Southport Minerals

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Southport Minerals, Inc – some points to remember

Financial architecture (financing program) can transform a negative NPV project into a positive NPV project  value addition done by financial manager. •Southport Indonesia (SI), a wholly-owned subsidiary of Southport Minerals, entrusted with a responsibility of mining the copper ore at Firstburg, Indonesia. oInitial experiments established that Firstburg mine contained 33 million tons of copper ore with an average copper content of 2.5%. oBechtel conducted the cost and feasibility studies and informed that the total development cost would be $120mil and could be operationalized by end of 1972 (including $4.5 mil working capital). oThe ore body is expected to last for 13 years and the production costs are expected to be among the lowest in the world. oSM is concerned with the expropriation risk and output risk as these are the major risks that are yet to be mitigated. oThough world copper prices rised from 28.7 cents (in 1961) to 66.3 (in 1969), the project does not provide the minimum required return of 20% on equity (NPV is -$17 mil). Corporate-financing the project can reduce the WACC thereby making the NPV to be positive. oIn 1969 (at the time of deciding this project), SM had $231 million in networth and hardly any debt apart from very good liquidity and profitability. Though SM can take the leverage on its balance sheet to fund the entire $120 million viz. corporate-financing the project, it is apprehensive of expropriation risk. •Given the risks of SI project, SM has designed a financing-cum-risk-management program to project-finance it with an initial debt ratio of 83%. Two customer groups (Consortium of Japanese Smelters and a German Smelter) were identified and asked to absorb the major portion of the risks. oThough Japan and Germany are very large consumers of Copper, those countries don’t have significant ore deposits but have refining capacities. Hence, the output quantity risk is...
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