ETHANOL PRODUCTION IN SOUTH AFRICA

World leader in agricultural processing, including ethanolLooking to expand and diversify bioenergy product portfolioMarket capitalization of $18.2B and earnings of $1.7B in 2009Positioned for growth opportunities Invested $6.7B in the construction and maintenance of manufacturing plantsLow 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

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 BrazilTechnology 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 Provides new trade platformAllows 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 routesBuying 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 entity1.75 years for construction5 years to breakevenADMs strong cash position makes acquiring financing for greenfield FDI in South Africa relatively straightforward

Opportunity Cost of InvestmentRisk-free return on government treasury billsShort-term Brazilian (9% yield) or other government bondsInvestment in other market segments

Must evaluate whether the return on investment is greater than the risk premium of the projectRISK AREAS INCLUDE FINANCIAL, TECHNOLOGICAL, POLITICAL, AND CURRENCY

Price sensitivity to inputs and outputsRising grain pricesLabor rates and relationshipsUnions exist but high unemployment rate (24%) reduces their influenceAbundance of low-skilled labor and relative shortage of high-skilled laborEnergy shortfalls as a result of economic growth relative to electricity generating capacityWater shortage predicted to continueFluctuating fuel prices

Risk of power shift to leftist parties in 2014 In favor of state owned industrial centers, especially in mining sector Call for stricter land expropriation lawsImpact of public health issues (e.g. HIV rate) on future market conditions and health care implications for ADMEffect of external political environment Expansion of Somali piracy Decline in Zimbabwes political situationRand projected to increase value placing pressure on input costsFurther decline in US$ values would increase dollar denominated input costs Change in SAF macroeconomic policies leading to increased current account deficitsInflation

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

United StatesBrazilSouth AfricaCorn based ethanolCorn subsidies for farmers and tax credits for ethanol producersSugar cane based ethanolEthanol production no longer subsidized by the governmentNon-existentNo subsidies for farmers or ethanol producersCorn production surplusAd Valorem duty of 2.5% on ethanol importsSecondary duty of $0.54 per gallon of ethanolRecently eliminated tariffs on ethanol importsNo existing tariffs on ethanol importsLabor rates 30% higher than BrazilLabor rates 30% cheaper than USHigh level of unemployment

Chart1

0.5502943435

0.336728948

0.0532377783

0.0277450729

0.0222677246

0.0148963399

0.0047094958

0.0042487842

0.0029178398

0.0126439724

Sales

Sheet1

Sales

US0.5502943435

BRAZIL0.336728948

EU0.0532377783

CHINA0.0277450729

THAILAND0.0222677246

CANADA0.0148963399

INDIA0.0047094958

COLOMBIA0.0042487842

AUSTRALIA0.0029178398

OTHER0.0126439724

To resize chart data range, drag lower right corner of range.

South Africa does not possess a competitive advantage in corn-based ethanolFinancial, technological, political, and currency risk factors increase the risk premiumBest alternative is expansion of current manufacturing efforts in the U.S. and Brazil

ADM SHOULD NOT MAKE A FDI IN SOUTH AFRICA