Bidding for Antamina Project

Topics: Discounted cash flow, Net present value, Option Pages: 8 (2918 words) Published: May 28, 2011
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.

Executive Summary1
External Environmental Analysis1
Internal Situation Analysis2
Reasons to Bid3
Recommendations of the Bidding.4
A Simulation Model4
How to Set the Bidding Price5
How Much Should RTZ-CRT Place on the Bid5

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 recommendations for placing the proper bid. Introduction

Beginning in the early 1990’s, the Peruvian government sought to return many of its state-owned companies to private ownership. Antamina, a poly-metallic ore deposit about 482 kilometers north of Lima, Peru, was a part of the privatization. There was large uncertainty as to what the actual amount and quality of ore reserve was in the Antamina property. A two year feasibility study, costing approximately $24 million, would more precisely establish the amount and quality of ore in the Antamina property. The auction rules required bidders to submit an initial payment (minimum of $17.5 million, which along with the $24 million to conduct the feasibility study would make up the option premium), as well as an initial investment commitment (which would make up the exercise price). This bidding process created a real option. The winning bidder would have two years to explore the property before deciding whether or not to develop the site. By early June, only three competitors were in the running: RTZ-CRA, Noranda, and a joint venture of Inment Mining and Rio Alogom. We are taking on the role of the business development team for RTZ-CRA to help them determine how much the mine was worth and to recommend how they should bid in the upcoming auction. External Environmental Analysis

During the mid-1990s, certain countries were holding a vast number of state-owned real assets (such as mining/metals, timber, oil and gas, etc.) and were seeking entry into the global free market economy with privatization programs underway. Further privatization was viewed as a more attractive ownership structure and would perhaps yield ancillary investments into these countries from more developed free-market economies and multinational companies. These privatizations were not always successful, but could result in substantial cash flows, more efficient resource extraction, and potential income growth for their citizens. Peru was one such...
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