Dominican Republic - Falconbridge Nickel Project

RESTRICTED FILE COPY Report No. P-757 This report wos prepared for use within the Bank and its affiliated organizoaIons. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INT1RNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FALCONBRIDGE DOMINICANA C. por A. WITH THE GUARANTEE OF THE DOMINICAN REPUBLIC November 26, 1969  INTERNATION4AL BANK FOR RECONSTRUCTION A4ND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO FALCONBRIDGE DONINICANA C. por A. IN THE DOMI4ICAN REPUBLIC 1. I submit the following report and recommendation on a proposed loan in various currencies equivalent to $25 million to Falconbridge Domi- nicana C. por A. (Falcondo). PART I - HISTORICAL 2. The proposed loan would be the first financing provided by the World Bank Group to the Dominican Republic. In view of its balance of payments weakness, discussed in Part V and an annex to this Report, the Dominican Republic is not regarded at present as eligible for Ban: loans, except for an enclave project such as now being recorivended. Three IDA credits are currently under study for irrigation, education and livestock projects. 3. The Bank was approached by Falconbridge Nickel Nines Limited, Ontario, Canada (Falconbridge), in January 1957 to contribute to the financing of a nickel mining and smelting project to be carried out by its subsidiary in the Dominican Republic (Falcondo). The Barik subse- quently indicated it would be prepared to consider a loan of up to $25 mil- lion for the power plant and related facilities provided Falconbridge, and now also Armco Steel Corporation, Ohio, who acquired shares in Falcondo (hereinafter called the sponsors), guaranteed the loan or undertook a sat- isfactory "ta-ke or pay" obli-ation tantamount thereto, and arranged a suitable combination of equity and loan financing for the remaining $170 mil- lion estimated cost of the project. After both these undertakin:ps had been worked out in principle, Bank/IFC appraisal missions visited the Dominican Republic in late July 196d and Canada in late February 1369, and negotiations took place in Washington on November 6 - o". Representatives of the sponsors and of the Borrower were led by 14r. E. L. Healy, Vice-President of Falcon- bridge Canada, and Representatives of the Dominican Republic by Lic. Juan Velasquez, Legal Counsel of the Central Bank.  - 2 - PART II - DESCRIPTION OF THE PROPOSED LOAN 14.. Borrower: Falconbridge Dominicana C. por A. Guarantor: The Dominican Republic. Amount: In various currencies equivalent to US$25 million. Purpose: To finance the foreign exchange cost of construction of a thermal power generating plant and asso- ciated facilities in connection with a ferronickel project, as well as the capitalization of part of the interest during construction. Amortization: In 15 years, including a 3-1/2 year period of grace, through equal semi- annual installments of principal starting December 15, 1973, and ending December 15, 1984. Interest Rate: 7 percent per annum. Commitment Charge: 3/4 of 1 percent per annum. PART III - THE PROJECT 5. A report entitled "Appraisal of the Falconbridge Nickel Project - Dominican Republic" (LA-5) is attached. 6. Under a concession granted in 1956, some terms of which have been recently renegotiated and which now extends for an unlimited time, Falcondo would mine nickel ore, process it into ferronickel and sell the product to Falconbridge for resale in the worldmarket.'alcondo is entering into manage- ment and sales agreements with Falconbridge. After deducting sales costs and commissions, the latter will transfer net sales payments to a New York trustee who will represent the interests of the lenders, sponsors, Falcondo and the Central Bank of the Dominican Republic. 7. Of the total cost of the project, estimated at $195 million, $49 million (or 25.2 percent) would be financed by the sponsors with equity and subordinated debt; $80 million (or 41.0 percent) by three United States insurance companies on a long-term basis; $41 million (or 21.0 percent) by two commercial banks (one United States and one Canadian) on a medium-term basis, and $25 million (or 12.8 percent) by the IBRD loan. Interim financing  - 3 - would also be provided by the commercial banks to establish revolving credits up to $55 million. All loans other than the Bank's would be made to Loma Corporation, a Delaware corporation set up by the sponsors to act as a channel for this borrowing; these loans will be covered by a U.S. AID guarantee, which has already been given, against specific risks such as war, revolution, expropriation and inconvertibility. 8. The project focuses on one of the basic economic problems of the Dominican Republic -- the need to develop its natural resources and increase exports. The market for ferronickel has been growing steadily and the prospective demand is strong in relation to the prospective supply, although substantial increases are anticipated in world production of ferronickel. Construction of the project represents an important part of investment in the Dominican Republic over the next three years, when employment of local labor and materials will provide a net contribution of $32 million to the country's foreign exchange receipts. Thereafter, when the project becomes operational, net earnings in foreign exchange are expected to rise from $10 million in the first full year of operation to $21 million by 1991. Increases compare with average export earnings of $152 million a year during 1966-68. 9. The project consists of the construction and operation of all of the facilities needed for the mining and metallurgical processing of lateritic ore for the industrial production of ferronickel. The estimated cost of the project, in millions of dollars, consists of: Processing plant and mining facilities 114.9 Thermal unit and associated facilities 28.1 Preproduction expenses 17.3 Financial charges 24.3 Working capital 10.4 Total 195.0 The Bank loan would finance the foreign exchange cost of the thermal power generating unit and associated facilities, estimated to total $24 million, and a portion of the interest and other charges during construction. 10. The Bank's usual international bidding procedures will apply to all procurement financed out of the proceeds of the loan. As noted in the Monthly Operational Summary, Falcondo has already placed contracts for boilers, turbines and general construction after Bank review of bid evaluations. Expenditures made after April 1, 1969 and prior to the signing of the loan, including up to $1 million for engineering services as well as up to $0.5 million for equipment, would be eligible for reimbursement. By proceeding, prior to the completion of the financial arrangements, with consulting services and placing contracts for equipment for the power facilities, which require the longest period of construction, Falcondo will have avoided costly delays on the overall project.  - 4 - 11. The financial forecast for the project, based on conservative selling price and production cost estimates, indicates that the flow of funds in the form of profits and depreciation allowances would be sufficient to recover the total capital cost of the project in 7