Nghi Son Cement Corporation (NSCC) Expansion Project

Summary of Proposed Investment

This Summary of Proposed Investment is prepared and distributed to the public in advance of the IFC Board of Directors’ consideration of the proposed transaction. Its purpose is to enhance the transparency of IFC’s activities, and this document should not be construed as presuming the outcome of the Board decision. Board dates are estimates only.

Project number	23915
Company name	Nghi Son Cement Corporation
Country	Vietnam
Sector	Nonmetallic Mineral Product Manufacturing
Environmental category	B
Department	Global Manufacturing & Services
Status	Pending Approval

Date SPI disclosed	April 21, 2008
Projected board date	May 21, 2008

View Environmental & Social Review Summary (ESRS), click here

Overview

Sponsor/Cost/Location

Development Impact

Contacts

Attachments

Project description

The project is a $240 million expansion for an existing IFC client, Nghi Son Cement Company (NSCC or the company) to add:

- second cement production line with a capacity of 2.15 million tpy at the plant in Thanh Hoa province 230 km Southwest of Hanoi,
- a distribution terminal with a capacity of 0.5 million tpy in Khanh Hoa province (South Central coast, 450 km from Hi Chi Minh City), and
- a cement tanker with capacity of 14,500 deadweight tons. IFC proposes to provide an A Loan of up to $35 million and a B Loans of up to $33 million to support the Project.

The goal of the project is to help NSCC to:

- maintain its leading position in Vietnam by expanding its production capacity and distribution network,
- improve efficiency through economies of scale, and
- provide more high-quality cement to underserved areas.

The project will provide high-quality cement to support the growth of Vietnam’s infrastructure which is a critical component of the country’s development program, as well as to the commercial and residential construction sector.

NSCC is an IFC client to whom IFC provided a $30 million A loan ($5.8 million outstanding) and a $26.5 million B loan (fully repaid in 2006) for a $340 million 2.15 million tpy greenfield plant in 1998. Since start-up, NSCC has shown strong financial performance and demonstrated a strong track record in meeting international standards for insurance, environment/social performance and local community development.

Project sponsor and major shareholders of project company

NSCC is a foreign joint venture owned 65% by NM Cement Company Ltd. (NMCC or the sponsor) and the 35% by Vietnam Cement Industry Corporation (VICEM, and together with NMCC, the sponsors), a state-owned cement holding company. NMCC is a Japanese joint-venture owned 70% by Taiheiyo Cement Corp. (Taiheiyo) and 30% by Mitsubishi Materials Corp. (MMC).

- Taiheiyo Cement:

Taiheiyo was formed in 1998 through the merger of Chichibu Cement and Nihon Cement, and is today the largest cement producer in Japan, with a 35% market share. It is also the world’s seventh largest cement producer with an installed capacity of 51 million tpy. It generates two-thirds of its sales from Japan, 25% from North America, and the remaining from Asia including China, South Korea, the Philippines and Vietnam. Taiheiyo currently consists of 327 subsidiaries and 153 affiliates organized into cement (62%), mineral resources (11%), environmental (7%), construction materials (10%), ceramics and electronics (8%), and other businesses. Taiheiyo is listed on Tokyo Stock Exchange and Fukuoka Stock Exchange in Japan. Its top ten shareholders are mostly Japanese financial institutions including The Master Trust Bank of Japan (trust account, 8.9%), Japan Trustee Services Bank (trust account, 8.2%), and Nippon Life Insurance Company (3.4%). For FY2007 ended March 31st 2007, Taiheiyo reported sales of $7.96 billion, net income of $206.7 million and total assets of $10.6 billion. According to the interim report, by September 31st, 2007, Taiheiyo reported sales of $3.8 billion and net income of $71 million.

- Mitsubishi Materials:

Founded in 1950, MMC is a producer of industrial materials including fabricated metal products, nonferrous metals, cement and silicon. It is the second largest cement producer in Japan and approximately 14.4% of the company’s revenues are derived from cement (volume of 13.9 million tpy). Besides NSCC, it operates two cement plants outside of Japan, one in Yantai, China and one in California. It is listed on Tokyo Stock Exchange and Osaka Security Exchange in Japan. In FY 2007 ended March 31st 2007, MMC achieved revenues of $12.3 billion vs. $9.7 billion for FY2006. Net income during the period improved from $500 million in FY2006 to $604 million in FY2007. Total assets stood at $15 billion. According to the interim report, by September 31st, 2007, MMC reported sales of $6.6 billion and net income of $333 million.

- VICEM:

VICEM is a large state-owned cement company and dominates the Vietnamese market with about 42% of production capacity and 38% of sales revenue in 2007. It has stakes in at least 20 large cement plants across the country, including in partnership with the foreign players like Holcim, Lafarge and Chinfon.

Total project cost and amount and nature of IFC's investment

The total project cost is estimated at $ 240 million, consisting of:

- $168 million loan financing; and
- $72 million cash equity injection from sponsors.

