Southport Minerals

Introduction:-

Southport Minerals, Inc. is the largest U.S. sulphur producer had been enjoying sharply increasing profitability after five years of low profitability. So they were financially well positioned for significant diversification and had high liquidity in the system with no debt in their capital structure. So they were in the hunt for attractive investment opportunities.

In 1967, Southport Minerals found an opportunity for a major financial commitment to develop a copper mine in Indonesia. The major body of the copper ore was at an extremely inaccessible location in the Firstburg, Indonesia. Southport Indonesia (SI), a wholly-owned subsidiary of Southport Minerals, entrusted with a responsibility of mining. While contemplating to invest in the copper mine Southwest Minerals tentatively negotiated a complex financing package for the project. While assessing the new investment plan Southport Minerals, Inc came up with 4 different methods for analyzing the investment worth of the project:

 Discount at Southport Minerals' cost of capital, ignore the specifics of the financing choice

 Discount at a premium above Southport Minerals' cost of capital; ignore the specifics of the financing choice

 Discount at Southport Minerals' cost of capital, thereby taking into consideration the specific financing choice

 Discount the dividends paid versus the equity invested at SI's cost of equity

Investment Structure:-

In total the project required $120million investment. They wanted to have a debt-equity ratio of 83% in their capital structure. Following are the important points in the proposed investment project:

 Japanese consortium agreed to lend SI $20 million in subordinate debt at an interest rate equal to 7 %.the loan would be repayable at a rate of $3.3 million per year between 1975 and 1980. The Export Import Bank of Japan guaranteed the repayment of this loan

 German Bank would lend SI $ 22 million of senior debt at 7% interest. This loan was repayable between 1974 and 1982 in escalating instalments, and it guaranteed by the Federal Republic of Germany

 A group of US Banks agreed to advance $18 million repayable between 1974 and 1976 at a interest of 7% , repayment of this debt was guaranteed by an agency of the US government

 A group of US Insurance companies agreed to lend SI $40 million repayable between 1975 and 1982 at an interest of 11%, this debt was guaranteed by the Overseas Private Investment Corp, an agency of the US government

 Southport Minerals Inc was to invest $20 million of equity capital into SI for the project

Now the expropriation risk is shifted to three Governments rather than one.