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Privatization of Siderurgica del Orinoco

Privatization of Siderurgica del Orinoco. John Blake Ken McNish 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

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Privatization of Siderurgica del Orinoco

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  1. Privatization ofSiderurgica del Orinoco John Blake Ken McNish Sean O’Brien Phil Thorogood Lew Zaretzki

  2. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  3. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  4. SIDOR’s History • 1926 Cerro el Pao iron mines discovered • 1955 Siderurgical plant constructed • 1964 State-owned SIDOR is established • 1972 Capacity is 1.2 million tons • 1989 Capacity is 3.0 million tons • 1997 Gov’t announces privatization

  5. 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

  6. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  7. 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

  8. Industry Fundamentals • SIDOR is last significant producer to be privatized • Its cost advantages are attractive in a mature industry • Strategically attractive to regional rivals

  9. Industry Fundamentals What is fair value?

  10. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  11. 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)

  12. Available Commodity prices Production targets Projected margins Capital expenditures Debt terms Assumed Product mix Cost structure Taxes Capex timing Basic DCF Model

  13. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  14. 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

  15. Risks and Discount Rates

  16. Risks and Discount Rates

  17. Risks and Discount Rates

  18. Goldman Country Spread: 13.3% ICCRC Adjusted: 32.7% Risks and Discount Rates

  19. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  20. Amounts Bid Amount Bid Bidder ($billions) Amazonia Consortium $ 1.2 Aceros del Orinoco 1.1 Ispat 1.0

  21. Amounts Bid

  22. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  23. Our Valuation Bid $ 1.20 ($billions) Goldman ICCRC Spread Model Model Our Valuation 0.67 0.10 Implied Real Option 0.53 1.10

  24. Our Valuation

  25. Overview • SIDOR’s History • Industry Fundamentals • Basic DCF Model • Risks and Discount Rates • Amounts Bid • Our Valuation • Additional Sources of Value

  26. 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

  27. 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

  28. 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

  29. QUESTIONS?

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