The proposed IFC investment is an A Loan of up to $35 million and a B Loans of up to $33 million as part of a $168 million financing package. The remaining $100 million will consist of loans supported by sponsor guarantees, including a $65 million subordinated loan from NMCC and a $35 million loan from JBIC supported by guarantee from the Government of Vietnam.

Location of project and description of site

The company’s plant is located in Hai Thuong commune, Tinh Gia district, Thanh Hoa Province, about 230 km south of the city of Hanoi, Vietnam. In addition to the existing 2.15 million tpy NSP cement line, the facility includes limestone, sand and clay quarries, and a jetty/port which can accommodate vessels of 22,000 deadweight tons (DWT). The plant was started construction in 1998 and went into commercial production in mid-2000. The existing production line was based on the latest dry-process technology available at the time and the civil work was contracted to a foreign/local joint venture. Mitsubishi Heavy Industries was the main equipment supplier and all equipment was imported from leading manufacturers. In addition to the Thanh Hoa plant, the company has a distribution terminal located outside Ho Chi Minh City (HCMC) with a 15,000 ton storage silo.

Under the project, the company will build a second clinker and cement line with a capacity of 5,800 tons of clinker per day (or 2.15 million tons of cement per year) at the existing plant in Thanh Hoa, and erect a new cement distribution terminal with direct sea access in Ninh Thuy, Ninh Phuoc industrial zone, Khanh Hoa province. This distribution terminal will facilitate cement distribution in the south-central part of the country which is an underserved market, but has great potential for tourism development. As part of the project, the company will commission a new cement tanker to strengthen sea transportation links from Thanh Hoa to the southern markets.

Anticipated development impact of the project

Key development impacts of the project could be summarized as:

- Provide high-quality cement for Vietnam’s infrastructure development and construction secto:

The company has been running at over 100% capacity and is not able to meet demand. Vietnam’s 8% growth over the past several years has been underpinned by infrastructure and construction sectors, which has been growing at over 10% annually. The government has a stated policy to encourage more integrated cement capacity in Vietnam and to eventually scale-down polluting vertical shaft kiln technology plants. The Project will help the government achieve these development objectives.

- Supply underdeveloped south-central market:

Through development of new Nha Trang distribution terminal, the project will supply an
undersupplied market and facilitate the development of local tourism resorts and infrastructure.

- Increase scale and efficiency of existing assets:

NSCC is already an efficient producer of high-quality cement employing about 465 people. The
expansion will enable the company to achieve scale economies on overheads and higher efficiency
overall, as well as generate more tax income. The cement tanker will lower cost and increase
reliability of cement deliveries to the Southern markets.

- Employment and Development of Remote Area:

The project will create incremental employment in the underdeveloped Nghi Son area. In addition to
125 permanent jobs, there will be significant construction employment. Due to the expansion of the
company among other factors, Electricity of Vietnam (EVN) is building local power generating
capacity which will help develop the area into an industrial zone.

- Strengthening VICEM Management:

The joint venture platform will help VICEM continue to improve its managerial, finance and marketing
capabilities through working with Japanese partners.

IFC's expected development contribution

IFC’s main contribution will be:

- Mobilization of long-term finance including B Loan:

Vietnam’s financial markets are still developing, and long-term financing is not readily available from domestic lenders or if so, at relatively high spreads. IFC will provide a long term loan with maturity up to 7 years, which is critical for the success of the Project. IFC will also mobilize a long-term offshore syndicated loan, which is still relatively unusual in Vietnam.

- Energy efficiency:

IFC will continue to share our global best practices in energy-efficiency with the company, as well as our experience in using waste fuels in the kiln and developing alternative products such as slag cement which can help reduce CO2 emissions. IFC will continue to support the company to set a new standard on energy efficiency and emissions in Vietnam.

Currently, IFC advisory services is contracted to manage the competitive bidding for a 600MW coal-fired plant being developed by the national power company, Electricity of Vietnam, in the Nghi Son valley. The company recognizes IFC’s ongoing efforts to strengthen the power supply situation in the region and appreciates IFC’s relationship with the government in this area.

Environmental and social issues - Category B

This project is being reviewed as a Direct Investment according to IFC’s Social and Environmental Sustainability Policy. Based on a review of project information, the following Performance Standards (PS) are found relevant for the project:

- PS1: Social and Environmental Assessment and Management Systems
- PS2: Labor and Working Conditions
- PS3: Pollution Prevention and Abatement
- PS 4: Community Health, Safety and Security
- PS 5: Land Acquisition and Involuntary Resettlement
- PS 6: Biodiversity Conservation and Sustainable Natural Resource Management

Appraisal included field visits to all company plants. IFC has identified areas for improvement and in coordination with the company, designed and agreed adequate mitigating measures formulated in an Action Plan.

The conclusions of IFC’s review and the Action Plan may be found in the ESRS.

IFC PROJECTS