Aucun titre de diapositive

1
Privatization strategy Kombinat aluminijuma
Podgorica

DRAFT June 2004
2
Privatization strategy of Kombinat aluminijuma
Podgorica

• Section
• Executive Summary
• Objectives of the Government of Montenegro 1
• Investors rationale and concerns
  
  2
• Key issues
  
  3
• Target investors group 4
• Eligibility and selection criteria 5
• Principles of tender process 6
• Timetable of privatization 7

3
Executive summary
4
Executive summary

• Privatization Strategy of KAP and its main
  features result from understanding of key
  objectives of the Government of Montenegro in
  privatization of KAP the analyses mentioned in
  the Diagnostic Report and sale prospects arising
  out of the Preliminary Market Assessment
• The launch of the sale proces of 65,5270 shares
  of KAP assumes that favourable answer is given to
  the key privatization issues identified during
  the initial stages of the work. We believe that
  recommendations offer the best possible
  equilibrium between different objectives and
  constraints of the transaction, while taking into
  account the real world feedback which determines
  the feasibility of the transaction.
• The proper solutions of these key issues, in line
  with market constraints and expectations should
  be treated by the Government of Montenegro as a
  condition of sine qua non of successful
  privatization and given the highest possible
  priority.

5
Executive summary

• Under the assumption of satisfactory solution of
  key issues, we believe that the tender procedure
  will yield a sufficient market interest as to
  offer reasonable chances of transaction closing,
  providing the negotiations between potential
  bedders and Major Creditors.
• Current market conditions are favourable to the
  potential transaction even if high aluminium
  prices have had a negative effect on the level of
  potential discount Major Creditors may consider
  granting to potential investors as well as on
  Major Creditors Willingness to get out of the
  company.

6
Objectives of the Government of Montenegro

• Section 1

7
Objectives of the Government of Montenegro

• Any transactions is structured in order to
  fulfil and/or maximize the legitimate objectives
  of the seller while taking into account at all
  times the situation and specificities of the
  asset offered for sale, as well as the market
  feedback and reality, reflected by the level of
  interest-or lack thereof-from potential
  investors.
• The sellers objectives naturally influence the
  transaction structuring and are usually reflected
  in the eligibility and selection criteria of the
  tender.
• In accordance with proposal of Advisor which was
  formed on the basis of communication with Tender
  Commission and Working Groups, the following
  elements may be considered as main objectives of
  the Government in the privatization of KAP
• Survial and long-term development of KAP
• Being the countrys largest company and
  representing one of the pillars of the economy
  with strong influence on the GDP, employment and
  financial situation of Montenegro, the target of
  the privatisation of KAP for the Government of
  Montenegro is to ensure survival and long-term
  development of Company. The objective is to
  atract a solid investor who will secure the
  position of KAP on international markets, improve
  its competitiveness and allow rehabilitation of
  production tool by introduction of new
  technologies and international standards of
  business and management with possible further
  increase of capacities.

8
Objectives of the Government of Montenegro

• Survival and long-term development of associated
  businesses
• The privatisation of KAP is also understood by
  the Government of Montenegro in the context of
  KAPs interdependence with Rudnici Boksita, the
  EPCG, the Railway Company, the Port of Bar and
  many other companies in Montenegro.
• Addressing of social issue
• Given the fact that KAP and the bauxite mine
  rudnici Boksita are overstaffed employing over
  4900 employees, the objective of the Government
  is to preserve to the extent possible the level
  of employment, to include a social plan as an
  integral part of privatisation program and to
  secure a certain minimum level of social
  commitments to be undertaken by the incoming
  investor.
• Settlement of the obligations of the DRA
• The complex debt situation of KAP resulting
  primarily from the past economic sanctions on the
  former Yugoslavia requires an active approach of
  the Government of Montenegro in debt
  restructurings with the Major Creditors. It is
  therefore necessary that through privatisation of
  KAP settles the obligations arising out of DRA,
  including those resulting from the GoM letter of
  guarantee for the part of debt related to
  investments and to the working capital facility.

9
Objectives of the Government of Montenegro

• Addressing environmental issues
• One of the main issues which should be salved in
  KAP concerns the environmental pollution. The
  privatisation is considered as a way to encourage
  the transfer of new technologies and improvement
  of the operations, leading to progressive
  reduction of the gap between the level of past
  and ongoing pollution so the KAP can respect all
  ecological, healthy and protection standards of
  Montenegro and European Union..
• Attracting foreign investment
• Foreign direct investments are a key driving
  factor for economies in transition, having
  positive impact on sustainable GDP growth,
  exports and general economic stability of the
  country. The privatisation of KAP, even if it
  will not represent significant inflow of foreign
  capital, will be perceived, due to its size, as a
  catalyst for other investments of foreign
  investors in Montenegro.
• Timing
• Privatization strategy was prepared having in
  mind that efficiency and successful closing of
  process is of paramount importance to the
  Government of Montenegro.

10
Objectives of the Government of Montenegro

• Public image
• One of the key concerns is to run a process that
  will be fair and transparent and also will be
  perceived as such. The strategy described
  hereafter is aimed at ensuring the credibility of
  the privatisation process and will contribute
  strongly to building investors confidence
  towards the country.
• The successful completion of the transaction
  will definitely have a strong positive impact on
  the perception of Montenegro as an
  investor-friendly environment and should
  encourage further development of the foreign
  direct investment. Properly run tender process,
  perceived as fair and transparent, shall have a
  positive impact on public acceptance of the
  transaction and shall reduce the scope of
  potential criticism.

