The Challenge
A client was considering an investment in a new company in the steel sector in Saudi Arabia: a plant with capacity to produce 100,000 metric tonnes of steel a year, for a total investment of under SAR 100 million. Steel is a capital-heavy industry with long build and ramp-up periods, exposure to raw material and energy costs, and margins that move with the market. A decision to invest commits a large amount of capital for many years, and it cannot easily be reversed once the plant is built.
The client needed to know whether the project was worth investing in, on what terms, and with what level of confidence. That required more than a market overview. It required a business plan that could be tested, a valuation of the project, and a returns analysis that put a clear number on what the investment would earn.
Our Process
The business plan. We built the business plan for the new company from the ground up: the market it would sell into, the production it could achieve and when, the pricing it could command, and the full cost base of running a steel operation, from raw materials and energy to staffing and maintenance.
Capital and ramp-up. For a new plant, the shape of the first years matters as much as the steady state. We modelled the capital expenditure and its timing, the period before production reaches capacity, and the working capital the business would need while it ramps up.
Valuation of the project. We valued the project on its forecast cash flows, so the client could see what the investment was worth against what it would cost to make.
IRR and NPV analysis. We calculated the project's internal rate of return and net present value, and tested both against the variables that drive a steel project's economics: selling prices, input costs, the speed of the ramp-up and the capital budget. The result was a decision framed in the terms an investor uses: what the project returns, what it is worth today, and how sensitive both are to the assumptions most likely to move.
Key Outcome
The analysis supported the investment. The project IRR came out in the early 20s, a return that justified the capital at risk, and the client proceeded.
The more telling result came later. Twelve months after the company started operating, its performance is tracking the plan. For a capital-heavy industrial project, the first year is where plans most often diverge from reality: ramp-ups take longer, costs run higher and working capital needs surprise. That this one is running to plan says as much about the quality of the original analysis as the investment decision itself.
Results
- ·A complete business plan for a new steel company, from market and production to the full operating cost base
- ·A 100,000 tonne-a-year plant, under SAR 100 million, valued with IRR and NPV analysis that framed the decision in investor terms
- ·Project IRR in the early 20s, tested against prices, input costs, ramp-up speed and the capital budget
- ·Client proceeded with the investment on the strength of the study
- ·Twelve months into operations, the company is performing in line with the plan
Why this matters
A feasibility study is usually judged at the moment of the decision. The better test comes a year later, when the plan meets the real business. A study built on evidence and an honest model tends to pass that test. One built to reach a target return tends not to.
For industrial investors in Saudi Arabia, where lenders such as the Saudi Industrial Development Fund and boards alike scrutinise the numbers behind a new plant, that difference matters long after the study is delivered.
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