Topics: Net present value, Investment, Rate of return Pages: 6 (2974 words) Published: October 2, 2014
Peter Bremner, general manager for Northern Drilling Inc. (Northern) was looking over the RFP for an upcoming exploration contract for one of Canada’s largest mining companies, Mond Nickel Company (Mond). The RFP consisted of 2 projects, a Deep/Complex job (3,000m holes) and an Intermediate/Routine job (1,800m holes). The proposal was due in 3 weeks and Peter had to make a decision whether to send a proposal on either Deep or Intermediate jobs, both jobs, or whether to bid at all. The Canadian mining exploration industry was extremely competitive and consisted of about 80 drilling contractors, many of which had little overhead costs and were driving down industry prices. The total budget allocated by mining companies for the exploration phase was about US$ 2.29B in 2011, or US$ 28.7M, 1.25% per company on average, Northern market share in 2011 was roughly CA$57M, 2.5% (Exhibit 1). Furthermore, the market was very cyclical, although short-term outlooks were promising, nothing was for certain and the industry had recently experienced a shortage of experienced drillers. Northern was recognized for their superior technical capability, and although they were struggling to be competitive on the routine jobs, they were able to differentiate themselves by completing complex jobs in poor geological condition in a timely fashion, while extracting high-quality core samples. The deeper the holes, the greater expertise required as there would be sever consequences if mistakes were made, not only financially as Northern would have to cover the additional costs, but also risk the company’s reputation if the project was delayed. The stakes were high, if Northern managed to execute the DEEP job successfully; they would be established as one of Canada’s most technically competent drilling contractors. However, if they failed, they could jeopardize their reputation of being technically experts, not only with Mond, but with the entire Canadian market as competing mining firms frequently shared information and experiences about various contractors. Furthermore, Peter is concerned whether or not Northern is capable of handling the deep job successfully. If Northern were to bid both contracts, they would require an additional 24 drillers to complete the job. In order to align with Northern’s long-term growth strategy, to focus on long-term specialized work, these drillers would need to be highly capable and experienced to avoid mistakes. The availability of diamond drills was a key issues as the Intermediate, Deep, Both jobs would require 4, 5, 8 diamond drills respectively. Currently, Northern did not have any drills available but anticipated that 4 diamond drills could be made available but that depended on the renegotiation of the Noranda contract. Noranda is the fourth largest nickel producer and had been Northern’s largest customers for several years, representing 60% of revenue. Although it’s important for Northern to diversify its client base, it’s critical to maintain a strong relationship with Noranda. If Peter were to suggest investing in additional drills, he would need to understand the financial impact as well as guarantee that they would exceed the 20 % hurdle rate, which was the typical management benchmark, given the current industry conditions. The final problem was setting a competitive price to pursue the bid. What price should Peter offer in order to beat the competition while maintaining a healthy margin, traditionally at 30% and ensure a good Return on Investment. CRITERIA

1. Financial Impact of the Investment – The first criteria to evaluate Peter’s decision should be whether or not Northern has the necessary financials to pursue the investment in the drilling equipment, or whether Northern would need to obtain an additional bank loan, which could potentially increase the cost of the investment. The drilling...
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