuamanu
TAHUAMANU S.A
SMEs
(Bolivia)
Large
(Brazil, Ecuador)
Technology
Suppliers
(Germany)
Andean
Development
Corporation
Tahuamanu S.A.
The world’s largest producer of processed Brazil Nuts
Seeking diversification (nut production reaching saturation)
Extensive experience in sustainable forest management
High managerial and industrial capacity
Long-established international marketing channels
Tahuamanu's exports
180,000
160,000
140,000
120,000
100,000
80,000
U$ 6M annual
revenues
60,000
40,000
20,000
Source: Tahuamanu, 2004
2007
2008
2004
2005
2006
2001
2002
2003
1998
1999
2000
0
1993
1994
Volume (20Kg-boxes)
200,000
1995
1996
1997
•
•
•
•
•
Wood Processing Project
Internalized activity
Precious
(4%)
Vermeer
Slicing
(4%)
Panels
Energy
US
(40%)
Belem
Paran
agua
Santo
s
La
Paz
Brokers
Laminating
(46%)
Maintenance
Outsourced
Plywood
Marketing
TRANSP.
MARKETS
Land-River-Sea
Soft
(46%)
Sawing
(50%)
PRODUC
T
Land
Subcontr
actors
(70%)
Hard
(50%)
PROCE
SS
58,000 m3/y of processed wood
Communitybased
suppliers
(50%)
Own
extraction
(30%)
TRANS
P.
PLANT
Subcontractors
Private
concessions
(50%)
EXTRACTION
130,000 m3/y of raw material
187,000 he of forest land /20y
RAW
MATERI
AL
Europe
(30%)
Regional
BR-AR
(30%)
Transportation Alternatives
North American
markets
Belem (3,015 K m)
Manaus (1,650K m)
A rqu em e s
T
Future alternative
ports
Regional markets
S a o P ao lo
European
markets
Likely Financial Structure
U$000
%
12,922
1.00
Debt
IIC-IADB
IFC-WB
Commercial
4,523
2,500
1,500
523
0.35
0.19
0.12
0.04
Equity
Tahuamanu
Brazil/Ecuador Partners
SMEs
International Furniture
Technology Supplier
USAID-GDA
PUMA Foundation
Andean Development Corporation*
8,399
3,877
1,034
775
646
646
646
388
388
0.65
0.30
0.08
0.06
0.05
0.05
0.05
0.03
0.03
Total Investment
*Subordinated loan (Quasi-equity)
Key Success Factors
-Wood-Nut synergy (extraction, storage, transportation, labor)
-Economies of scale and scope
-Tax-free industrial park (20% cost savings)
-Low labor/production costs
-Forestry management
Price
Advantage
-International marketing
-Industrial capacity (larger
than most competitors)
-Continuous technological
upgrading
-Bolivian Tropical Forest at
1% of full capacity
Internal
capabilitie
s
SUCCESS
- One of the world's largest
certified forest
Growth
Potential
-Market integration (FTAA +
MERCOSUR)
-Knowledge of local
suppliers
-Continuous learning
through inter-firm
cooperation
-International demand
expected to grow steadily
Flexibility
-Outsourcing
-Strategic location
- Transportation alternatives through BR/PER
- Access to the Brazilian wood cluster
- Isolated from political conflict
- Modern regulatory and
legal framework
Major obstacles and mitigating factors
• Learning costs (new industry)
•Tahuamanu’s high managerial and industrial
capabilities
•Inter-firm cooperation (consortium modality)
• Lack of infrastructure (roads,
communications)
Strategic location (flexibility to use more
reliable infrastructure in Brazil/Peru)
• Expensive energy
Investment in a wood-based energy
generating plant
• Lack of supporting and
related industries
Strategic Location (access to the Brazilian
wood-processing cluster)
• Long distance to ports
Value-added processed products with lower
incidence of transportation costs
• Political instability
Strategic location (isolated from the most
conflictive regions)
3. Country Overview
Bolivia: Basics
Landlocked country located in the
center of South American
Area: 1 million sq km (about three
times the size of Montana)
Population: 8.7 million
Natural resources: tin, natural
gas, petroleum, timber and others
Poorest country in South America
- poverty rate - 60%
- GDP per capita - 900 USD
Source: CIA, 2003, World Bank, 2003
Bolivia: Economic Environment
23 years of democracy and 20 years of
market reforms
 Economic Reforms Package:
- liberalization of prices, exchange
and interest rates
- privatizations
- trade and capital account liberalization
GDP growth:1.5%/y
(1990-2001)
 Results : macroeconomic stabilization
(low inflation rates, stable ER, etc.)
