1

Business Plan on Organization of Production and

Processing of Zirconium-Containing

Scraps

Project Sponsor: VEKS LLC

Development Contractor: OOO SPC Zeolite

Development Contractor: OOO OgneuporPromGroup

This Business Plan is developed by: Legal and Business Consulting, LLC

Moscow, 2017

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Memorandum of Confidentiality

The purpose of this Memorandum of Confidentiality is to prevent those who have read the

Business Plan from disclosure of any information contained therein.

Please, bear in mind that any person who has read the Business Plan shall not disclose the

information contained therein without the prior consent of the management of the project

participants – VEKS LLC, OOO SPC Zeolite, OOO OgneuporPromGroup.

Furthermore, it is prohibited to reproduce the Business Plan or any part thereof or transfer

it to third parties without the express consent of the Development Contractor.

The Project Sponsor considers the following information confidential:

Forms, methods and techniques of business activities,

Marketing information,

Information contained in engineering documentation,

Description of the manufacturing process,

Existence and contents of contracts and agreements with legal entities and

individuals, as well as their projects,

Sales volumes,

Number, names and personal data of employees, their positions.

The information and opinions provided herein are based on the sources deemed reliable

and trustworthy; however, the latter do not fully guarantee the accuracy and completeness

thereof.

The following sources have been used:

Designs, calculations, technical documents provided by OOO

OgneuporPromGroup,

Results of pilot and experimental works performed at the premises of MMK, OJSC,

National University of Science and Technology “MISiS”, Ural Federal

University, Institute of New Materials and Technologies and ООО

SpecOgneuporComplekt,

Mass media and online resources.

All data, assessments, plans, proposals and conclusions presented under this project and

related to its potential profitability, production volumes, costs, profit rate and its future level are

based on the consensus of the project development team members.

The following documents provided a methodological framework for the Business Plan:

Guidelines for Evaluating the Effectiveness of Investment Projects (Second Edition,

revised and amended) (approved by the Ministry of Economic Development,

Ministry of Finance and State Committee for Construction of the Russian

Federation on June 21, 1999, No. VK-477).

477).

Methods of UNIDO (United Nations Industrial Development Organization).

3

Summary

This Business Plan is a description of the project on construction of a processing facility

for zirconium-containing scraps.

The Project Sponsor is VEKS LLC (INN 5018143961; KPP 501801001).

The Development Contractor responsible for chemical processing is OOO SPC Zeolite

(INN 7455007210; KPP 745501001).

The Development Contractor responsible for mechanical processing is OOO

OgneuporPromGroup (INN 7456001130; KPP 745601001).

The project includes construction of two processing shops.

The first cycle shop – RUB 74,000,000

Dimensions of the shop are 24 m (D) x 18 m (W) x 16 m (H)

(hangar and sandwich steel structures) and those of the intake area are 24 m (D) x 18 m

(W) x 16 m (H) (hangar steel structure).

Custom-design processing equipment and its installation.

Ural-Omega, CJSC (www.uralomega.ru) will supply the equipment.

The second cycle shop – RUB 45,500,000

Dimensions of the shop are 18 m (D) x 24 m (W) x 12 m (H) (hangar and

sandwich steel structures).

Custom-design processing equipment and its installation.

OOO TPK SIBMASHPOLYMER (www.sibmashpolymer.ru) will supply the

equipment.

The land plot with facilities and communications is worth RUB 40,000,000.

Address: Industrial Area, Agapovsky District, Magnitogorsk, Russia

The table below presents the key performance indicators of the investment project.

Table – Key Performance Indicators of the Investment Project

(Most Likely Scenario)

Metric Value

Investment costs, thousand RUB 223,950.00

Net present value, thousand RUB 2,029,000,00

Internal rate of return (%) 213

Return on investment 9.75

Payback period (DCF) 12 months

Payback period (CF) 11 months

As we can see from the table, all performance indicators comply with the generally

accepted standards. Therefore, the project can be considered economically viable and feasible for

development.

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Generally, the advantages of the investment project under consideration are summarized as

follows:

1. Great investment potential of the project (see Table “Key Performance Indicators of the

Investment Project”)

2. The underlying business idea is the innovative manufacture of refractories using

zirconium scrap.

3. The project’s environmental component (the source raw material is waste of glass

factories, mineral wool factories and dumping sites). Implementation of the project

under consideration will significantly reduce the accumulated environmental damage.

