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Project Finance:
Pricing of Expropriation: The Zaravshan-Newmont Joint Venture
Kim Anton 修士論文 アブストラクト
For the last 50 years, project finance has become a large and rapidly growing field within the dis- cipline of finance. Project-financed investments grew at a compound annual rate of almost 20%
through most of the 1990s and peaked at $217billion in 2001. We have to remark that project finance is now widely used in the natural resources extraction field, power, telecommunication, and infra- structure industries. More than 75% of total project-financed investments in 2002 have been commit- ted to power, telecoms, infrastructure and the oil & gas industries. Around 70% of project finance in- volves very large investments from $500 million to more than $1billion with a lifespan of 10 years to 50 years. As of 2002, total global project finance market capitalization was approximately $135 bil- lion.
So what is the Project Finance and why it is so important?
Probably, one of the best definitions of project finance is made by Benjamin C. Esty: “Project fi- nance involves the creation of legally independent project company financed with nonrecourse debt (and equity from one or more sponsors) for the purpose of financing a single purpose, industrial asset.”
Project finance has very unique structural features and merits, when compared to standard Cor- porate Finance; Project Finance is often referred to as “off-balance sheet, non-recourse financing”, which implies no substantial impact on the creditworthiness of the sponsors ︵promoter of project︶, and where collateral for the provided loans is backed by the assets and cash flows of the project company, but not of the sponsor company as it is in Corporate Finance. Project finance is character- ized by high-leverage ︵debt ratio︶ with average project company debt at more than 70% whereas it stands at 35% for public companies. Project companies are legally independent entities with concen- trated equity, usually 2-3 companies hold equity of entire project company compared to thousands shareholders of normal public traded company. Risk-transfer or risk-spread ︵mitigation︶ among debt and equity holders, high ability of debt capacity, because funding raise is conducted toward certain project, not parent company and thereby based only on cash flows generated by project and other benefits which leads to “capital/cost efficiency”.
Among the many risks ︵macro-economic, commercial, construction risks︶, inherent to Project Fi- nance, the projects physical location lends itself to “country risk” or risk that the project is in an un- friendly political environment and might be taken over ︵expropriated︶ by the Host Country. This paper is dedicated to understanding the risk of expropriation.
In the light of recent expropriation events of natural resource projects in Venezuela, Bolivia, Ecua- dor, Algeria, Dubai, Chad, Russia, China, India and many other countries, assessment and the evalu- ation of expropriation risk is an extremely important issue in global business and investments, espe- cially for multinational corporations, who potentially face such risk if investments are undertaken in foreign countries.
The recent wave of high prices of oil, gold and other commodities reflects this expropriation
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“trend”, or what is often referred to as “Resource Nationalism”. The host government can ︵it has power and right︶ expropriate assets of Project Company any time it wishes, because project is locat- ed in the jurisdiction and physical territory of a certain country.
The case study of this paper is the Zaravshan-Newmont Joint Venture in gold mining, located in Uzbekistan, Central Asia. This case is an appropriate example for studying the Real Option ap- proach when the government runs into takeover options of a value-increasing project. As it is widely known, gold price has been spectacularly rising in recent years and peaked its historical price. It is also a very unique case study, because concatenation of the political circumstances between Uzbeki- stan and USA ended up offering a political reason for expropriation besides the economical, rational motivation for expropriation.
It is clearly shown in this thesis, how an increase of gold price directly impacts on the value of ex- propriation option. As it says, the act of expropriation is viewed as exercise of call option by the host country which was written by the company at the time company made investments in the mine.
Kim Anton: Project Finance