11
Investors rationale and concerns

• Section 2

12
Investors rationale and concerns

• The main objective of the privatisation strategy
  is to attract strong and experienced strategic
  investors to invest and manage KAP over the
  logn-term. In order to attract such investors and
  ensure that the sale process generates sufficient
  demand from investors, the sale strategy should
  take into account investors rationale and
  concerns.
• In that sense different recommendations of
  financial Advisor arising out of the Diagnostic
  Report were based on knowledge and understanding
  of the company, but more importantly, on
  knowledge of the market and constant dialogue
  with potential buyers, understanding of their
  strategy and constraints.
• On such basis, the key limitations of potential
  investors including the following issues are
  being identified
• Control of management decisions
• Strategic investors want to ensure that they
  would be able to control and largely influence
  the key management decisions concerning issues
  such as purchasing, labour, capital investments,
  organisation and other issues. In general,
  investors prefer not to undertake strict
  privatisation obligations resulting in a
  limitation or loss of control over various
  issues.

13
Investors rationale and concerns

• Return potential
• Prospective investors will analyse carefully the
  operations of KAP in order to assess (i) KAPs
  profit generating potential (ii) the potential
  for cost savings and other efficiencies (iii)
  the levels of capital expenditures required in
  future years. It is therefore necessary to
  carefully decide on the priorities of the
  Government in the context of the above-mentioned
  return potential factors specifically, given
  high level of up-front investment expected from
  the investors in relation to the DRA debt. It is
  critical for the transaction success to create
  favourable conditions for the potential investor
  in order to guarantee/secure an expected return.
• Purchase of bauxite
• KAPs dependence of Rudnici boksita Nikšic for
  the purchase of bauxite if a major concern for
  investors and could represent a significant
  barrier in the privatisation if secure long-term
  supply of bauxite on fair terms is not ensured.
  Investors that were familiar with the situation
  often understood common ownership of KAP and
  Rudnici boksita as the most convenient option.
  It means that the bauxite price and general rules
  of operation of two companies should not be
  imposed upon the incoming investor but can be
  established post-transaction.
• Supply of electricity
• Adequate conditions of the purchase of
  electricity, representing one of the highest cost
  items of KAP, are essential for the long-term
  development of the company. The investors
  stressed the fact KAP will be competing with its
  products on the world-wide market and cost should
  therefore be competative. It is crucial to secure
  not only a favourable price level but also this
  price to be applied for longer period of time.

14
Investors rationale and concerns

• Employment and social aspects
• Some of investors contacted in the market
  assessment phase were to a large extent familiar
  with the employment and social situation of KAP,
  being aware of the heavy overstaffing and
  invalids issue. Naturally, their preference in
  connection with the privatisation is to preserve
  control over their restructuring plans, yet would
  be able to accept an adoption of a reasonable
  social programme. On the other hand, all
  investors consider the invalids being on the
  payroll of KAP as a heavy burden and believe it
  should by treated by the Governmental social
  schemes.
• Debt
• The debt issue has a specific position not only
  because of the heavy indebtedness of KAP but also
  due to the fact that some of the Major creditors
  are also interested in the privatisation. Key
  potential acquirers are aware of the complex debt
  situation and recognize that they are in better
  position than the GoM to negotiate a debt
  settlement.
• Long-term visibility
• Among the objectives of the privatisation of KAP
  is the maximisation of funds of capital to be
  spent by the incoming investor in order to secure
  the survival and long-term development of the
  company. Within their evaluation of the
  investment opportunity, investors shall prepare
  business plans based on which a discounted cash
  flow model is made. The longer the visibility of
  the economic environment of the target and its
  main parameters, the less uncertainty is
  reflected in the discount factor of their
  valuation. Therefore, investors price
  calculations are maximised when based on solid
  parameters over a sufficient time period. This
  applies especially to the visibility of the price
  of key inputs (power, bauxite)

15
Investors rationale and concerns

• Competition from similar transactions
• International strategic investors will compare
  the investment opportunity in KAP together with
  the related conditions, with other privatisation
  or sale projects ahead or underway, as well as
  with possible green-field projects. Competing or
  forthcoming opportunities could potentially pose
  a problem of timing and perception of KAPs
  relative attractiveness. In this respect, key
  drivers for attracting potential investors rely
  on an attractively structured and
  uncertainty-proof transaction.
• Respect of the announced sale process, timetable
  and transparency
• Regardless of the sale method that will be
  retained by the Government, bidding rules,
  bidding assumptions and selection criteria should
  be specified up-front and strictly adhered to.
  Investors expect that the conditions, based on
  which they form their price offers, would remain
  unchanged and be respected in practice. Any
  change of rules may deter potential investors
  leading to their withdrawal. In fact, many
  bidders will participate in tenders only if they
  believe that they bave a real chance of winning,
  so much that submitting a bid represents for the
  bidders a financial cost that may well exceed EUR
  1 milion.
• Country risk perception
• Perception of Montenegros political stability,
  the Governments economic policy and the
  countrys relative positioning among the
  countries in the region is will be a significant
  factor behind the investors decision to invest
  or not in KAP. The country risk element will
  determine the level of prospective bidders
  valuation of KAP either through the multiples
  range which would be applied to these
  transactions or as a risk spread included in the
  discount factor used for calculationg the net
  present value of KAPs free cash flows. It is
  however fair to say that international
  acquisition policy of potential bidders can be
  affected by country risk incidents elsewhere in
  the world.

