Bidding for Antamina Project
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Bidding for antaminA
Prepared By:
Fiona Wang
This case introduces us to real option valuation in a bidding context. We are helping RTZ-CRA to determine the value of Antamina and to recommend how RTZ-CRA should bid in the upcoming auction under the non-traditional bidding rules set by the Peruvian government.
Contents Executive Summary 1 Introduction 1 External Environmental Analysis 1 Internal Situation Analysis 2 Reasons to Bid 3 Valuation 3 Recommendations of the Bidding. 4 A Simulation Model 4 How to Set the Bidding Price 5 How Much Should RTZ-CRT Place on the Bid 5
Executive Summary
This case introduces the real option valuation methodology by detailing the bidding for a real option (the right to develop the Antamina mine in Peru) in the natural resources industry. The real option was embedded in the bidding rules for Antamina as part of the Peruvian privatization process. The government motivated more bidders to propose higher substantial investments in developing the Antamina property by allowing companies to submit two elements of the bid (the initial cash payment and initial investment commitment). However, the government made the bidding more complicated by giving the purchaser the option of either returning the property back to them, or re-negotiating a deal. This created value of delay for this real option, which deviated from the goals of the Peruvian government.
In this paper we will began by introducing the background of the Antamina mine and the bidding process set up by the government. Next, we will provide an internal and external analysis. Third, we will present the valuation process we conducted to come up with a value of this real option. The summary valuation is disclosed in Exhibit 1, and the basic DCF and Black Scholes models were established to determine the bidding price for RTZ-CRA. The final section of the paper revisits the valuation and provides
Bidding for antaminA
Prepared By:
Fiona Wang
This case introduces us to real option valuation in a bidding context. We are helping RTZ-CRA to determine the value of Antamina and to recommend how RTZ-CRA should bid in the upcoming auction under the non-traditional bidding rules set by the Peruvian government.
Contents Executive Summary 1 Introduction 1 External Environmental Analysis 1 Internal Situation Analysis 2 Reasons to Bid 3 Valuation 3 Recommendations of the Bidding. 4 A Simulation Model 4 How to Set the Bidding Price 5 How Much Should RTZ-CRT Place on the Bid 5
Executive Summary
This case introduces the real option valuation methodology by detailing the bidding for a real option (the right to develop the Antamina mine in Peru) in the natural resources industry. The real option was embedded in the bidding rules for Antamina as part of the Peruvian privatization process. The government motivated more bidders to propose higher substantial investments in developing the Antamina property by allowing companies to submit two elements of the bid (the initial cash payment and initial investment commitment). However, the government made the bidding more complicated by giving the purchaser the option of either returning the property back to them, or re-negotiating a deal. This created value of delay for this real option, which deviated from the goals of the Peruvian government.
In this paper we will began by introducing the background of the Antamina mine and the bidding process set up by the government. Next, we will provide an internal and external analysis. Third, we will present the valuation process we conducted to come up with a value of this real option. The summary valuation is disclosed in Exhibit 1, and the basic DCF and Black Scholes models were established to determine the bidding price for RTZ-CRA. The final section of the paper revisits the valuation and provides