One of the leading producers of valuable metals in America, the New Earth mining company is the subject of this case. The company’s main operations run in the USA and Canada, however, the company has made investments in gold mining in Chile and Australia. It has been extremely profitable and the level of debt is low. Thus, the financial position of the company is strong. Given this, the company considers the diversification into newer metal for production. There are four alternatives for the company’s investment including risky areas such as South Africa for the iron ore. The main concern is the civil war against the border countries and the probability that all mining functions be nationalized in the country. The financing of the project in South Africa puts the company into a situation of financial risk and complexity. The quantitative evaluation of each project is required before the final suggestion based on the analysis of these figures.
Projected EBIT for New Earth Equity Investment (in millions of dollars)
Tentative Capital Takedown Plan and Loan Principal Repayment Schedule (in millions of dollars)
Projected Cash Flows for New Earth Equity Investment (in millions dollars)
Interest Payment Schedule
Approach 1 - VP of Operation
Approach 2 - Accounting Officer
Cash Flow from Operations
Approach 3 - External Consulting Firm
Approach 4 - Internal Analyst
Value of Financial Package
1. Is Iron Ore in South Africa considered an attractive investment opportunity for New Earth given the materials presented in the case?
2. Which valuation approach in analyzing the NPV of the new investment is the mostAccurate, why are the other methods inaccurate?Hint: the NPV for two of the four approaches is given in the case.
3. What is the value added by the design of the financing package? How does it alter both risk and return of the new project? Is it effective at reducing the project’s operating risks?
4. If you, the CFO of New Earth, were trying to negotiate a better deal with customers and lenders, in which areas would you concentrate your efforts, and why?
a. Ore pricing (non-negotiable b/c its market driven)
b. Interest rates
c. Prepayment scheduled. Dividends allowed
e. Debt maturity
f. Extension of the guarantee program.
5. Shouldn't New Earth makes the investment?