16
Key issues

• Section 3

17
Main privatisation issues

• By means of market assessment we have analysed
  the interest, the perception and major concerns
  of the investors in connection with the
  forthcoming privatisation of KAP. Results of
  examinations are given in the Diagnostic report
  identifying following key issues for the
  transaction
• - Debt to Major Creditors (Debt
  restructuring Agreement)
• - Non DRA debts
• - Electricity price and conditions for the
  contract on electricity
• - Environmental protection norms
• - Social issues and employment level
• - Anotech contract status
• - Downstream capacities
• - Ownership in the Bauxite mines
• For each of the key issuesTender Comission has
  established Work Groups consisting of
  representatives of various bodies. The initial
  aim of the Work Group was to find a solution
  which would facilitate the privatisation of KAP
  and address the major concerns of the potential
  investors.
• Based on the work groups analysis and advisors
  recommendations, proposals for each key issue
  have been formed. Working groups and advisor have
  had different attitudes regarding the issues of
  electricity price and Bauxite.

18

• Debt toward the Major Creditors

19
Debt toward the Major Creditors

• The Debt Restructuring Agreement of KAP was
  signed on April 27, 2001 and was classified in
  three classes. In the Class A debt are Glencore
  (5.660.120 USD), Rudnici boksita (Bauxite Mines)
  and EPCG (3.780.560 USD) and Standard Bank/Gerald
  (1.000.000 USD). The total debt from this Class
  10.441.680 USD with related interest of 12 (for
  Standard Bank/Gerald the interest amounted 6,5
  or LIBOR 2,5) was paid on March 31, 2004.
• Class B consists of debts in the amount
  of 111.127.000 USD and they belong to Vektra
  (53.100.000 USD), to Standard Bank/Gerald
  (28.498.000 USD) and to Glencore (a) 5.729.000
  USD and (b) 23.800.000 USD), with interest of
  6,5 or LIBOR 2,5 (the smaller amount is
  taken).
• In the Class C are Vektra (8.056.527
  USD), Glencore (1.200.000 USD) and Domestic
  Creditors (25.000.000 USD) with interest of 6,5
  or LIBOR 2,5 (the smaller amount is taken).
• The Class C calculates interest from 2006, and
  the interest is going to be repaid from 2013.
• The Dabt toward Main Creditors as at March
  31.2004 (according to data of Standard Bank
  London Agent Bank) amounts 138.288.205 USD
  toward Vektra 69.252.292 USD toward Glencore
  34.757.626 USD and toward Standard Bank/Gerald
  34.278.287 USD. The company Sinochem of London
  has law suit with KAP due to 3.340.000 USD.
  Several times the Standard Bank has been informed
  about this because they undertook the claims of
  the Sinochem.
• Until privatization the KAP debts will be
  reduced significantly (the reduction of aprox.
  EUR 15 millions is expected) because the market
  price of aluminium is rather high, therefore this
  should be taken into consideration during talks
  with Creditors and investors.

20
Debt toward Major Creditors (Continuation)

• Proposal
• Given that potential bidder is in better position
  to negotiate KAPs debt and to reach solution
  with the Major Creditors, then sellers or
  advisor, it has been proposed to enable direct
  negotiations among pre-qualifed bidders and the
  Major Creditors with reference to conditions and
  terms of compensation of debt.
• Organized process with reduced number of
  candidates, limited period for negotiations and
  scope of negotiations previously agreed with
  Major Creditors and candidates will maximize
  chances for success of negotiations.

21

• KAPs debt toward the Government of
  Montenegro, the State funds domestic state
  companies and pre-sanctiones debts

22
KAPs debts toward the Government of Montenegro,
the State funds, the domestic state sompanies and
pre-sanctiones debts

• By Debt Restructuring Agreement US 25 millions
  was anticipated for restructuring of KAPs debt
  toward the Government of Montenegro but only US
  20 millions was restructured toward it. Domestic
  state companies could not fit into in the rest
  of US 5 millions, therefore the indivudual
  contracts on debt restructuring with EPCG,
  Bauxite Mines, Jugopetrol and the Port of Bar
  were signed. The base for these contracts was the
  solutions from the Debt Restructuring Agreement
  of KAP. We mention that the Railroad of
  Montenegro refused to sign the contract.
• According to delivered table of the status of
  domestic debts (KAP owes on behalf of
  pre-sanctions debts (mostly the Paris club)
  around EUR 32.5 millions (unofficial data of
  CBCG), then to the Government, domestic state
  companies, funds and banks on the basis of
  restructured and non-restructured debt of cca EUR
  79.5 millions on behalf of obligations arose up
  to October 7, 1998. At current exchange rate, and
  EUR 4.5 millions the obligations arose in 1999,
  2000, (the law suits with EPCG), and 2003. (the
  restructured debt). KAP has obligations toward so
  colled other creditors (25. maj Macedonia and
  Vitol Switzerland) of cca 1.8 millions, as
  obligations undertaken from the Government in the
  period up to October 07.1998.
• Obligations of KAP for these three groups of
  Creditors, amount in total EUR 116.58 millions
  (USD 78.476.588,00 EUR 50.584.873,00, SHF
  647.532,00) according to exchange rate of CBCG
  dated May 24, 2004.

23
KAPs debts toward the Government of Montenegro,
the State funds, the domestic state Companies and
pre-sanctions debts (continuation)

• Proposal
• The debt toward the Government, State funds,
  domestic state companies as well as pre-
  sanctions debts to be separated from the balance
  of KAP and assigned to the competence of the
  Government in order to be used as additional
  quarantee which will be progressively paid off as
  the new investor fulfills its obligations. In the
  meantime, it is necessary the Ministry of finance
  and Central Bank of Montenegro to bring into
  accordance data on the amount of pre-sanction
  debts.
• KAPs debt to Jugopetrol Kotor will be solved
  separately according to the agreement that KAP
  and BNP Paribas will reach with Jugopetrol Kotor
  regarding regulating the debt toward this company
  (it is possible debt to be paid off persuant to
  the signed Debt Restructuring Agreement which has
  been signed by KAP and Jugopetrol).
• The Government of Montenegro is obliged to help
  in bringing into accordance the KAPs debt to
  Railway of Montenegro, having in mind provisions
  of the Debt Restructuring Agreement.
• KAPs restructured debt to the Bauxite mines will
  be salved separately, with possible additional
  financing of the Bauxite Mines by KAPs investor.

