Zeta Mining: Walking The Drag-line The Case Solution
Question 1
In the given case, there was a change in the strategy because of southern pit being not advancing for 10 years and there was no need of a drag-line(McCarthy, 2014). The three options that Corner Horwill was left with as well as the circumstances which could occur by availing these options, are described below:
- To purchase a new drag-line for the north pit:
Drag-lines are one of the most expensive machines used for the removal of mine overburden. It costs approximately $220 million to install a new drag-line in a mine which includes its fabrication, transportation and assembling. In addition to that, it requires almost two and half years for drag-lines to be ready to use. Hence, because of the capital and time needed for a new drag-line to operate; this idea was not implemented.
- Walking a drag-line that was supposed to be utilized at south pit:
The second option available to Or will was to walk a drag-line that was originally purchased to be used for south pit, six kilometres to north pit through temporarily built roads, and replacing railway line at $10 million and assembling it near the north pit.
-
Using contractor model to strip out the overburden.
The last alternative was to use a contractor model and remove the overburden by using contractors truck fleet. This alternative was more labor intensive and a great level of staff was required to implement this model.
Since the first option was rejected after some discussions, second and third alternative were given consideration due to their viability.
Question 2
If I was in Conner Horwill’s shoes; I would have also assigned 9% as risk premium, because it is used by the many large corporations of the country, and it is determined at a higher company level, using weighted average cost of capital method. So, it is better to use the provided 9 % which is also used by others.
Question 3
The answer to this question is provided in the attached excel document.
Question 4
MEMO
The purpose of this memo is to provide recommendation for the issue whose solution is being considered,i.e., whether to walk the drag-line six kilometres to north pit or to use contractor model to remove the mine’s overburden. The provided recommendation is completely based on the NPV analysis of using both the alternatives.
As there has been a recent change of strategy in the company because the south pit is found to be no longer advancing for 10 years, and in order to increase the production in north pit; the company needs to make a quick and final decision about where the drag-line should be situated. For that purpose, a recommendation solely based on NPV analysis was required. As a response to that, a deep NPV analysis of both the alternatives was conducted. The results which was derived was: if the company chooses to invest in walking the drag-line alternative; it will cost the company $13941668 at present, but if it chooses to use the contractor model; it would then be required to invest $ 23,020,557 at present.
Since the investment required for contractor model is higher at present than the investment required for contractor model at present; therefore,the company is recommended to avail the ‘walk the dragline’ option. This recommendation is completely based on NPV analysis and does not include the external factors.......................
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