Examining the strategic location of South Face Mine

Examining the strategic situation of South character MineThe strategic location of the South take care Mine, owned by Mountain Mining Canada Ltd (MMCL), catches the attention of dynamic to invite an offer for purchasing the mine. If our comp both successfully acquires it, the combination of better bug out logistics and optimal location of new drift mines could pop the question an annual embody saving of up to $1.5 million for 20 years. However, MMCL has closed the mine and before long been spending on closure and reclamation of it undoubtedly MMCL would like to dispatch those be to us.The purpose of this memorandum is to determine the walk-away psyche, which is the highest amount Can-Do would hit to offer in the negotiation with MMCL, with the use of data from the management calculate provided by MMCL, the discounted hard cash flow model and esthesia examines on heterogeneous assumptions.Given the data in the MMCL management budget with removal of lives which arg on non transferred to Can-Do or squeeze out be internalized1, and expect a 6% interest rate for discounting, the 15% contingency adaption used in MMCL implies an rising prices rate of 2.55%.Having studied various assumptions, the sensibility tests indicate the variance of short-term duration is the nigh important venture underlying as a 1-year extension of short-term be reduces the treasure of erudition by $6.6 million from $15.5 million to $8.9 million (58% of authoritative value). A 2-year extension further reduces the value by 6.4 million to $2.5 million (16% of original value).2The recommended walk-away point would be $14 million, a value lower than the take in values of erudition calculated in most sensitivity tests excluding those with part to short-term duration and estimated court saving. It also means that an efficient cost control should be performed to avoid an extension of short-term cost and a failure to realize the estimated cost saving.It is also wor th noting that there are large discrepancies of cost items between the 2006 and 2005 budgets. A detailed go over on financial data is suggested so as to find out any hidden problems or risks.IntroductionThe purchase of the South baptistery Mine, currently owned by Mountain Mining Canada Limited (MMCL), can provide Can-Do a very large reduction in in execution(p) cost of North Fork Mine, located adjacent to South Face Mine, by an estimated amount up to $1.5 million annually for the next 20 years, attributed to the optimal location of new drift mines and the improved logistics.However, it is expected that MMCL would admit us to bear the closure and reclamation cost. therefore, the net value of the acquisition is the value of cost saving net of the value of those additional costs.By considering the data provided and computing the net value of acquisition, it comes up with the walk-away point, which is critical and important to our negotiation with MMCL. The be parts of this mem orandum explain the finding of the walk-away point. In particular, the purpose of this study is toReview the financial data providedDo sensitivity tests for assumptions with respect to the closure and reclamation costsSet a healthy walk-away pointIdentify other possible risks for the determination of the walk-away pointThere are different types of costs, including short-term costs which will be incurred inside five years and long-term costs which will be incurred during the square reclamation period. There are also salvage values of equipments remaining on site (i.e. Inventory Disposition), and they will accrue to Can-Do. Moreover, MMCL has included a 15% contingency permissiveness in its calculation.From the tabularize above, it is clearly observed that large discrepancies exist for most cost items between 2006 and 2005 budget, and this indicates a insufficiency of the contingency allowance in 2005 to cover the adverse development of costs estimated from 2005 to 2006. It co ncerns us about the accuracy and reliability of the previsions. It is suggested a detailed review of financial data as well as other data related to the situation of the mine be conducted in order to discover any potential problems which may put our company at risk.selective information AdjustmentThe data provided is subject to fittings so as to calculate a more reasonable walk-away point. They includeRemoving costs not to be transferred from MMCL to Can-Do (e.g. severance costs)Removing costs which could be realized from internalizing them in Can-Do (e.g. management costs)Analysis Methods AssumptionsContingency Allowance Inflation RateMMCL has included a 15% contingency allowance in its budget while has not considered the time value of cost items. Assuming the allowance is totally for the inflation, the implied inflation rate that is equivalent to the 15% contingency allowance is found to be 2.55% (using the Excel function goal seek), after the data adjustment aforementioned .Sensitivity Tests, Risks Walk-away PointTo investigate the risks underlying, sensitivity tests deliver been performed to examine the uncertainties associated with the assumptions of cash flow projections (all with 0% contingency allowance).Table 3 Sensitivity TestsThe table consists of the net value of the acquisition under different combinations of short-term duration, long-term duration, inflation rate and discount rate (Scenario Base and 1-10). From the table, it shows that under most scenarios the value of acquisition is around $14-15 million. Therefore, it would be appropriate and conservative to tack $14 million as the walk-away point.In addition, an extra sensitivity test on estimated cost saving are conducted (Scenario 11-12). When compared to Scenario 4, it demonstrates that a 10% come down in cost saving causes the value of acquisition below $14 million. It implies a strong control is needed to monitor that the realized cost saving is close to the estimated one.As sho wn in the tables, the short-term duration should be the key risk factor as an increase in it leads to a tremendous decrease in value (by comparing Scenario Base to Scenario 1-2 or Scenario 4 to Scenario 5-6). Can-Do should therefore pay much attention to the extension of short-term cost projections.Conclusions and RecommendationsBased upon the modified cost budget and assume a 6% discount rate, a 15% contingency allowance implies an inflation rate of 2.55%. Also, after a study of various assumptions by sensitivity tests, a walk-away point of $14 million will be sufficient for the acquisition of South Face Mine. However, a few issues have to be highlightedThe large variances between the 2006 and 2005 budget raise concerns of the validity and reliability of the estimated values in the budget.The implied inflation rate of 2.55% is less than the lower funk of inflation rate projected by our economists.The net value of acquisition is very responsive to the duration of short-term costs according to the results of sensitivity tests.The determination of walk-away point is based on the assumption that $1.5 million can be saved annually over 20 years. A dismiss decrease in it can be enough to cause an boilersuit loss for the acquisition provided that the final purchase price of South Face Mine is close to the walk-away point.For some costs including water treatment operation/maintenance costs and salaries of accountant/environmental person, they may be internalized to a certain extent yet they are not removed for the determination of walk-away point due to their specialty. This also provides a relatively conservative walk-away point implicitly.It is recommended that a detailed investigation should be carried out to verify the estimated costs in the budget as well as to locate any other problems. It is also proposed that an efficient cost control should be accomplished in order to keep the cost be aligned with the prediction if Can-Do successfully purchases the South Face Mine from MMCL