24

• Electricity price

25
Electricity price

• It is important to provide KAPs Buyer with
  electricity supply under competative prices for
  longer period of time. Potential investors
  usually make comperisons of electricity tariffs
  in worlds smelters as well as structure of costs
  of the world aluminium industry. These costs are
  main indicators of metal price on long term.
• Potential investors see an adequate addressing
  of electricity issue for KAP through building of
  new power plant or through provision of
  electricity supply through long term contract. In
  case of construction of new source of
  electricity, the Buyer will need to provide a
  interim electricity supply.
• Proposel of price relations of EPCG and KAP
• Alternative 1
• 1. Price relations of EPCG and KAP in
  2005.
• Electricity price which EPCG will deliver to the
  KAP in 2005. is formed according to the
  following
• a)    for year 2005 EPCG is obliged to provide
  annual delivery up to level of 1.204.762 MWh in
  equal monthy instalments i.e. 2/3 of necessary
  electricity for production
•  b)   Electricity price from item a) is
• 24,39 USD for MWh, converted into EUR
  according to middle exchange rate from echange
  rate list of ECB on day of invoice issuing. If
  the result of conversion is less then EUR 20.44
  the price of EUR 20.44 for MWh will be applied.
• c)      Costs of electricity transamission
  independently purchased by KAP from abroad, will
  be paid EUR 2.21 for MWh.

26
Electricity price (continued)

• 2.     Price relation EPCG-KAP for the
  period 2006-2008
• a)       In the period 2006 - 2008 EPCG is
  obligated to provide annual supply up to the
  level of 1.204.762 MW/h in equal monthly
  tranches, i.e. 2/3 of the energy needed for
  production
• b)       Electricity price (CE) from the item a)
  shall be established under the formula
•   CE PC BK ,  where
•          PC initial price established in the
  item 1. b) is 24,39 USD for MW/h converted in
  EUR under the ECBs average exchange rate on the
  date of invoice issuance. If conversion result is
  lower than 20,44 EUR, price of 20,44 EUR for MW/h
  shall be applied.)
•         BK energy price correction in case of
  positive deviation of primary aluminium price
  from the reference value of 1.550 USD/t .
•  BK should be calculated according to the
  following
•  BK ((LME - 1.550) x 0,024) x (srk(USD)) where
•  -         LME is average primary aluminium
  price at London Metal Exchange in the month for
  which invoicing of the energy deleivered is
  carried out
•  -         srk(USD) - average USD exchange rate
  according to ECBs exchange rate list on the date
  of invoicing
• - BK
  higher or equal to 0,00 EUR
•  
  Obtained BK represents amount in EUR.
• c)      Electricity price above 2/3 of the energy
  needed for production, i.e. above the quantity
  established in the item 1. a) in equal monthly
  amounts, KAP shall import or this price shall be
  formed by free agreement between KAP and EPCG
• d)      Transmission of the electricity purchased
  by KAP independently from import, shall be paid
  at the price of 2,21 EUR per MWh.

27
Electricity price (continued)

• 3.     KAP-EPCG price relations in the period
  2009 - 2010
• a)    In the period 2009 - 2010 EPCG is obligated
  to provide annual supply up to the level of
  903.570 MW/h in equal monthly tranches, i.e. up
  to 1/2 of the energy needed for production
• b)    Electricity price (CE) from the item a)
  shall be established under the formula   CE
  PC BK, where
•          PC initial price established under
  the item 1b) (24,39 USD for MW/h converted in EUR
  under the average ECBs exchange rate on the date
  of invoice issuance. If conversion result is
  lower than 20,44 EUR, price of 20,44 EUR for MW/h
  shall be applied.) increased (decreased) by
  increasing (decreasing) index of the energy price
  on the Exchange in Leipzig for the period
  01.01.2006 01.01.2009 ( i.e. 01.01.2006-01.01.20
  10, for the year 2010).
•         BK - energy price correction in case of
  positive deviation of primary aluminium price
  from the reference value of 1.550 USD/t .
•    BK should be calculated according to the
  following BK ((LME - 1.550) x 0,024) x
  (srk(USD)) where
•  -         LME is average primary aluminium
  price at London Metal Exchange in the month for
  which invoicing of the energy deleivered is
  carried out
•  -         srk(USD) - average USD exchange rate
  according to ECBs exchange rate list on the date
  of invoicing  
• - BK higher or equal to 0,00 EUR
•  
  Obtained BK represents amount in EUR.
• c)    Electricity price above the quantity from
  the item 6. a) (903.570 MW/h) KAP shall import or
  this price shall be formed by free agreement
  between KAP and EPCG.
• d)   Transmission of the electricity purchased by
  KAP independently from import, shall be paid at
  the price established by Energy Agency.

28

• Environmental issues

29
Environmental issues

• Impacts of operation of Kombinat
  aluminijuma Podgorica on environment and health
  of people are noted in Diagnostic report. Based
  on that report, Report of the State Commission
  from 1993, two M.A. theses and other available
  expert reports and studies, it has been concluded
  that technology installed at KAP is 30-35 years
  old, and in that period there was no essential
  changes except at the very beginning of operation
  when red mud filtration system was improved.
  During the period of UN sanctions KAP operated in
  irregular conditions with stop-go system. This
  unavoidably caused equipment damages (scrubbing
  system of the Smelter Potline B etc.) and increse
  of scrap. Cosequences in deterioration of
  environmental quality reflect in deterioration of
  the basic environmental segments of undrground
  and ground waters, air, soil. Solving of the
  problems stated understands activities in two
  directions rehabilitation of the consequences of
  the previous pollutions and prevention of further
  pollution.
• Proposal
• Government should undertake the activities for
  rehabilitation of the consequences of previous
  pollutions arised as the consequence of
  Kombinats operation.
• Future investor should prevent further pollution
  and to propose investments intended for improval
  of the quality of all environmental and working
  segments at the site of KAP.
• Section line should be established as the
  result of current revision of environment in
  order to define the line between the current
  status and new obligations of the investor that
  should be adjusted to the requirements of
  European and world standards.
• Precised exploring of the environmental status
  shall be possible to do only as the result of
  environmental due dilligence that is in the
  course.

