Fortune Minerals - The Nico Project Case Solution
- The site would be beneficial for the Tlicho community, a site would provide an access of the highway to an isolated community.
- The agreement with the Tlicho government would create more employment opportunities, bringing improvements in the living standards as well as the economic growth of the entire region.
- The company would become profitable by expanding its market share and supply of the fastest growth deposits.
Costs
- The project was prone to various economic factors causing fluctuations in the prices of the deposits, including: cobalt, bismuth and gold. The variation in the prices could lead towards low as well as high profitability levels, ultimately increasing the risks for the company.
- The company also required the location permits from Tlicho government, as the mining procedures had the requirement of a smooth transportation network and taking the licenses from the Tlicho government was to be in accordance with Tlicho’s community needs and objectives.
- The company could also face the cost fluctuations due to fluctuations in the foreign exchange rates, leading the company towards being exposed to an increased level of risks.
- The company would have to bear huge financial costs by paying royalties for the licenses granted by the Tellico government.
Net Present Value – NICO Project
The NIPO project will provide different output levels for each of the three deposits (See Appendix 1) and the related prices of each deposits after encountering the exchange rate fluctuations. Other data included the initial outflow, cost of capital, tax rate, operating mining cots etc. Afterwards, the net present value of the project is calculated.
First of all, the revenue for the years 1-15, were calculated by multiplying the price of each deposit with each of the output. Then the operating costs of $80 million for year 1 and 2 and $55 million for years3-15 were calculated and the mining costs of 15 million was subtracted from the revenue in order to get the operating profit. Then the NOPAT was calculated by multiplying the operating profit with the factor (1-Tax rate). The NOPAT is then adjusted for changes in working and capital expenditures to get free cash flows. A $4 million of salvage value was added at the end of the project’s useful life. The free cash flows were discounted at 8% cost of capital, which had resulted in the NICO project’s NPV of $716.6 million. (See Appendix 2).
Sensitivity Analysis
As the company was expected be face different risks especially the exchange rate fluctuations and the licenses agreements,so a sensitivity analysis (See Appendix 3) was performed to assess the viability of the project. In fist case, the price was reduced by 10% and the discount rate was kept as 10%, which led to a positive but lower NPV than the base case of $506.57. In second and third case; prices for all deposits were reduced by 20% and 30%, while the cost of capital was kept 12% and 20%, respectively, which again led to the positive NPVs of 290.48 and 92.4, respectively.
Recommendation
The company should go for the NPV project as it has positive NPV even in the situation of high cost of capital, i.e. 20%. The project has huge deposits, which could lead towards more profitable business and it would give a competitive edge to the company, as the Fortune minerals has been paying to maintain the mining rights of the area, so that no other competitor could reach to the site. Furthermore, the site would be beneficial for the Tlicho community, a sit would provide an access of the highway to the community which was isolated for years. The agreement with the Tlicho government would create more employment opportunities, improvements in living standards and economic growth for the entire region........................
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