ETHANOL PRODUCTION IN SOUTH AFRICA

World leader in agricultural processing, including ethanol

Looking to expand and diversify bioenergy product portfolio

Market capitalization of $18.2B and earnings of $1.7B in 2009

Positioned for growth opportunities ◦ Invested $6.7B in the construction and

maintenance of manufacturing plants◦ Low WACC (6.7%) versus high ROIC (11.9%)

indicates strategic capital investments add value to the firm

Factors influencing ethanol demand: Oil prices Government mandates on ethanol blend levels

Current platforms: U.S. is the leading ethanol producer in the world Brazil is 2nd largest producer and leading exporter of ethanol in the worldU.S. and EU have been primary markets for imports as consumption increases due to energy demands and biofuel targets Asia and India are emerging as major import market targets

As a diversified agribusiness, with existing scale and expertise in corn processing and a global transportation and distribution

network, ADM has become a market leader in ethanol production.

ADM is an industry leader in dry-mill corn-based ethanol production technologies◦ 7 corn-based mills in the U.S.◦ 1 sugarcane-based mill in Brazil

Technology improvements include advanced water treatment techniques and improved fermentation processes

Strategy includes expanding ethanol production and developing business in emerging African markets FDI in South Africa meets both of these needs o Provides new trade platformo Allows better access to meet growing ethanol demand in Europe and

emerging Asian markets

Location provides easy access to shipping routes to Europe and Asia

Access to a surplus of corn Modern transportation

infrastructure mitigates the need to develop transportation routes

Buying stations located throughout South Africa make transport of imports easy

Costs of Investing in South Africa:◦ $165M for manufacturing plant◦ $97.6M in production costs with $176M in sales

annually (based on 110M gallons of output)◦ 21 days to establish business entity◦ 1.75 years for construction◦ 5 years to breakeven

ADM’s strong cash position makes acquiring financing for greenfield FDI in South Africa relatively straightforward

Opportunity Cost of Investment◦ Risk-free return on government treasury bills◦ Short-term Brazilian (9% yield) or other government

bonds◦ Investment in other market segments

Must evaluate whether the return on investment is greater than the risk premium of the project

RISK AREAS INCLUDE FINANCIAL, TECHNOLOGICAL, POLITICAL, AND CURRENCY

RISK AREAS INCLUDE FINANCIAL, TECHNOLOGICAL, POLITICAL, AND CURRENCY

Price sensitivity to inputs and outputs◦ Rising grain prices◦ Labor rates and relationships

Unions exist but high unemployment rate (24%) reduces their influence

Abundance of low-skilled labor and relative shortage of high-skilled labor

◦ Energy shortfalls as a result of economic growth relative to electricity generating capacity

◦ Water shortage predicted to continue◦ Fluctuating fuel prices

Risk of power shift to leftist parties in 2014o In favor of state owned industrial centers, especially in mining sectoro Call for stricter land expropriation laws

Impact of public health issues (e.g. HIV rate) on future market conditions and health care implications for ADM

Effect of external political environmento Expansion of Somali piracyo Decline in Zimbabwe’s political situation

Rand projected to increase value placing pressure on input costs

Further decline in US$ values would increase dollar denominated input costs

Change in SAF macroeconomic policies leading to increased current account deficits

Inflation

Does SA possess a competitive advantage in ethanol? Brazil and US combined dominate world ethanol production – 89% of global total

United States Brazil South Africa

•Corn based ethanol•Corn subsidies for farmers and tax credits for ethanol producers

•Sugar cane based ethanol•Ethanol production no longer subsidized by the government

•Non-existent•No subsidies for farmers or ethanol producers•Corn production surplus

•Ad Valorem duty of 2.5% on ethanol imports•Secondary duty of $0.54 per gallon of ethanol

•Recently eliminated tariffs on ethanol imports

•No existing tariffs on ethanol imports

•Labor rates 30% higher than Brazil

•Labor rates 30% cheaper than US

•High level of unemployment

South Africa does not possess a competitive advantage in corn-based ethanol

Financial, technological, political, and currency risk factors increase the risk premium

Best alternative is expansion of current manufacturing efforts in the U.S. and Brazil

ADM SHOULD NOT MAKE A FDI IN SOUTH AFRICA

ADM SHOULD NOT MAKE A FDI IN SOUTH AFRICA