30

• Labor

31
Labor

• 2.746 emoloyees are employed in the primary
  production which is the subject of privatization.
  There are 389 invalids totally. 838 employees are
  employed in KAPs Downstream capacities, out of
  which 62 of them are professional invalids.
  Amount for salaries of invalids in the primary
  production paid by KAP in 2003 is EUR
  2.994.971,28 (excluding salary amount for
  invalids in Downstream capacities). This salary
  amount represents 9,73 of the total KAPs salary
  amount.
• According to information from Bauxite Mine
  their total number of emloyees is 1.400 out which
  145 of them are professional invalids that should
  be treated in the same manner as KAPs
  professional invalids (in case decision of value
  increse of Bauxite Mines is reached).
• There is a significant number of redundant
  labor as well as in other similar companies.
  Taking into account the level of employment,
  company does not have benefits from the diference
  in average salary costs in Montenegro and Western
  countries. Average salary in KAP is significantly
  higher than national level. Issue of employment
  level has been repeated by the potential
  investors we talked to. Part of redundant
  employees relate to invalids that are on the
  payroll of the compyny

32
Labor (continued)

• Proposal
• Issue of invalids should be displaced from KAP
  and Bauxite Mine (if decision on value increase
  is reached) i.e. Government should take over the
  obligation after KAP/and Bauxite Mines/ make
  complete revision of the certificates on degree
  of disability with coordination of the Ministry
  of Labor and Social Welfare,
• Ministry of Labor and Social Welfare should
  urgently propose amendments to existing law
  regulations.
• According to existing law regulations, it is
  necessary to carry out optimization of existing
  labor nad invalids,
• For payment of costs arised by taking over of
  obligations toward invalids, it is necessary part
  of privatization revenue to be allocated to
  social Funds.

33

• Contract with Anotech

34
Contract with Anotech

• In 2000, seven year contract was signed
  with Anotech company which includes the
  obligation of USD 15 mio investment. Anotech
  company has addressed to KAPs Board of Directors
  with a demand to extend a contract on management
  and reconstruction for the following 30 months.
• KAPs Board of Directors has rejected a
  request, evaluating that it is not in accordance
  with the signed contract.
• On the ocassion of its request explanation,
  Anotech has stated that total value of
  investments spent amounts USD 19,287.950,78 ant
  that it exceeds the investment plan by cca
  4,287.950 USD. Anotech claims that feasibility
  study has been used only as a base for the
  investment, and that it has been made on the
  basis of physical examination of the equipment at
  the Anode plant, and that equipment and spare
  parts have been bought mainly at the european
  market including credit indebtedness at very
  unfavourable credit conditions. They have also
  stated some other reasons because of which they
  ask for the extention of the term for 30 months.
  Based on the Work group attitude and a proposal
  of the advisor it has been proposed
• Proposal
• A new owner/owners of KAP, pursuant to valid
  agreement, has the right to terminate the
  contract between KAP and Anotech unilaterally,
  after the privatization.

35

• Downstream capacities

36
Downstream capacities

• Since 1999, downstream capacities have, for
  the purposes of privatisation, been divided into
  three plants Processing plant (strip casting,
  strip rolling, foil rolling, packaging, pressing,
  bicycle rims) Casting plant (billet casting,
  billet forging) Wire and rope plant, FAK (wire
  extrusion, wires for ground ducts). In the
  previous period, an international tender for sale
  of certain parts of downistream capacities was
  launched 4 times. Interest has been shown only
  for the plant of Al processing Prerada and for
  the Casting plant.
• Proposal
• GOM prefers privatisation of the primary
  production and downstream capacities.
• The potential buyers should be given an option
  regarding buying downstream capacities,
• In the process of potential investors selection,
  investors which offer the business plan and
  investment program for dowrstream capacities will
  be given additional points according criteria for
  evaluation of the offers,
• As an option, downstream capacities should be
  provided, through a commercial contract during
  privatisation, with supply of required quantity
  of Al (up to the installed capacities) if they
  are not taken by KAPs buyer. The price will be
  commercial within range to be proposed by the
  Advisor.

37

• The Bauxite mine

38
The Bauxite mine

• The Bauxite mine is the independent
  company with different structure of ownership
  (state ownes 31,38 of shares) which has signed a
  longterm agreement with KAP (30 years) regarding
  bauxite delivery However, there has not been a
  contract on price relations between those two
  companies for two years now.
• The bauxite mines in Nikšic have been
  working for more than 50 years. In the past it
  has delivered bauxite to other parts of ex
  Jugoslavia, independent States union and Romania,
  since 1971 the only client of this company is
  KAP. From KAPs standpoint, Bauxite mine is its
  only bauxite supplier, thus, both subjects
  completely depend on each other.
• We consider that is it not good for KAP to
  try to satisfy its needs for bauxite by
  purchasing it outside Montenegro
• Bauxite is the good of great volume but small
  value thus, international transport and
  manipulative expenses can increase expenses of
  bauxite devilery largerly, especially at current
  high transport prices.
• Storage capacity of the Port of Bar limits the
  possibility of bauhite import from the
  international markets like markets of India,
  Australia, Venezuela or Guinea.
• Beside that, it is debatable that Bauxite mines
  will not survive if faced with international
  competition, and bauxite reserves should be
  considred a resource which can not be used again.
  