 However: stagnant growth
Source: World Bank, 2004
Bolivia: Key Comparative Indicators
Source: World Bank, 2004
Governance Indicators (2002)
Source: D. Kaufman, A. Kraay, and M. Mastruzzi (2003). World Bank Policy Research Working Paper
The major obstacles for doing business in Bolivia
How problematic are obstacles in the business
environment in the following areas?
% respondants
1
Inflation
4
5
Source: World Bank, Doing business 2003
6
7
8
9
Organized
Crime
Anti
competitive
Policy
Inestability
3
Street Crime
Taxes and
Regulations
2
Corruption
Infrastructure
1
.
Exchange
Rate
Functioning
of Judiciary
Financing
0
10
11
Political Environment
 Since 1980s – constant social tension
driven by poor economic conditions,
income and regional disparities, ethnic
conflict and wide-spread drug production
and trafficking.
 Since the early 2003, conflicts have
taken a violent tenor:
-
in October 2003 President Gonzalo Sánchez de
Lozada, an unconditional supporter of market
reforms resigned after two months of rioting and
strikes
-
a separatist movement led by agricultural-rich
elites in western Bolivia is gaining momentum
 The current president has lost control
over the congress and is seen as “weak”
in dealing with social pressure.
 Recent attempts to modify the legal
framework for the energy sector has
increased legal uncertainty.
Comparative Historical Risk
Overall risk comprises:
a)
Economic risk
b)
Operational risk
c)
Political risk
World Markets Research Center, September 2004
4. Risk Assessment
Cost of Capital Worksheet
Risk Premium Calculation
Inputs
4.00
3.50
93.70
24.40
Output Category
U.S. risk free in %
U.S. risk premium in %
Current U.S. Credit Rating
Institutional Investor country credit rating (0-100)
31.32 Anchored Cost of Equity Capital for project of average risk in country (ICCRC)
23.82 Country Risk Premium
Industry Adjustment
1.05 Beta (Industry)
-3.50 Sector adjustment
Project Risk Mitigation
(-10 to 10; where 10=risk completely eliminated, 0=average for country)
Weights
Score
0.35
0.05
0.04
0.04
0.04
0.04
0.03
0.03
6.00
3.00
0.00
6.00
3.00
5.00
0.00
-3.00
0.02
0.02
-4.00
-6.00
0.03
0.02
0.02
0.01
0.02
7.00
3.00
8.00
8.00
-5.00
0.03
0.02
4.00
0.00
0.02
0.02
0.01
0.02
0.02
0.02
0.03
0.02
0.03
7.00
6.00
6.00
4.00
7.00
8.00
-3.00
8.00
Impact on Country
Premium
-5.00
-0.36
0.00
-0.57
-0.29
-0.48
0.00
0.21
Operating-Precompletion (setting up the plant)
0.19 Resources available (quantity/quality) -part not in discount rate
0.29 Technology (proven technology) -part not in discount rate
-0.50
-0.14
-0.38
-0.19
0.24
Operating-Post-completion
Sensitivity of operations to blockades, riots and other disruptions associated with political instability
Market risks (prices of outputs and demand)
Supply/input risk (availability)
Throughput risk (material put through plus efficiency of systems operation)
Operating costs
Financial
-0.29 Probability of Default
0.00 Political Risk Insurance
-0.33
-0.29
0.00
-0.29
-0.19
-0.33
-0.57
0.14
-0.57
1.00
Project Cost of Capital
Risks
Sovereign
Currency (convertibility)
Expropriation-direct
Expropriation-diversion
Expropriation-creeping
Commercial International partners
Involvement of Multilateral Agencies
Sensitivity of Project to wars, strikes, terrorism
Sensitivity of Project to natural disasters
Real Options (some handled through cash flows)
Input mix or process flexibility
Output mix or product flexibility
Abandonment or termination
Temporary stop or shutdown
Intensity or operating scale
Expansion
Interproject/intraproject
Shadow costs
Financial Flexibility
Sum of weights
18.12
Risk Premium (Country)
Risk Premium Calculation
Inputs
4.00
3.50
93.70
24.40
Output Category
U.S. risk free in %
U.S. risk premium in %
Current U.S. Credit Rating
Institutional Investor country credit rating (0-100)
31.32 Anchored Cost of Equity Capital for project of average risk in country (ICCRC)
10-year T-bond
Sep/04
27.4 (Sep/04) - 3 to account for escalating social
conflicts (Jan-Mar/04)
23.82 Country Risk Premium
Industry Adjustment
1.05 Beta (Industry)
-3.50 Sector adjustment
MSCI 12/99
W eights
S core
Im pact on
C ountry
P rem ium
R isks
M itigating factors
Aggravating factors
-M ost of the production will be priced and sold
in international m arkets (90% ).