Information on the experts who provided an expert review of the investment project:

Vitaliy Nikolaevich Merzlyakov – Director, OOO SPC Zeolite;

Evgeniy Valerievich Panov – Director, OOO OgneuporPromGroup;

Vadim Valerievich Sychev – Director, VEKS LLC.

1. Information on Project Participants

The purpose of the proposed Business Plan is to justify the economic efficiency of the

organization of refractory manufacturing using zirconium-containing refractory waste. The

Project Sponsor is VEKS, Limited Liability Company.

Projects Implemented by OOO SPC Zeolite (Development Contractor):

OOO SPC Zeolite – Details:

Legal Address: 32-224, Zeleny Log Str., Magnitogorsk, Chelyabinsk Region, 455034

Mailing Address: 32-224, Zeleny Log Str., Magnitogorsk, Chelyabinsk Region, 455034

E-mail: spc.zeolite@mail.ru

Phone/ Fax: +7 (3519) 29-03-75

INN: 455007210

KPP: 745501001

OKPO: 37907031

Current Account: 40702810990200003358 in Chelyabinvestbank, OJSC, Magnitogorsk

Correspondent Account: 30101810600000000748, BIC 047516748

Director: Vitaliy Nikolaevich Merzlyakov

2012

1) On the instruction of management of OOO LUKOIL-West Siberia, the lightened cement

for cementing the annulus of barren wells was developed with characteristics (in terms of

both performance and price) superior to its market analogues.

2) Advanced refining technology for the reforming catalyst was developed by OOO Tobolsk

Neftekhim.

5

2013

1) In cooperation with the management of Magnitogorsk Iron and Steel Works (MMK,

OJSC) a testing and delivery schedule for MP-D washing material (developed by OOO

SPC Zeolite) for blast furnace wells was made in order to increase productivity.

2) Together with the management of MMK, OJSC a testing and delivery schedule for

SKHP-95 casting powder (developed by OOO OgneuporPromGroup) for CCM No. 6

was made.

2014

1) A technology for chemical enrichment of oxidized nickel ores, including ore pretreatment,

was developed using the ore-preparation technology designed by OgneuporPromGroup.

The technology is implemented at the premises of OOO Buruktal Nickel Plant.

2) Developed a tungsten concentrate processing and enrichment process.

2015

1) In cooperation with OOO OgneuporPromGroup developed a processing technology for

waste dumps of a gangue quartz deposit to produce high quality refractory linings and

high-purity quartz sand. Implemented at Magnitogorsk Plant of Rolling Rolls, CJSC

(MZPV, CJSC).

Projects Implemented by OOO OgneuporPromGroup (Development Contractor):

OOO OgneuporPromGroup – Details:

Mailing, Legal and Location Address: Room 9, 61/3, Imeni Gazety “Pravda” Str.,

Magnitogorsk, Chelyabinsk Region, 455026 Russia

INN 7456001130/ KPP 745601001

OKPO 65763571, OGRN 1107456001069

Current Account 40702810424021000566 in Chelyabinsk Branch of B&N Bank, OJSC

Correspondent Account 30101810400000000996

BIC 047528996 Phone/ Fax: + 7 (3519) 21-68-99

Director: Evgeniy Valerievich Panov

2010 – A manufacturing process was developed to produce high quality periclase powder from

fused magnesia waste (“the crust”, partially fused magnesia).

2011 – The own pilot production, large-scale manufacturing of periclase powders was launched.

2011. – A manufacturing process was initiated to produce chromium alloyed magnesium-

aluminate powders from ferrous-chromium aluminothermic slags.

2012 – A manufacturing process was developed to produce chromium alloyed alumina powders

from metallic chromium aluminothermic slags.

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2012 – In-process testing of the developed materials was conducted at the major iron and steel

and refractory enterprises of the Russian Federation, such as MMK, OJSC, OOO Ogneupor,

OOO Magnezit Group, and ООО SpecOgneuporComplekt.

2012 – Special materials of different composition for the foundry industry were developed, as

well as manufacturing techniques for their production from secondary raw materials, in

particular, special molding sands, ultrafine fillers for nonstick coatings, etc. The serial production

commenced.

2012 – A technology of dry concentration for low-grade and waste chromium ores of the Ural

area was developed to obtain a commercial metallurgical concentrate.

2012 – A manufacturing process was developed to produce a high-quality chrome concentrate

for the chemical industry.

2013 – A technology of low-grade oxidized nickel ore pretreatment was developed for further

chemical enrichment as requested by OOO SPC Zeolite.

2013 – Industrial tests of alumina and spinel powders in the refractory industry were conducted.