• Hence, KAP has to continue relining on the
  local bauxite inventories, both from economic and
  social standpoint, thus resolving a question of
  those two companies mutual relation. Considering
  a specific structure of shareholders at the
  Bauxite mines, inclusion of this company into the
  range of a transaction should be predicted by a
  combination, on of capital increase in the
  company and purchasing of the existing shares
  owned by the state. On the contrary, investor
  should not be prevented from buying the existing
  shares of private shareholders. By presenting
  close economic connection and mutual dependency
  between two companies, we have proposed the
  Bauxite mine to be included into the range of the
  transaction.

39
The Bauxite mine

• Proposal
• Alternative 1
• Sale of minority block of shares (31,38 owned by
  the Funds) with additional financing. Realization
  of this model understands making a decision on
  additional financing at the Bauxite mine general
  assembly, to the amount of EUR 8 mio, including
  the following conditions set by majority
  shareholders
• 1) The Bauxite mine and KAP to enter the
  privatisation process as two separate companies .
  
• 2) to define bauxite price LME formula
  depended, or the bauxite price to be fixed, that
  is, EUR 26
• 3) the average salary amount to stay at the
  same level at least .
• 4) the same social program and environmental
  protection conditions as for KAP .
• 5) Investment and business plan for the period
  of 5 years to be proposed by the investor
• Alternative 2
• Sale of minority block of shares (31,38 owned
  by Funds)
• Possibility of KAPs buyer to continue buying
  shares at free stock market.
  
  
  
  
  
  
  

40
Target investors group

• Section 4

41
Target investor group

• Several types of investors could be potentially
  interested in investing in KAP aluminium
  producers, trading groups, different financial
  investitors. .
• The process should be designed in order to
  promote the candidacy of the preferred target
  investor type, but should also take into account
  the market reality .
• In order to maximise the number of candidates, we
  propose to open the process to both strategic
  investors, financial investors and consortiums.
• The main reason behind the unusual extension to
  the financial investors is related to the risk of
  expected low competition among strategic players,
  while the potential presence of the financial
  investor will create the risk for industrial
  players of unexpected competiotion.
• Nevertheless, we propose to ectablish a quality
  control of potential investors through
  appropriate definition of the eligibility
  criteria, in order to eliminate non suitable
  parties, unable to fulfil Government of
  Montenegros expectations related to the
  transaction or to effectively close the
  transaction.
• On following pages we briefly present main
  characteristics of those categories of investors.

42
Target investor group Strategic investors

• The investors of this type are from the
  aluminium sector, (i.e.the same business as KAP)
  are hands-on, active managers, able to handle
  business and strategic issues with speed.
• Compared to other types of investors, strategic
  investors have a longer term investment horizon
  and are ready to pay a higher price, provided
  they are given the operational and management
  control of the target company.
• The main advantages of involving strategic
  investors are the following
• Managerial, commercial, financial and
  administrative support and discipline
• Introduction of new technologies and technical
  expertiese, as well as the experience to respond
  to increasing competition
• Providing financing to support the future growth
• Securing the strategic investor for KAP shall
  increase the profile of the privatisation
  programme internationally, which will be useful
  for the future trade sales.
• In theory strategic investors may be mindful of
  future exit routes, but follow the market far
  less frequently than financial investors and are
  less senstive to market volatility or liquidity
  issues.

43
Target investor group Financial investors

• Portfolio investors are in the business of
  managing large funds, which invest in a
  predetermined risk class of assets. Investment
  decisions are made on a risk-return basis, taking
  into account the economic and political risk of
  the country in question as well as the other
  risks, growth prospects, liquidity and volatility
  of the target asset.
• Typically, this type of investors exercise
  passive management control through the voting
  process and are rarely hands-on managers. The
  ultimate purpose of such investors is to divest
  in the short or medium term to realise their
  profits. Some portfolio investors are specialised
  in managing distress situations, such as KAP, and
  those will be our main target.
• Private equity investors are a specific group of
  medium-term portfolio investors. These are
  typically investment funds providing medium-term,
  committed share capital, to help unquoted
  companies grow and succeed. Private equity is
  money invested in exchange for a stake in the
  company and, as shareholders, the investors
  returns depend on the growth and profitability of
  the company.
• Given the complex situation of KAP and the fact
  that it is beneficial to increase interest in its
  privatisation, it is recommended that portfolio
  investors and private equity groups are allowed
  to participate in the sale process, either alone
  or in consortium with a third party. They will be
  required to demonstrate their capacity to bring
  relevant technical experience and know-how in the
  production and sale of aluminium in collaboration
  with third parties.

44
Target investor group Financial investors
(contd)

• International institutions such as the EBRD and
  the IFC (International Finance Company, World
  Bank Group) could be invited to participate in
  the privatisation alongside the strategic
  investors. Typically, these institutions invest
  in privatised companies in consortium with
  strategic investors and on the same
  price-per-share terms.
• The involvement of an international institution
  in the privatisation may be beneficial for both
  the Montenegrin authorities and potential
  strategic investors. The presence of an
  international institution would upgrade the
  status of the privatisation tender and increase
  the visibility of the transaction.
• From the investors point of view, the
  participation of an international institution may
  be perceived as a protection against the risk of
  political interference and as a guarantee that
  the vendor would meet all contractual
  obligations. Such a participation may even result
  in a higher credit rating of KAP and in an easier
  access to local and international debt financing.
  On the other side, the Government should be aware
  that some strategic investors may turn down the
  proposal to team up with international
  institutions for various reasons.
• We recommend that international institutions
  should be invited to participate in the
  privatisation process, but the investors should
  be free to decide and/or approach on their own
  the international institutions that will express
  interest in KAP.