-The U $/B s exchange rate has been stable in
the last 20 years.
-D iv ersified m arkets (U S , E urope, S outh
A m erica, possibly A sia).
-N early 30% of production expected
to be sold in regional m arkets that are
m ore prone to exchange rate v olatility
(A rgentina, B razil).
-O perational costs are to be incurred
in two currencies (B razil, B oliv ia).
-G rowing fiscal deficit.
0.35
6.00
S overeign
-5.00 C urrency (conv ertibility)
0.05
3.00
-0.36 E xpropriation-direct
0.04
0.00
0.00 E xpropriation-div ersion
0.04
6.00
-0.57 E xpropriation-creeping
-P roject located in a tax-free export processing
zone.
-The gov ernm ent has recently enacted a
com prehensiv e forestry law.
0.04
3.00
-0.29 C om m ercial International partners
-TW C will work closely with long-established
supporting and related industries in B razil.
-TW C is reaching out to B razilian and
E cuadorian wood processors to join the
consortium .
-U S A ID , A ndean D ev elopm ent C orporation.
0.04
5.00
-0.48 Inv olv em ent of M ultilateral A gencies
-Financing likely to include loans from W B IFC , IIC -IA D B , K FW , C A F
0.03
0.00
0.03
-3.00
-B oliv ia has shown a strong com m itm ent to
m arket reform s and property rights.
-The forestry sector in general is not
considered strategic for the
econom y/gov ernm ent.
-The project will own no land (supply of raw
m aterial through concessionaries)
-G ov ernm ent with no stake in the project.
-Increasing legal uncertainty; a)
changes in the legal fram ework for
the energy sector, b) A French utility
com pany forced to term inate its
contract.
- N o international partner directly
inv olv ed in the initial phase of the
project.
0.00 S ensitiv ity of P roject to wars, strikes, terrorism
0.21 S ensitiv ity of P roject to natural disasters
-H igh lev els of hum idity in the B oliv ian forest
reduce the likelihood of wood fires.
-V ulnerability to wood fires and floods.
Operating-Precompletion (setting up the
plant)
0.02
-4.00
0.19 Resources available (quantity/quality) -part not
in discount rate
0.02
-6.00
0.29 Technology (proven technology) -part not in
discount rate
-No experience in setting up a wood
processing plant.
-TWC seeking local and international partners -Learning costs associated with
to acquire the necessary expertise in wood
adapting and mastering new
processing technology.
technology.
Operating-Post-completion
0.03
7.00
-0.50 Sensitivity of operations to blockades, riots and
other disruptions associated with political
instability
-The project is located in a border city far
from the regions more prone to social unrest.
-Flexibility to use the transportation and
communication systems of bordering
Brazilian/Peruvian cities in case of domestic
disruptions.
0.02
3.00
-0.14 Market risks (prices of outputs and demand)
-Demand/price of processed tropical wood
expected to increase steadily in the medium
term (ITC).
0.02
8.00
-0.38 Supply/input risk (availability)
-The seventh largest and most diverse
forests in the world at 2% of full capacity.
-Experience in forest management and
working with indigenous communities.
-The nut-wood synergy guarantees a yearround availability of labor with no reallocation
costs.
0.01
8.00
-0.19 Throughput risk (material put through plus
efficiency of systems operation)
-The plant is designed to process 35 species
of hard, soft and precious wood in order to
maximize throughput and reap economies of
scale.
-Nut-wood synergy expected to reduce
extraction and transportation costs.
0.02
-5.00
0.24 Operating costs
-Some price volatility observed in lowvalue added products.
