ARAB OPEN UNIVERSITY

FACULTY OF BUSINESS STUDIES

(MBA) BB831 CORPORATE FIANNCE
TUTOR MARKED ASSESSMENT – Spring 2020

TMA01
Please read these instructions carefully and contact your tutor if you require any further clarifications. You
should submit your completed assignment to your tutor to arrive no later than the cut-off date.

Please use standard A4 size paper for submitting the hard copy of your TMA. Your name, personal
identifier, course and assignment numbers must appear at the top of each sheet. A soft copy of your
TMA must be uploaded to the university moodle within the indicated cut-off date. The hard & soft copies
must be identical. Please leave wide margins and space at the end of each sheet for tutor comments. It is
better to use double spacing so that you can easily handwrite corrections to your drafts and tutors have space
to include their feedback on the script. Start each question in the assignment on a new page.

Completing and sending your assignments

When you have completed your TMA, you must fill in the assignment form (PT3), taking care to fill all
information correctly including your personal identifier, course code, section & tutor, and assignment
numbers. Each TMA and its PT3 form should be uploaded on the AOU branch moodle within the cut-off
date. Late submissions require approval from the branch course coordinator and will be subject to grade
deductions. All assignments are treated in strict confidence.

If you feel that you are unable to meet the cut-off date of the TMA because of unusual circumstances, please
contact your tutor as soon as possible to discuss a possible extension to the cut-off date.

Plagiarism

The Arab Open University Definitions of cheating and plagiarism

According to the Arab Open University By-laws, “The following acts represent cases of cheating and
plagiarism:

 Verbatim copying of printed material and submitting them as part of TMAs without proper academic
acknowledgement and documentation.
 Verbatim copying of material from the Internet, including tables and graphics.
 Copying other students’ notes or reports.
 Using paid or unpaid material prepared for the student by individuals or firms.
 Utilization of, or proceeding to utilize, contraband materials or devices in examinations.”

Penalty on plagiarism
The following is the standard plagiarism penalty applied across branches as per Article 11 of the university
by-laws:
1) Awarding of zero for a TMA wherein more than 20% of the content is plagiarized.
2) Documentation of warning in student record.
3) Failure in the course to dismissal from the University.
All University programmes are required to apply penalties that are consistent with the University by
laws.
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Examples of Plagiarism
Copying from a single or multiple source, this is where the student uses one or more of the following as the
basis for the whole, or a good part, of the assignment:
 Published or unpublished books, articles or reports
 The Internet
 The media (e.g.TV programmes, radio programmes or newspaper articles)
 An essay from an essay bank
 A piece of work previously submitted by another student
 Copying from a text which is about to be submitted for the same assignment

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 Case Study
ZETA MINING: WALKING THE DRAGLINE

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holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. This document contains copyrighted material
the use of which has not been specifically authorized by the copyright owners. It is distributed without profit to students who have an interest in receiving the
included information for research and educational purposes. This constitutes a fair use of any such material as provided for in the Lebanese Law.

THE COMPANY

In 2001, a Queensland company, Zeta Mining (Zeta), was formed with the objective of mining the coal
resources of the Bowen Basin in Central Queensland, Australia. Since then, Zeta had become one of the
world’s largest producers of metallurgical coal, operating a number of open-cut mines in the Bowen Basin.
The mines were estimated to produce 6,000 million tonnes of coal over the next 120 years. Used in the
manufacture of steel, the coal that was sold offshore was shipped from the company-owned coal terminal,
which loaded about 450 ships per year for 70 customers in more than 20 countries. The major export
destinations were Japan, South Korea, China and India.

The company’s investment in the area was estimated at about $8 billion and included machinery,
accommodation, high voltage infrastructure, ports, water management, roads and tailings management. One
of the most important and expensive pieces of machinery used on the mines were the draglines. In 2012,
Zeta used the net present value (NPV) methodology to determine whether to “walk” one of its draglines to
another mine.

THE SETTING

Draglines are used to remove the mine overburden, that is, the dirt, rock and other geological waste sitting
on top of the coal. The dragline buckets can hold up to 400 tonnes. The draglines are imported from the
United States, shipped by sea to Mackay or Gladstone. The components are then transported by road to a
specially built pad near the mine to operate the dragline, which is then put together on site. The assembly
can take up to eight months and requires a specialist assembly crew of 40 people. From the time Zeta
decides to purchase a new machine, it can be up to two and a half years until it is ready to be put to use. The
draglines weigh about 3,400 tonnes and have a top speed of just 120 metres per hour. A new dragline can
cost approximately $220 million, including fabrication, transport and assembly.

Recently, Zeta needed to decide where the dragline originally intended for the southern pit of the New Find
mine could be situated after a change in the mine plan meant that that pit would not be advancing for another
10 years and the dragline was thus no longer required there. Because this change involved increasing
production in the northern pit, earthmoving and mining equipment had to be relocated there. To “walk” the
dragline the six kilometers to the northern pit, it had to cross two public roads and a railway line owned and
operated by Aurizon (formerly Queensland Rail). The trains using the tracks were electric and were powered
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through lines running above the trains and parallel with the tracks. The traffic on the roads could be
temporarily controlled and diverted at minimal cost, causing only minimal inconvenience to public traffic.
The rail crossing was much more problematic because Aurizon would only permit the train line, power lines
and all supporting materials (sleepers, rock ballast and network/communication cabling) to be out of service
for 48 hours. Potentially, Zeta would be subject to significant fines if the track was out of commission for
any time above the 48 hours, including any interference caused by inclement weather.