45
Target investor group Consortia and SPV
(Organization for special purposes)

• In order to offer prospective strategic and
  financial investors a larger degree of
  flexibility and, in particiular, to encourage the
  participation of those candidates who are not in
  a position or prefer not to bid on a stand-alone
  basis, offers submitted by consortia or
  special-purpose vehicles (SPVs ) should be
  accepted.
• In addition, it is possible that the
  pre-qualified bidders on the basis of their
  stand-alone participation in the tender will
  create consortia of SPV before the submission of
  binding offers.
• Consortia, consisting of different Industrial
  and/or financial investors, will be allowed to
  participate in the tender only under the
  condition that at least one member of the
  consortium 1) fulfils all the relevant criteria.
  or 2) has proven experience in production and
  sale of Al and proven financial ability to
  realize investment program.
• All consortium partners will have to be jointly
  and severally liable.

46
Eligibility and selection criteria

• Section 5

47
Eligibility criteria

• Based on our experience in similar tenders
  world-wide and specifically in the region of
  Central and Eastern Europe, taking into account
  the specifics of the privatisation of KAP, we
  recommend the eligibility criteria listed
  further.
• Their main purpose of the eligibility criteria
  is to limit the number of bidders to those being
  serious in their participation in the tender,
  such with relevant experience and capacity to pay
  the purchase price.
• Experience and financial ability
• In order to secure the sound development of KAP,
  we believe that the potential strategic investors
  should be present in the aluminium industry as
  producer. Potential financial investor should
  have sufficient experience of investment fund
  management and should demonstrate the ability to
  provide adequate technical and managerial
  capacities. Bidders will be requested to provide
  details related to their involvement in the
  aluminium business and of any existing
  relationships, if any, they might have with the
  companies.
• Strategic investors will be required to have a
  minimum of 3 years experience in the production
  of aluminium.
• Financial investors should be in operation of at
  least 3 years and should prove appropriate
  technical experience and know-how in the
  production and sale of aluminium in collaboration
  with third parties.

48
Eligibility criteria (continved)

• The incoming investor of KAP will be undertaking
  several substantial financial obligations, not
  only to pay the purchase price but also to settle
  restructured debt and to undertake an investment
  program. In addition, since the Government is
  concerned to ensure the survival and long term
  development of KAP and associated businesses, the
  financial capacity of bidders or their
  shareholders is of primary concern.
• Strategic investors total annual production
  should be no less than 120,000 tonnes of
  aluminum
• Financial investors will need to demonstrate a
  minimum funds under management of at least EUR
  500 milion and to prove experience in Al Business
  in a way acceptable by Commission.
• If a producer is a consortium, at least one
  member of a consortium should have Al production
  of at least 50.000 t annually. Consortium should
  provide acceptable bank guarantee (Intention
  letter of A bank) proving the ability of a
  Consortium to realize the investment program to
  the amount of at least EUR 120.000 mio, including
  solidary responsibility of all consortium
  members.
• The incoming investor is obliged to
  comply with all ecological, health, protectional
  standards of the Republic of Montenegro and
  Curopean Union and to Implement Ecological
  action plan.
• Ownership structure
• The investors will be asked to provide a
  statement with respect to their ultimate
  shareholding structure and all necessary
  documentation demonstrating those statements.

49
Evaluation criteria

• Unlike eligibility criteria, where potential
  bidders are judged on their own merits, not on
  transaction-related elements, the evaluation
  criteria applied to the submitted bids were
  designed in order to judge the bidder on
  transaction related elements, in the most
  objective and indisputable manner.
• After the validity of all the submitted Bid
  Packages is assessed, valid bids shall be
  evaluated according to the following proposed Bid
  Scoring System (BSS).
• Purchase price
• 5 year investment program
• Option of purchasing of Dowstream assets
• Participation in purchasing of Bauxite Mine
  shares
• Social aspect
• Proposed model for electricity supply
• Changes in purchase agreement
• Purchasing of shares of minority shareholders

50
Evaluation criteria (continued)

• The selection criteria described above were
  designed to ensure simple, fair and transparent
  evaluation of the bids while corresponding to the
  objectives of the Government as well as the
  approach to key issues.
• Other, non scored obligations will be defined by
  Tender Rules.

51
Section 6

• __________________________________________________
  _____________________________
• Tender process principles

52
Tender process principles

• Transparency
• The Government will be judged by a domestic and
  international audience on their capacity to run a
  transparent sale process.
• Selection criteria should therefore be meaningful
  and easily measurable, ensuring that final bids
  can be objectively compared. At the same time
  through the eligibility criteria the Government
  cans ensure that only the parties fulfilling its
  objectives can participate in the tender.
• A highly transparent process should also assist
  in securing the highest quality of potential
  bidders.
• Efficiency
• A speedy and efficient selection process is a
  pre-condition for a successful sale
• As the bidding process is expensive for bidders
  and can, if significantly drawn out, have a
  negative impact on operations at the companies,
  it is vital to conclude as rapidly as possible
  with as little disruption as possible.
• Fairness
• All potential bidders should be guaranteed equal
  access and equal information in the process as
  the starting point is not necessarily the same
  for all parties. Some of them already have a well
  developed knowledge of the company.
• The process must ensure full access to
  information and provide the time necessarily for
  all parties to assimilate it.
• The fairness of the process will also have an
  impact on the quality of bidders and in this
  light we would stress that process should not
  only be fair but should be seen to be fair by
  participants and observers.