Provisional agreements on commercial-scale deliveries for 2014 were entered into.

2014 – Industrial tests of periclase, chromite and aluminosilicate carbon powders in the chemical

industry were conducted.

2015 – A manufacturing process was designed to produce high-purity quartz sands (SiO2 ≥ 99.9)

using the waste dumps of worked-out gangue quartz deposits in cooperation with OOO SPC

Zeolite.

2. Brief Description of Manufacturing Process

The source raw material for the future enterprise is zirconium-containing scrap provided

by various glass factories.

The investment project under consideration includes construction of two shops based on

payback periods.

The main products of the future plant are as follows: zirconium concentrate (powder) with

ZrO2 contents of with at least 65 % (base product) plus Hf 2.5–3 % with the maximum content

of alkaline earth metals of 1.5 %, and synthetic mold powder (MP). The manufacturing process

uses dry concentration and separation of materials, including selective grinding techniques, dry

magnetic and gravity separation.

The products of the future enterprise are primarily used for manufacture of refractories.

The iron and steel industry may use the products of the future enterprise to manufacture

refractories. These products can be used in the foundry and chemical industries, as well.

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3. Marketing Plan

3.1 General Analysis of Zircon Refractory Market

Due to their great refractory properties and corrosion resistance to metal and mineral

melts, zirconium refractories, in particular, zircon, brazilite and fused-cast brazilite-alumina

refractories are in high demand in the iron and steel and glass industries. Zircon refractories in

the continuous casting process are just an example of their efficient use in the iron and steel

industry. Considering that brazilite-alumina refractories are essential for the state-of-the-art glass

manufacturing processes, new production facilities for these materials were set up in Belgium,

Australia, India, China in the last decade. SEPR Group (France), RHI (Germany) and other

companies produce a wide range of zirconium refractories for the iron and steel and glass

industries. In Russia, Borovichi Refractory Works, OJSC and Dinur, OJSC produce a small

amount of zircon refractories for the iron and steel industry. Moreover, the total amount of

fused-cast brazilite-alumina refractories produced for the glass industry does not exceed 10

thousand tons per year. Since there are no domestic zirconium-containing raw materials

(zirconium and zirconium dioxide), foreign companies provide the bulk of brazilite-alumina

refractories for the glass industry.

Every year approximately 15 thousand tons of zirconium are used in Russia. However,

according to various estimates, the demand is from 40 to 100 thousand tons. The domestic

manufacture satisfies maximum 2–3 % of Russia’s demand in zirconium-containing raw

materials. The Kovdor Mining and Processing Works, the only enterprise in Russia that produces

zirconium raw material (brazilite powder), produces 5–6 thousand tons per year. Most of this

material is exported to Norway, Japan and other countries. One of the most sought-after mineral

raw materials – zirconium concentrate – is not manufactured in Russia. It is imported from

Ukraine and Australia. Ranking third in the world in zirconium reserves, Russia has no

commercially developed deposits with zirconium production. Generally, titanium and zirconium

deposits can be developed only as a whole with mandatory production of ferrous titanate

(titanium oxide) and zirconium concentrates, the demand for which is confirmed by the industry.

As titanium and zirconium are strategically important commercial minerals, it is critical to

develop their supplies base for the self-sufficiency of Russia.

There are titanium and zirconium placer deposits with proved reserves in Russia. If

developed, these deposits could satisfy the domestic demand for zirconium raw material for

decades. They include Tuganskoye deposit (Tomsk Region), Lukoyanovskoye deposit (Nizhny

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Novgorod Region), Tarskoye deposit (Omsk Region), Centralnoye deposit (Tambov Region),

Beshpagirskoe deposit (Stavropol Territory).

• Tuganskoye deposit. In 2002, the Tugansk Ore Mining and Processing Enterprise

“Ilmenite” was established there. It was the first company in Russia that started implementing

the manufacturing program for zirconium concentrate. The zirconium concentrate manufactured

by the Tugansk Ore Mining and Processing Enterprise “Ilmenite” under the pilot production

according to TU 1762-002-581914756-2005 contains Zr02 > 60.0 %, TiO2 ^ 4.0 %, Fe2O3 <

1.0 %, Al2O3 < 1 %. Although the concentrate does not meet the requirements for production of

fused-cast brazilite-alumina refractories in terms of ferrous and titanium oxide content, it can be

widely used in manufacturing of zirconium products.

• Lukoyanovskoye deposit (Itmanovskaya placer). It is ready for commercial development.

The raw material quality is high (zirconium content is 24.32 kg/m3).

