Ocean Carriers

presented byFranko Kulaga

Guergana AnguelovaMoritz 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

Case

Operating 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 new

In 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 Production

China 820 (2009

Australia 470 (2009)

Brazil 250India 150Russia 105Ukraine 73United States 54

South Africa 40

Iran 35Canada 33Sweden 24Venezuela 20Kazakhstan 15Mauritania 11Other countries 43

Total world 1690

Estimated iron ore production in million metric tons for 2006 according to U.S. Geological Survey - wikipedia.org

RecommendationsImportance of NPV?

Economic profits (NPV) are “excess” returns

All projects earn zero “excess” returns in a long-term competitive equilibrium

Does 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