-Increasing substitution of wood for
non-wood products (bio-composite,
plastic, aluminum etc.).
-Central and Eastern European wood
suppliers expected to capture part of
the EU market.
-Learning through inter-firm cooperation.
-Outsourcing to Brazilian supporting
industries (transportation, extraction,
maintenance).
-Flexibility to use Brazilian/Peruvian road
networks.
-Plant located far from the regions more
prone to social conflict.
-Learning costs (no experience in
wood production).
-Expensive and unreliable
transportation through Bolivia.
-Operational risk due to political
instability (road blockades, strikes,
riots).
-Tahuamanu has a high credit record (it has
never defaulted on its debt).
-No experience/expertise in woodprocessing
Financial
0.03
4.00
0.02
0.00
-0.29 Probability of Default
0.00 Political Risk Insurance
Real Options
0.02
7.00
-0.33 Input mix or process flexibility
- Only 35 out of 360 wood species will be
initially exploited.
0.02
6.00
-0.29 Output mix or product flexibility
-Technology can be easily adapted to
manufacture other types of products in the
future.
0.01
0.00 Abandonment or termination
-Since TWC will own no land and outsource
many activities, the cost of termination is
relatively low.
-Marketable technology/infrastructure (easy to
be resold).
0.02
6.00
-0.29 Temporary stop or shutdown
-Since TWC will own no land and some of the
processes are outsourced, the cost of
temporary shutdown is relatively low.
-Labor-intensive processes to be outsourced
(extraction, transportation).
0.02
4.00
-0.19 Intensity or operating scale
-Plant designed with overcapacity to allow
production flexibility
0.02
7.00
-0.33 Expansion
-Availability of inputs (wood forest)
-Relatively simple infrastructure/technology.
-Technology supplier likely to be part of the
consortium (easy access to technology for
expansion/upgrading).
0.03
8.00
-0.57 Interproject/intraproject
-The synergy between nut and wood
processing will make both industries more
competitive and allow for future expansion
projects to take place.
0.02
-3.00
0.03
8.00
0.14 Shadow costs
-0.57 Financial Flexibility
-Full capacity reached in year 6
according to projections.
-Project design and implementation requires -Brazil nut production reaching
Tahuamanu's management and engineering saturation (not many expansion
time.
opportunities).
-Low initial leverage (0.35 debt/equity ratio)
5. Project Appraisal
Cost of Debt
U$000
%
12,922
1.00
Debt
IIC-IADB
IFC-WB
Commercial
4,523
2,500
1,500
523
0.35
0.19
0.12
0.04
Equity
Tahuamanu
Brazil/Ecuador Partners
SMEs
International Furniture
Technology Supplier
USAID-GDA
PUMA Foundation
Andean Development Corporation*
8,399
3,877
1,034
775
646
646
646
388
388
0.65
0.30
0.08
0.06
0.05
0.05
0.05
0.03
0.03
Total Investment
*Subordinated loan (Quasi-equity)
Cost
Weight
Weight * Cost
0.080
0.55
0.044
0.082
0.33
0.027
0.093
0.12
0.011
Cost of Debt (Kd)
0.082
Valuation
Ke
Kd
t
D
E
WACC
NPV
IRR
Pay-Back
Net Present Value of real options
Scenario 1
Scenario 2
with real options
no real options
18.12
8.19
0.35
0.65
14.65
20.31
8.19
0.35
0.65
16.07
$6,248.43
25%
6.1
$4,947.86
25%
6.1
$1,300.57
Different Scenarios
U$ 000
Scenario 1
with real options
Ke
Kd
t
D
E
WACC
NPV
IRR
Pay-Back
18.12
8.2
0.35
0.65
14.65
$6,248.43
25%
6.10
Scenario 2
no real options
20.31
8.2
0.35
0.65
16.07
$4,947.86
25%
6.10
Scenario 4
effective tax of 20%
imposed
19.60
18.12
11.5
7.2
0.20
0.60
0.35
0.40
0.65
14.74
13.80
$6,156.27
$4,372.78
25%
22%
6.10
6.10
Scenario 3
different leverage
TWC is unable to find
equity partners and has
to leverage more.
Implies higher financial
distress and reduces
future growth options
Tax is imposed (export
processing zone
ceases)
TWC valuation
11.20
$8,658.29
24%
$6.10
Some risk accounted
for in cash flow
projections
Thank you