• Tarskoye deposit (zirconium content is 4.7 kg/m3). Provided significant reserves of rare

earth elements of lanthanum and cerium groups are confirmed, the value of the deposit will

increase exponentially. Experimental batches of zirconium concentrate produced in small

amounts by the Tarsk Mining and Processing Works according to TU 1762-003-79932362-2007

contain Zr02 > 60.0 %, Р205 < 0.2 %, А1203 < 2.5 %, Si02 < 37.0 %, TiO2 < 0.8 %, Feo6l4 <

0.15 %. A concentrate of such quality can be widely used for manufacturing of refractories,

ferrous-based alloys, abrasives, etc.

• Centralnoye deposit. The Eastern section (7 km long and 5 km wide) is the best explored.

There are high concentrations of useful components (zirconium content is 7.28 kg/m3) sufficient

to establish a large mining and processing enterprise.

• Beshpagirskoe deposit (Stavropol Territory). It is located in an economically advantageous

area with developed infrastructure, and in 2006, the State Commission for Reserves booked it.

The estimated forecast resources of the deposit are 4.0 million tons of zirconium oxide. Primary

exploration targets are reserves amounting to 22.535,000 m3 with zirconium content of 11.29

kg/m3.

Due to frequent changes of ownership, lack of funds and failure governmental attempts to

implement the targeted integrated programs, all of the above-mentioned deposits have not been

commercially developed for decades. Taking into account the high costs, first, based on

comparison of economic parameters of development of these deposits, it is required to identify

the most promising one for organization of commercial zirconium concentrate and zirconium

dioxide manufacturing. The problem of creating titanium and zirconium supplies base in Russia

is nationwide. The economic stability of the country in terms of providing various industries,

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including the nuclear, iron and steel and refractory industries, with zirconium-containing raw

materials depends on the solution of this problem.

3.2 Pricing Policy

It is expected that prices for the products of the future plant for producing materials from

zirconium-containing waste will be determined based on the cost of foreign analogues, because

such material made of waste is not manufactured in Russia. This pricing method is essentially as

follows. The manufacturer determines the price based on the present value of imported products

minus 20 % to improve the price competitiveness. Then it compares the estimated price to that of

the closest analogue.

Table 3.1 presents the estimated minimum price limit values for the main products of the

future plant. As mentioned above, a similar material of foreign manufacture was taken as an

analogue.

Table 3.1 – Price Limit Values for Main Products of the Future Plant.

Item No. Product Price, RUB/ ton

1 Zirconium concentrate 165,000

2 Mold powder (MP) 46,000

4. Organizational Plan

The project includes construction of a plant consisting of two shops.

The first cycle shop is a hangar (24 m (D) x 18 m (W) x 16 m (H)) with an intake area

(24 m (D) x 18 m (W) x 16 m (H)).

Complex of mechanical processing equipment based on patented innovative solutions.

The second cycle shop is a hangar (18 m (D) x 24 m (W) x 12 m (H)).

Complex of chemical equipment based on patented innovative solutions.

A base in the industrial area in Agapovsky District, Magnitogorsk, Russia that meets all

the project requirements will be purchased.

Summing up what has been said, the investment project for construction of a

manufacturing facility to produce refractories from aluminothermic slags provisionally consists

of the following principal stages:

a) Stage 1 – purchase of the land plot (1 month).

a) Stage 2 – construction and fabrication of the equipment (6 months).

a) Stage 3 – commissioning and startup (1 month).

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5. Financial Plan

The financial plan of the investment project reflects the dynamics of the company’s cash

inflows and outflows at gradual (from year to year) expansion of manufacturing and sales

capacities.

5.1 Investment Costs

Tables 5.1 – 5.3 show the investment costs for construction of the future manufacturing

facility to produce zirconium concentrate and MP from zirconium-containing scraps.

Figure 4.1 – Organizational Structure of Future Enterprise

Director

Deputy Director for Production

Chief Engineer

Power

Engineer

2

El

Electricians

in rotating

teams

Fitters 2 in rotating

teams

Chief

Process Engineer

Lab Technicians 2

in rotating

teams

Sales

Engineer

Deputy Director for Economics and Finance

( appointed by the investor )