53
Request of Expression of Interest and
pre-qualification phase

• The launch of the tender will be officially
  announced by the Agency through an invitation to
  express interest published in the national and/or
  international press and on the web site of the
  Privatisation Agency.
• The purpose of this phase is to guarantee the
  seriousness, the technical capability and the
  financial strength of the competitors. This stage
  aims at pre-qualifying potential investors which
  comply with specific criteria. Such criteria are
  designed to ensure
• The integrity and transparency of the sale
  process, and
• The seriousness of undertakings given by the
  investors in terms of investment and development
  commitments, the bidders management capabilities
  as well as payment of the purchase price and
  capacity to close the deal with Major Creditors.
• Bidders will have three weeks to express their
  interest from the launch of the tender.
• Bidders which will have expressed their interest
  for the acquisition of the Shares and have been
  found as satisfying the prequalification criteria
  on the basis of demonstrated evidence, will be
  invited to purchase the Tender Documentation and
  thus participate in the next stages of the tender.

54
Circulation of the Tender Documents

• A Notice of Eligibility, Confidentiality
  Agreement and Tender Documents Fee Invoice will
  be sent to Pre-qualified participants who fulfil
  Eligibility Criteria
• The confidentiality agreement will set out a
  number of obligations concerning respect of the
  confidentiality of information to be received and
  restricting the right of use or otherwise
  damaging the value of the assets.
• Upon payment of the amount for purchasing of
  Tender Documents and signing of the
  confidentiality agreement, the Tender
  Documentation will be made available to the
  pre-qualified bidders.
• The Tender Documentation consists of (a) the
  Information Memorandum, (b) the Tender Rules, (c)
  the draft Sale and Purchase Agreement, and (d)
  other information and documentation as may be
  needed. The pre-qualified bidders should be given
  14 days in order to analyse the Transaction
  Documentation before the commencement of the data
  room phase.
• Qualified Tender Participants will be encouraged
  to submit drafts of the SPA with any amendments
  they propose to the Advisors prior to the Bid
  Submission Deadline for clarifications and
  consultation. If the Tender Commission agrees
  that a proposed amendment is acceptable, a new
  draft SPA shall be circulated to all Qualified
  Tender Participants including the amendment
  agreed.

55
Due diligence

• As data room contains sensitive information to
  add to candidates understanding of the business
  but which was not included in the Information
  Memorandum, their availability to candidates will
  be governed by rules which are fixed in advance
  in the instructions to bidders document. In
  parallel with site visits, data room will be made
  available to candidates and their advisers
• All bidders will bid on the same set of
  Transaction Documents and terms and conditions.
  This will ensure comparability of offers
  transparency of process and crucially maximise
  the Government of Montenegros bargaining power
  in negotiations with the selected bidder. The
  final stage will consist of the submission of
  final the Bid package.
• The due diligence phase shall be governed by the
  Tender rules. Participants are to submit an
  Access application, upon which within 7 days,
  participants shall be notified on the precise
  dates of investors access to the data room, site
  visits and management meetings.

56
Negotiations with the Major creditors

• The DRA imposes significant requirements in the
  event of any sale of the shares of KAP
• According to the DRA, KAP must notify and request
  the approval of the Major Creditors reasonably in
  advance of a proposed sale (whether by
  privatisation or otherwise) of a material portion
  of the stock or shares or assets of KAP, and of
  the likely terms of the proposed sale.
• The completion of the sale shall be subject to
  the prior approval of two of the three Major
  Creditors.
• KAP may proceed with a sale without the approval
  of the Major Creditors if the Restructured Debt
  and interest is paid off in full as a condition
  to the completion of the sale.
• KAP may also proceed without prior approval if
  the sale does not result in loss of control by
  the present shareholders of KAP, provided that if
  two out of three of the Major Creditors has
  reasonably objected to the sale and the Major
  Creditors so require, the fraction of the
  Restructured Debt which corresponds to the
  proportion of the shares or assets sold is paid
  off.
• KAP may also proceed without prior approval and
  no repayment if the two of the three Major
  Creditors object unreasonably.
• Qualified Tender Participants shall be given the
  opportunity to negotiate the terms of the DRA
  directly with the Major Creditors and to seek the
  approval of the Major Creditors to the proposed
  Bid. It will be requested to state, as the part
  of his final bid, that bidder arrived at an
  agreement with the Major Creditors, allowing the
  conclusion of the transaction.

57
Bid package and submission of bids

• The precondition to submitting a bid by qualified
  tender participant is the procurement and
  submission of a bid bond. The Bid Bond may be
  cashed in by the Agency provided the bidder does
  not fulfil certain obligations arising from
  submitting the bid, i.e. does not sign the SPA,
  does not pay the purchase price, etc. The amount
  of the Bid Bond is set at EUR1,000,000.
• The bid package will be submitted in both English
  and Serbian languages (except for certain
  supporting documents) and for some of the
  documents, in order to speed up the following
  stages of the process, will also be required in
  electronic form.
• Bid package should consist of (Bid form
  shall be explained in detail in Tender Rules)
• Identification/Qualification Documents with all
  elements of financial reports, Bid Bond, proof on
  sufficient finacial resources, identification
  details and contacts etc.,
• Bid of purchase price with proposal for debt
  addressing,
• Investment and business plan for the 5-year
  period including Downstream assets and possibly
  Bauxite Mine,
• Environmental and occupational protection program
• Social program
• Electricity supply program

58
Timetable

• Section 7

59
Tender process overview

• Launching of a public invitation for the
  submission of expression of interest
• Pre-qualification of potential investors
• Sale of tender documents to the pre-qualified
  potential investors
• Development of due diligence by pre-qualified
  investors
• Submission of final binding offers
• Selection of the preferred bidder(s)
• Negotiations and signing of the transaction
  documentation
• Transaction closing process

60
Privatisation timetable