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Hydro Aluminum Consolidated (HAC). FINA 7360 Dr. R. Susmel. Presented by: Natalia Mora Aamir Nomani. Case Information. HAC, engaged in production & distribution of Aluminum CVRD (Companhia Vale do Rio Dolce) Alunorte, sub-division (Aluminum). Objectives.

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hydro aluminum consolidated hac

Hydro Aluminum Consolidated (HAC)

FINA 7360

Dr. R. Susmel

Presented by:

Natalia Mora

Aamir Nomani

case information
Case Information
  • HAC, engaged in production & distribution of Aluminum
  • CVRD (Companhia Vale do Rio Dolce)
    • Alunorte, sub-division (Aluminum)
  • Determine the investment opportunity with CVRD
  • Determine under what terms and conditions should HAC accept CVRD’s offer
country report brazil
Country Report - Brazil
  • Checklist method
    • Risk is assessed based on:
      • Economic Indicators, to evaluate the country’s financial condition
      • Debt Management, to measure the country’s ability to repay debt
      • Political factors, to evaluate political characteristics and political stability
      • Structural factors, to measure socio-economic conditions
calculating i
Calculating βi
  • βiW=βi * βcw
    • βi = Domestic beta for Alcan and Alcoa
    • Βiw = Sensitivity of the assets to the world market
    • βcw = Sensitivity of the domestic market to the world market

Domestic Markets: S&P and BVSPA

World Market: MSCI World Index



  • 1999 USD/BRR 1.2105
  • Costs: USD 160M, USD 22.85/year
  • Tax rate: 8.78% (From CVRD 98 financial statements)
  • Long-term Gov. Securities 98: 18.06%
npv calculation
  • Discount rate = Long-term Brazilian securities rate + 2.75% (given)
  • NPV of the project = $7.23M
  • Since NPV = +ve, we advice HAC to invest
funding policy
  • HAC should borrow as much funds as it can in Brazil to cover the economic exposure.
  • Debt payments should match with revenues.
  • Better balance between inflows and outflows denominated in foreign currency (BRR).
  • Borrow from Brazil’s Government in BRR.
  • Finance from investors and suppliers in BRR.
hedging policy

i) 5% deposit of the proposed investment: Buy forward BRR for paying the deposit. If we know when CVRD is giving us the money back in case of loosing the contract buy a BRR put option for that time T.

ii) In case HAC's bid is accepted it needs to make a substantial investment in BRR denominated assets: For the net revenue amount after paying debt denominated in BRR. Sell 7-year BRR forward and Roll it over, or sell BRR forward today for each of the revenues from 99 to 05.

option s value

The Option: Convert credit to equity by acquiring CVRD’s common shares at a discount of 30% from the price.

CVRD's Infromation BRR USD

EPS 1998 2.67 3.23

Stock price Dec 98 9.32 11.2

Stock's SD 0.815

option s value15

P ’05 = P/E ratio * EPS ’05

Strike Price using 1 USD165.4

Strike Price for HAC USD115.8

Strike Price using 2 USD102.2

Strike Price for HAC USD71.6