Mechanic

2 Loader

Operators

in rotating

teams

Truck

Driver

Shop

Foreman

Operators 2

in rotating

teams

Shop Workers 4

2 in

each rotating team

Purchasing

Specialist

Chief

Accountant

Commercial Department

Manager

Accountant

Secretary

Chief Security

Officer

12

Table 5.1 – Investment Costs for Construction of First Cycle Shop

Cost Item Amount, thousand

RUB

Basic process equipment (in 2016 prices). 49,000

Main shop building and warehouses 25,000

TOTAL 74,000

Table 5.2 – Investment Costs for Construction of Second Cycle Shop

Cost Item Amount, thousand

RUB

Basic process equipment (in prices for 2011) 31,000

Main shop building and warehouses 12,000

Production project 2,500

TOTAL 45,500

Table 5.3 – Investment Costs (General)

Cost Item Amount,

thousand RUB

Construction of the primary cycle shop 74,000

Construction of the secondary cycle shop 45,500

Land plot with provided utilities (S = 7 ha4) 40,000

Commissioning permit 5,000

General project 5,000

Contingencies, 10 % 16,950

Machinery and vehicles 15,000

Operating expenses 22,500

TOTAL 223,950

5.2 Cost Budget for Daily Operations of Future Plant

Table 5.4 presents the operating costs associated with daily operations of the future plant for

manufacturing of refractories using zirconium-containing slags.

A month is taken as a reporting period.

Table 5.4 – Operating (Monthly) Costs for Manufacturing of Basic Products – Zirconium

Concentrate and MP.

Item

No.

Description Quantity, pcs. RUB/ ton Amount, thousand

RUB

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5.3 Expected Revenue from Project Implementation

Table 5.6 shows the operating revenue associated with daily operations of the future plant.

Table 5.6 – Future Plant’s Operating Revenue from Sales of Basic Products – Zirconium

Concentrate and MP.

Item

No.

Description Value

1

Output of zirconium concentrate (tons) 400

Average cost of 1 ton (rubles) 165,000

2

Output of MP 100

Average cost of 1 ton (rubles) 46,000

Total monthly revenue (rubles) 70,600.000

Note: A month is taken as a reporting period.

6. Economic Feasibility Analysis of the Project

6.1 Cash Flow Generation and Discounting

To determine the predictable future value of “present” money, the cash flow has to be discounted,

which means its value has to be reduced to that of the initial stage.

Discounting is the process of determining the value of tomorrow’s cash flows (future income at

this moment). For accurate assessment of the future income, you need to know the projected values of

revenues, expenses, investments, as well as the capital structure, residual value of the assets and discount

rate.

The discount rate is used to evaluate the efficiency of investments. In economics, the discount rate

is the rate of return on investment required by the investor.

In other words, the discount rate may help to determine the payment that the investor will have to

make today in order to get the estimated return in the future. Therefore, key decisions, including the

choice of the investment project, depend on the discount rate.

1 Raw materials (the price includes grading and

separation)

500.00 13,000 6,500.00

2 Transportation (delivery from the farthest point) 500.00 2,500 1,250.00

Mechanical processing costs

3 Power 500 500 250.00

4 Gas 500 270 135.00

5 Basic spare parts 500 4,000 2,000.00

6 Auxiliary supplies 500 350 175.00

Chemical processing costs

7 Acid 500 13,500 6,750.00

8 Lime 500 500 250.00

9 Extra operating expenses 500 3,500 1,750.00

10 Packaging, FIBC 500 450 225.00

11 Payroll budget - - 3,215.00

TOTAL 38,570 22,500.00

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The simplest practical method to determine the discount rate is to define it as equal to the interest

rate.

The cash flow associated with the implementation of the investment project under consideration

(Table 6) was discounted at the discount rate of 14 %.

Table 6 – Cash Flow Generation (thous. RUB) – Worst-Case Scenario1 with Basic Taxes Allowed for2

Profit/ Loss

4 months

Item UoM 2017 2018 2019 2020 2021 2022 Total

Production load %% 100% 100% 100% 100% 100% 100%

Processing of raw materials tons

2 000 6 000 6 000 6 000

6 000

6 000 32 000

ZrO2 output tons

1 600 4 800 4 800 4 800

4 800

4 800 25 600

MP output tons

400 1 200 1 200 1 200

1 200

1 200 6 400

Sales revenue MRUB

282 847 847 847

847

847 4 517

Cost value MRUB

(90) (270) (270) (270)

(270)

(270) (1 440)

Gross profit MRUB

192 577 577 577 577 577 3 077

Gross profit, %% %% 68% 68% 68% 68% 68% 68% 68%

Business expenses MRUB

(3) (10) (10) (10)

(10)

(10) (53)

Administrative expenses MRUB

(3) (3) (6) (6)

(6)

(6) (29)

