Advanced Corporate Finance
Cost and Feasibility study for
New Earth Mining, Inc.
Student Name: Zekui Wang
Student Number: S293105
Recently there has been wide speculation and interest placed on the iron ore project in the Kalahari in South Africa, and it is deemed as being a very attractive investment for New Earth Mining, Inc. (NEM). First of all, under normal condition, this project could contribute around $73 million to the shareholder. The return will be more than 85% over the entire period. Furthermore, this project is quite stable because it can deliver a positive NPV for NEM when the iron ore price above $65.83 which is around 17% lower than basic price and more than 50% lower than the current price, smelting, refining and freight cost below $76.3 just below 60% higher than basic condition, the EBIT has to drop by more than 40% and the discount rate smaller than 35% which is 46% higher than current discount rate. The situation may go worst but in the future but not to these amount.
According to the sensitivity analysis which is conducted in this report, this project has a much higher sensitivity with iron ore price than with the interest rate, discount rate and other type of costs. The supply and demand of iron ore determine the index-based quarterly pricing in the global seaborne market. In term of demand, on average there is a 4.4% constant growth market in the global seaborne iron ore trade especially in China, South Korea and Japan. For this project, all the iron ore which are produced will shift to Chinese, Korean and Japanese steel manufactures. Although there is a slowdown in Chinese economy, the price of iron ore may not trop below $80 per ton. Therefore, due to short supply and growth demand in the global iron ore market the price plunge of iron ore is very unlikely to repeat in the future.
There are some systematic risks involved in this project. For example, the great level of political risk within South Africa. In order to address this issue, firstly all debts are covered by U.S. banks, Korean and Japanese central banks and People’s Republic of China as it oversees the debt component capital structure of which 80% is debt, and provides a tool that operates similar to that of a hedging function. Secondly, the formation of NESA (New Earth South Africa) has further provided protection as a separate legal entity. Therefore, the country risk has been limited to a minimum level.
In conclusion, the iron ore project will be a good investment because the iron ore price is not likely to drop below $65.83 and majority of systematic risks have been addressed
New Earth Mining, Inc. (NEM) is a Denver-based gold mining company and one of the largest precious-metal producers in America. It has a very good financial position as a result of the upward gold price in the last decade. Furthermore, most of NEM’s mines are located in North America. In order to diversify the investment portfolio and reduce exposure to the volatility in precious metal price, NEM decided to invest in other minerals. However, NEM does not have much experience in other minerals. As a result, Drexel Corporation is hired to conduct a feasibility and cost analysis for an Iron ore project located in Kalahari manganese 1/9
field in the Northern Cape of the Republic of South Africa. According to Drexel Corporation findings, there are around 30 million tons of ore with an average iron content of 60% in that field. Furthermore, it can be extracted at rate of 2 million tons per year for 15 years. On top of this, Drexel Corporation projected that this project could be exploded by the beginning of 2015 and assumes it starts 2012.
Market for iron ore
According to the financial review, the steel industry consumes the majority of iron ore. China, Japan, and South Korea were among the top countries in both iron ore imports and steel production in 2010. According to BHP Billiton,...
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