New Earth Mining Case Solution

In: Business and Management

Submitted By anlixu
Words 1546
Pages 7
To: CFO, New Earth
From: Group 4 Consulting team: Ka Yan Michelle Au (20344951), Catherine Cho (20337067), Yutong Liu (20344878), An Li Xu (20341923), Jeffrey Wang (20342506)
Subject: New Earth’s South Africa Iron Ore Investment Analysis
______________________________________________________________________________
New Earth Mining Inc. (“New Earth”) has substantial investments in the precious metals industry, specifically gold, but is facing volatile gold prices that may not be sustainable in the future. In response to this threat, New Earth should consider opportunities to diversify its business through exploration activities for other minerals.
Attractive Investment for New Earth
New Earth should take the opportunity to invest in the iron ore deposits in South Africa due to the following reasons: 1) It is a stable investment with long-term prospects of 15 years and a floor price of $80 per metric ton, and 2) The NPV of the project is $181.75 million, thus providing enough cash flows to cover debt and provide dividends to shareholders.
Stable Iron Ore Investment
The iron ore investment satisfies New Earth’s desire to diversify its business from precious metals with this potential investment life of 15 years. Prices are expected to stay over $80 per ton, with ore prices having reached a high of over $100 per metric ton in 2012. Production costs are expected to be low due to the easy access to ports from the mine location, reducing the need for infrastructure investment to support the development of the mine. Crude steel production in three Asian countries (i.e. China, South Korea, and Japan) are also expected to grow more than 35% in the next decade, with demand expected to exceed supply until at least 2016. This is an opportunity to improve the sustainability of New Earth by investing in less volatile metals and to provide steady cash flows.
However, there…...

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