Operating income MRUB

186 564 561 561 561 562 2 995

Operating income %% 66% 67% 66% 66% 66% 66% 66%

Interest payable MRUB

- -

Profit before tax MRUB

186 564 561 561 561 562 2 995

Income tax MRUB

(38) (113) (112) (112)

(112)

(112) (599)

Deferred income tax MRUB

0 - - - - - 0

Net profit MRUB

149 451 449 449 449 449 2 396

Net profit %% 53% 53% 53% 53% 53% 53% 53%

Depreciation MRUB

6 19 19 19 19 19 103

EBITDA MRUB

193 583 580 580 581 581 3 098

EBITDA %% 68% 69% 68% 69% 69% 69% 69%

Cash flow

Operations UoM 2017 2018 2019 2020 2021 2022 Total

Inventory changes MRUB

(38) - - - - - (38)

Changes to accounts receivable MRUB

- - - - - - -

1 The worst-case scenario in terms of cash flow suggested that only 60 % of the future plant’s production capacity is used

within the entire period under consideration. 2 The basic taxes included income tax, property tax and value added tax.

15

Changes to accounts payable MRUB

35 35 - - - - 71

Total cash flow from operations MRUB 190 618 580 580

581

581 3 130

Investments

Acquisition of land MRUB

(40) -

(40)

Construction MRUB

(58) -

(58)

Purchase of equipment MRUB

(94) -

(94)

Reserve

(20) -

(20)

VAT refund MRUB

26 -

26

Total cash flow from investments MRUB (187) - - - - - (187)

Total free cash flow MRUB 3 618 580 580

581

581 2 943

Financing

Flow of shareholders’ funds MRUB

238 - - - - - 238

Flow of borrowed funds MRUB

- - - - - - -

Repayment of borrowed funds MRUB

- - - - - - -

Dividends MRUB

- - - - - - -

Total cash flow from financing MRUB 238 - - - - - 238

Total cash flow MRUB 241 618 580 580

581

581 3 181

Opening cash balance MRUB - 241 859 1 439

2 020

2 600 -

Closing cash balance MRUB 241 859 1 439 2 020

2 600

3 181 3 181

Table 6.1 provides a rationale for the estimate of depreciation.

FOR REFERENCE ONLY:

Table 6.1 – Estimate of Depreciation for Future Plant.

Rate Amount/ month Amount/ year

Depreciation of buildings, RUB 3 % 111,250 1,335,000

Equipment depreciation, RUB 16 % 1,492,667 17,912,000

TOTAL 1,603,917 19,247,000

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6.2 Methods to Determine Key Performance Indicators There are special methods (methods of capital budgeting) used to evaluate the effectiveness of an

investment project3.

In order to use these methods, the investment project shall be represented as a cash flow (Table 6).

Methods to determine key performance indicators of the project (methods of capital budgeting) can

include:

1. The payback period is the length of time required to recover the cost of the project investment using the

revenues from the company’s activities. This method provides only a rough estimate of the project's

liquidity.

2. Net income is an accumulated profit (cash flow balance) of the company for the reporting period.

3. Net present value (NPV) is the main criterion of the investment project’s effectiveness. This is the

algebraic sum of the values of all cash flow elements generated by the project. If the NPV of the

investment project is positive, the project is profitable (at the given discount rate), and it can be

considered for approval. The higher is the NPV, the more profitable the project is. As this metric is

absolute, the NPV method has the advantage of additivity (results for a few projects can be summed up).

4. Return on investment (ROI) is a relative indicator of the investment project’s profitability. The ROI is

compared to one. If the return on investment is greater than one, the project is profitable. If the ROI is

equal to one, the project is neither profitable nor unprofitable. If the ROI is less than one, the project is

unprofitable. The ROI shows the underlying strength of the project. The higher is the return on

investment, the less likely the investment project is to become unprofitable under unfavorable conditions

of its implementation.

5. Internal rate of return (IRR) is a discount rate that makes the net present value of all cash flows from a

particular project equal to zero. On the one hand, IRR shows the maximum possible level of income

associated with the project. This indicator as well as the return on investment is relative. It characterizes

the return on every invested ruble, but the rate of return determined by the IRR corresponds to a period

of one year. On the other hand, the IRR shows the maximum level of expenditure that may be associated

with the project. If it is higher than the cost of invested capital, the project is considered profitable, if it is

lower, the project is considered unprofitable.

6. A discounted payback period is a period required for investments to break even recognizing the time

value of money. This indicator is calculated using a cumulative calculation method.

