new case study
Introduction-
New Earth Mining is one of the largest producers of precious metals in America. The firms operations are primarily in America and Canada, but it has also made expansions in Australia and Chile regarding investments in gold exploration. New Earths balance sheet presents a large amount of cash, will further analysis showing a simple debt structure, and a reasonable leverage ratio with no risk of liquidity. New Earth has a strong financial position shown in basic accounting concepts which leads to the conclusion that New Earth has been very successful. New Earth wants to diversify into base metals and other minerals, rather than depending on precious metals. The new investment opportunity for mining iron ore in South Africa shows potential however still carries substantial risk. A high risk of neighbouring countries such as Zimbabwe and Botswana and the treat of civil war, with strong fears that the South African government will nationalize mining operations combine to create an unstable political environment. The financing package is difficult and creates challenges for determining a value for the project. The debt holders included in the finance package being China, South Korea, Japan and the remaining financing necessary from domestic lenders. Four different valuation approaches were proposed, approaches from the vice president of operations, the accounting officer, an outside consulting firm, and a financial analyst within the firm. The CFO of New Earth was considering all available approaches to determine the correct valuation of their South African investment opportunity.
Financial analysis-
Approach 1 –
SP - $80
NPV = $83 MILLION @ 14% Required return. (figure 4)
Cost of equity – 15%
Cost of debt – 10%
Capital structure – 12%
Approach 2 –
SP- $80
Use Cost of capital to fund new venture 14%
Required return @ 24%
NPV = -28M (figure 4)
Approach 3 –
Cost of Capital – 14%
RR > cost of capital = lower cost of capital
New Earth Mining is one of the largest producers of precious metals in America. The firms operations are primarily in America and Canada, but it has also made expansions in Australia and Chile regarding investments in gold exploration. New Earths balance sheet presents a large amount of cash, will further analysis showing a simple debt structure, and a reasonable leverage ratio with no risk of liquidity. New Earth has a strong financial position shown in basic accounting concepts which leads to the conclusion that New Earth has been very successful. New Earth wants to diversify into base metals and other minerals, rather than depending on precious metals. The new investment opportunity for mining iron ore in South Africa shows potential however still carries substantial risk. A high risk of neighbouring countries such as Zimbabwe and Botswana and the treat of civil war, with strong fears that the South African government will nationalize mining operations combine to create an unstable political environment. The financing package is difficult and creates challenges for determining a value for the project. The debt holders included in the finance package being China, South Korea, Japan and the remaining financing necessary from domestic lenders. Four different valuation approaches were proposed, approaches from the vice president of operations, the accounting officer, an outside consulting firm, and a financial analyst within the firm. The CFO of New Earth was considering all available approaches to determine the correct valuation of their South African investment opportunity.
Financial analysis-
Approach 1 –
SP - $80
NPV = $83 MILLION @ 14% Required return. (figure 4)
Cost of equity – 15%
Cost of debt – 10%
Capital structure – 12%
Approach 2 –
SP- $80
Use Cost of capital to fund new venture 14%
Required return @ 24%
NPV = -28M (figure 4)
Approach 3 –
Cost of Capital – 14%
RR > cost of capital = lower cost of capital