Privatization of Siderurgica del Orinoco John Blake Ken
Privatization of Siderurgica del Orinoco John Blake Ken Mc. Nish Sean O’Brien Phil Thorogood Lew Zaretzki
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
SIDOR’s History • • • 1926 1955 1964 1972 1989 1997 Cerro el Pao iron mines discovered Siderurgical plant constructed State-owned SIDOR is established Capacity is 1. 2 million tons Capacity is 3. 0 million tons Gov’t announces privatization
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
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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
Industry Fundamentals • SIDOR is last significant producer to be privatized • Its cost advantages are attractive in a mature industry • Strategically attractive to regional rivals
Industry Fundamentals What is fair value?
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
Basic DCF Model $US millions Price per ton Volume (thousands of tons) Revenue 1998 $ 310 3, 000 $ 930 Fixed Costs Variable Costs Total Costs EBITDA 120 727 847 $ Debt Service Taxes Capex Cash Flows to Equity 83 (87) (21) (130) $ (155)
Basic DCF Model • Available – – – Commodity prices Production targets Projected margins Capital expenditures Debt terms • Assumed – – Product mix Cost structure Taxes Capex timing
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
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
Risks and Discount Rates
Risks and Discount Rates
Risks and Discount Rates
Risks and Discount Rates • Goldman Country Spread: • ICCRC Adjusted: 13. 3% 32. 7%
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
Amounts Bidder Amazonia Consortium Aceros del Orinoco Ispat Amount Bid ($billions) $ 1. 2 1. 1 1. 0
Amounts Bid
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
Our Valuation Bid $ 1. 20 ($billions) Goldman Spread Model Our Valuation 0. 67 Implied Real Option ICCRC Model 0. 10 0. 53 1. 10
Our Valuation
Overview • • SIDOR’s History Industry Fundamentals Basic DCF Model Risks and Discount Rates Amounts Bid Our Valuation Additional Sources of Value
Additional Sources of Value • Strategic interests of consortium members • Potential synergies between SIDOR and consortium members • Real options - Further expansion - Flexibility in sources of energy
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
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 2 H 98 • Product prices have declined 30% • Annual production has been halved
QUESTIONS?
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