6.3 Calculation of Project’s Key Performance Indicators

Table 6.3 presents the calculation of key performance indicators of the project.

3 Guidelines for Evaluating the Effectiveness of Investment Projects (Second Edition, revised and amended) (approved by the

Ministry of Economic Development, Ministry of Finance and State Committee for Construction of the Russian Federation on June

21, 1999, No. VK477).

17

Table 6.3 – Key Performance Indicators of the Investment Project

MRUB

Periods Invest 2017 2018 2019 2020 2021 2022 Total

0 1 2 3 4 5

Free cash flow (224)

3

618

580

580

581

581

2 943

Discount rate

14%

Discount factor 1 1,00

0,88

0,77

0,67

0,59

0,52

Discounted cash flow (224) 3 542 446 392 344 302 2 029

TV discount factor 7,14

Terminal value 4 149

Discounted terminal value 2 155

Total enterprise value (EV), DCF method 4 184

Total investments 201

IRR 103%

EV/EBITDA 8,10

Payback period, years 0,50

EBITDA/ Cost of investments

2,56

Multiplier (M) 6,0

Enterprise value at M 3 098

-

100

200

300

400

500

600

700

2017 2018 2019 2020 2021 2022

EBITDA

18

As we can see from Table 6.3, all the performance indicators comply with the generally accepted

standards. Therefore, the project can be considered viable and feasible for development.

7. Risk Analysis of Investment Project

A risk is a possibility of such conditions in the future that may have adverse impacts.

The probability of a risk event is estimated as:

1) Minor (less than 20 %)

2) Low (20–39 %)

3) Medium (40–59 %)

4) High (60–79 %)

5) Very high (over 80 %)

The possible damage is estimated as:

1) Minor loss (up to RUB 10,000)

2) Insignificant loss (from RUB 10,000 to RUB 100,000)

3) Average loss (from RUB 100,000 to RUB 500,000)

4) Significant loss (from RUB 500,000 to RUB 1,000,000)

5) Catastrophic loss (from RUB 1,000,000 to the amount close to the company's annual profit)

-

100

200

300

400

500

600

700

2017 2018 2019 2020 2021 2022

Free Cash Flow

-

1 000

2 000

3 000

4 000

5 000

6 000

7 000

2017 2018 2019 2020 2021 2022

Processing of Raw Materials

19

Table 7.1 – Risk Register of Future Plant

Risk No. Type of

Risk Risk Factor Condition for Risk Risk Impact

Description of

Damage

Probability of Risk

Event

Possible

Dam

age

Sum

1 External

Risk

1) Environmental

requirements Adoption of regulations,

introducing stricter liability

for violation of

environmental requirements

Reduced

production

volume, shutdown

of the enterprise

Penalties, loss of

revenue, reduction of profits,

shutdown of the enterprise

2 5 7

2) Health and

safety

requirements

Adoption of regulations,

introducing stricter liability

and health safety

requirements

Reduced

production

volume, shutdown

of the enterprise

Penalties, loss of

revenue, reduction

of profits

2 3 5

2 Property

Risk

3) Intellectual

property

management

Reproduction of the

technology, development of

a new more efficient and

cheaper technology

Reduced sales

volume due to lower demand

for the products and new competitors

Loss of revenue,

reduction of

profits

3 4 7

3 Personnel

Risk

4) Low personnel

competence Lack of education, skills Reduced output

and quality of the

products

Loss of revenue,

reduction of

profits

2 3 5

Staff turnover,

shortage Lack of staff Reduced output

and quality of the

products

Loss of revenue,

reduction of

profits

2 3 5

4

Engineeri

ng and

Manufact

uring Risk

6) Physical

deterioration of the

equipment,

outdated

technologies

Long periods of equipment

operation, deferred

maintenance, new models

with better performance and

reliability

Lower

marketability of

the products

Lower revenues

and profits 2 2 4

7) Compliance of

the equipment and

technologies with

the requirements to

the product quality

Low quality of the

equipment and ill-designed

manufacturing process

Lower

marketability of

the products

Lower revenues

and profits 2 2 4

20

8) Production

bottlenecks A production unit that slows down the delivery of

the manufactured products.

