Ocean Carriers

presented by

Franko KulagaGuergana Anguelova

Moritz Broelz

Agenda

IntroductionProject FactorsMethodologyResultsSensitivity AnalysisRecommendationsDiscussion

Introduction

Ocean Carriers owns and operates Capesize vessels that carry iron ore worldwide.

Round cape horn– longer and riskier routes.Mainly chartered for 1-, 3-, or 5-year periods,

occasional spot market charter.

January 2001: proposed lease of a ship for 3 years beginning in early 2003

Daily charter rate: $20,000 per day, with annual escalation of $200 per day

No ship in fleet meets the requirements Commission a new capsize carrier?Option 1: Ocean carriers is US firm (35% tax)Option 2: Ocean carriers is HK firm (0% tax)

Project factorscustomers’ proposal

Methodology

Yearly Operating Costs‘ Growth = 1% + Inflation (3%) ∆ Net working Capital = Inflation

1.

2.

Calculate net cashflows for every year

Results

1. Actual cost of the new capsize vessel:Capesize is bought in 3 installments discounted at

9% = $33,738,397.44

IRR = NPV of 0 = Break-even WACC

2.

NPV At Different Deviations From BaseDeviation from

Base CaseOperating Cost Growth Rate

Avg. Daily Charter Growth Rate

Numbers of days operating

WACC

-30% $ 2,955,603 $ (713,769) $ (14,475,679) $ 9,603,476 -15% $ 2,118,038 $ 235,847 $ (6,631,602) $ 4,964,848

0 $ 1,212,475 $ 1,212,475 $ 1,212,475 $ 1,212,475 15% $ 232,610 $ 2,216,939 N/A $ (1,844,225)30% $ (828,474) $ 3,250,087 N/A $ (4,349,700)

Range $ 3,784,076 $ 3,963,856 $ 15,688,155 $ 13,953,176

Sensitivity Analysis

This is the best case scenario (25 year – no tax)! What if an important variable changes to an adverse condition?

RecommendationsVerify Consultant Firm Projections!

RecommendationsCaution:

Worldwide capesize fleet relatively newIn market downturn -> excess capacity (supply)!What would happen to spot-charter rates?

RecommendationsPractical implications possibly influencing decision:

Seek less expensive financing (BEP = IRR)Gaining a new customer:

Who?How much business in the future?

What about Iron Ore markets apart from Australia & India?

Country ProductionChina 820 (2009Australia 470 (2009)Brazil 250India 150Russia 105Ukraine 73United States 54South Africa 40Iran 35Canada 33Sweden 24Venezuela 20Kazakhstan 15Mauritania 11Other countries 43Total world 1690Estimated iron ore production in million metric tons for

2006 according to U.S. Geological Survey - wikipedia.org

Recommendations

Importance of NPV?Economic profits (NPV) are “excess” returnsAll projects earn zero “excess” returns in a long-

term competitive equilibriumDoes Ocean Carriers differ from the theoretical

“long run competitive equilibrium”? 25 Years!Positive NPV illusionary!?

Can this decision be made with the provided information?

Discussion

Any questions