Inability to quickly

increase the

production volume

in order to meet

the growing

demand

Loss of revenue,

reduction of

profits

2 2 4

9) Efficient

performance of the

equipment and

technologies

Inferior equipment and

technologies causing a

waste of resources

Overstated

manufacturing cost

of the finished

products

Reduced sales

profits, loss of

revenue

2 2 4

10) Productivity

of the equipment

and technologies

Low productivity of the

equipment and technologies Inability to quickly

increase the

production volume

in order to meet

the growing

demand

Loss of revenue,

reduction of

profits

2 2 4

11) Machinery

and equipment

changeover time

Lack of flexibility in terms

of equipment changeover, Reduced performance and

lower

marketability

Lower revenues

and profits,

penalties

3 4 7

no possibility for repairs

without shutdowns of the products,

failure to fulfill

delivery

obligations

12) Wideness of

the product range Insufficient product range Reduced

performance and lower

marketability of

the products, sales

market decline

Lower revenues

and profits 3 4 7

5 Market

Risk

13) Lower market

value of the

products

Overall market decline Reduced revenues Loss of revenue,

reduction of

profits

1 3 4

14) New strong

competition Rapid industry development Reduced revenues Loss of revenue,

reduction of

profits

2 4 6

15) Lower

consumer interest Decline in the significance

of this product type Reduced revenues Loss of revenue,

reduction of

profits

1 3 4

16) Increased price

of primary

products,

materials, semi-

finished products

Raw material prices

increased by suppliers Increase in

production costs Reduced sales

profits 2 4 6

6 Liquidity

Risk

17) Inadequately

balanced cash flow Unforeseen expenses or lost

revenue Inability to meet

obligations to

creditors

Possible penalties

imposed by

creditors,

including

bankruptcy

2 3 5

21

- The risk is fully (practically fully) controlled.

- The risk is partially controlled.

- No techniques of risk control are available.

Figure 7.1 – Chart of Company Risks

Table 7.2 – Risk Control Measures at the Future Plant

Type of Risk Risk Factor Risk Control Measures

External risk

1) Environmental requirements To consider possible adaptation of the technology in

accordance with the stricter environmental

requirements. 2) Health and safety

requirements To develop measures for adaptation of the production

and technology in accordance with possible stricter

health and safety requirements.

Property Risk

3) Intellectual property

management To patent the idea, to improve the existing technology

in order to increase its effectiveness and efficiency

while maintaining the quality parameters.

Personnel Risk

4) Low personnel competence To introduce a system of measures to improve the

competence and skills of the personnel. To provide

incentive payments for achieving targets.

Staff turnover, shortage To identify the appropriate number of staff for

operations, to regulate the workload.

22

Engineering and Manufacturing

Risk

6) Physical deterioration of the equipment, outdated technologies

To ensure timely repair and renovation of the

equipment in accordance with the state-of-the-art

innovations. 7) Compliance of the equipment

and technologies with the

requirements to the product

quality

To ensure timely repair and renovation of the

equipment in accordance with the state-of-the-art

innovations.

8) Production bottlenecks To identify and eliminate the bottlenecks in order to

increase the production capacity in general

9) Efficient performance of the

equipment and technologies To research a possibility of technical upgrade of the

existing technology and equipment in order to

implement resource-saving manufacturing practices. 10) Productivity of the

equipment and technologies To research a possibility of technical upgrade of the

existing technology and equipment in order to their

productivity. 11) Machinery and equipment

changeover time To introduce flexible methods of the manufacturing

process organization, including a possibility of the

equipment changeover and repair without any

shutdowns, to introduce a modular flow diagram.

12) Wideness of the product

range To search for possibilities to introduce new types of

products in order to spread the risks and increase the

marketability of the products.

Market Risk

13) Lower market value of the

products To seek opportunities to expand the sales market and

reduce the manufacturing cost at the constant product

quality. 14) New strong competition To seek opportunities to expand the sales markets and

reduce the manufacturing cost at the constant product

quality. 15) Lower consumer interest To plan matching of revenue to expenses, to expand the

product sales markets 16) Increased price of primary

products, materials, semi-

finished products

To search for new suppliers, cooperate with several

suppliers simultaneously to reduce the risks of price

increases.

Liquidity Risk 17) Inadequately balanced cash

flow To apply cash flow planning procedures. Self-insurance.

According to Table 7.2 and taking into account the estimated parameters, the most significant risk

factors include

– Environmental requirements

– Intellectual property management

– Machinery and equipment changeover time

– Wideness of the product range

Apart from the environmental requirements, the company can provide a full or partial control of

the risk factors.

There is an adequate system of measures provided for all the types of risk to reduce their adverse

impacts. What is more, even when the company has no direct methods to control any type of risk, it is

possible to avoid the adverse impacts by taking measures to reduce the company’s sensitivity to its

effects.

23

Appendix No. 1

Product Images

Zirconium concentrate MP

(synthetic mold powder)