THE DETAILS

As Zeta’s project evaluation director for the sector that included the New Find mine, Connor Horwill’s role
was to financially analyze the project and to recommend whether Zeta should undertake the task of moving
the dragline. Zeta’s policy was to use the NPV model on such large-scale projects and have the project
evaluation director present a recommendation to the chief financial officer (CFO) of the entire Bowen Basin
area. The CFO would then consider the NPV result together with any other relevant factors and make a final
decision about the project.

Horwill had total authority in determining the appropriate cash flows for the NPV model. These were
generated by his team in conjunction with various other departments. He calculated the cost of moving the
dragline, building temporary roads and removing and replacing the railway lines and power at $10 million.
The discount rate to be used in the analysis was determined at a higher company level using the weighted
average cost of capital (WACC) model. Like many large corporations, Zeta used a whole-of company based
WACC plus a premium for country risk.

In any case, Horwill was simply given the rate by the CFO to use in all analyses; for this project, it was 9 per
cent. Further, Horwill was directed to consider the project as an incremental comparison analysis by
balancing the business case optimized with the investment with the business case optimized without the
investment. This approach required Horwill and his team to identify a number of alternatives to moving the
dragline. Only two alternatives were considered viable: using the contractor’s excavator and truck fleet to
strip out the overburden or purchasing another dragline and assembling it near the northern pit. After further
consideration, the new dragline alternative was dismissed because of the significant capital and time
required before it would be operational. While the contractor model was far more labor intensive, at the
appropriate level of staffing, it could achieve the same rate of removal of overburden as the dragline. It was
estimated for the analysis that all the overburden would be removed after a five-year period. (Coal extraction
in the pit could begin about three months after stripping was completed.) The pit would have a useful
revenue generating life of approximately 25 years after this five-year period.

Contractor stripping was often used when draglines were not feasible because of where the mine was
located or specific issues, such as the mine’s unstable footings. This approach also had two clear advantages

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since Zeta had previously used contractors on other sites: first, their induction costs would be low; and
second, the contractors could be employed without having to go to tender. Horwill’s project evaluation team
determined induction expenses (which were tax deductible at the company tax rate of 30 per cent) to be $1
million in Year 1 and a further $250,000 in Years 3 and 5. Using contractors would allow Zeta to
immediately sell the dragline for $19 million with payment received in two instalments of 50 per cent each.
The first payment would be received at the end of the first year and the second payment 12 months later.
The current book value of the dragline was zero as a result of an attractive depreciation and investment
allowance offered to the mining industry. Any tax payable on disposal of the dragline was to be included in
the analysis when the cash was received.

The contractor contract was casual and could be suspended by Zeta at any time. For instance, Zeta might
decide that coal prices or significant exchange rate movements made the mine uneconomical. The cost of
employing the contractors comprised three tax deductible parts: an hourly rate per contractor, a flat fee per
year and an initial upfront engagement fee. The hourly rate accorded with the contractor’s level, whether as
laborer or supervisor. (The estimated labor hours required to work at the same rate of removal as the
dragline would cost are shown in Exhibit 1. The rates of pay for laborers are shown in Exhibit 2, while
supervisors cost an extra $15 per hour.) The flat fee per year was set at 15 per cent of the total labor cost for
the year (excluding the engagement fee) but covered the cost of fuel, maintenance and other expenses for the
contractor. The engagement fee of $750,000, a significant expense for Zeta, arose because of the casual
nature of the contract. The fee was payable immediately, and no part of it was refundable no matter how
long the contract remained in place.

The dragline required some modifications owing to the slightly different configuration of the northern pit.
Because this pit shared its eastern border with a major public road, excavation depth on that side was
restricted. This meant that the roads descending into the pit had to be steeper and narrower, requiring
steering and suspension adjustments at an immediate cost of $1,100,000. Ongoing maintenance was
$300,000 per year with an additional major service of $150,000 being required in Year 3. An annual salary
of $260,000 was payable to the dragline operator, while fuel, oil and other running costs were estimated at
$2 million per year. Both these figures were forecast to grow at 10 per cent per year. The adjustments to the
dragline, the ongoing maintenance and major service costs, operator salary, all running costs and the up-
front costs associated with “walking” the dragline were all tax deductible. Horwill estimated that, during the
five-year period to remove the overburden, if the mine was mothballed for any reason, it could be sold at
approximately $4 million less per year off the current sale price. At the end of the five-year period, the
dragline would have just scrap value and hence would not be considered in the analysis. As a community
service, the dragline could be donated to the local council as part of a tourist attraction to promote the
significance of the mines to the local district.

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THE DECISION

Horwill was instructed by the CFO to have a recommendation to her within the next month. While she
made it clear that the final decision would take into account various other factors, his recommendation
should be based solely on the NPV analysis.

Required:

1. Calculate the Net Present Value (NPV) of walking the dragline. (20 marks)

2. Calculate the Net Present Value (NPV) of employing contractors. (20 marks)

3. What recommendation should Horwill make to the CFO concerning the choice between
projects? (10 marks)

4. What other factors do you think the CFO should take into account when she makes her
final decision? (20 marks)

5. Critically assess the situation and based on your answers to Questions 3 and 4, give a
recommendation to the CFO. (30 marks)

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General Marks (Up to 20% Deduction)

Marks distribution: This assignment will be graded out of 100 marks, which will be allocated to your
answer for the two mini cases’ questions. 20% will be deducted based on the following criteria:

 10% for improper referencing (5% in-text referencing and 5% end-text references).
 5% for not using enough external resources.
 5% for not adhering to the word count (when applicable)

 Letter Grade Distribution 100 Marks (Distribution)

Letter Grade Description Min Grade Max Grade

A Excellent Pass 90 100

B+ Good Pass 85 89

B Clear Pass 80 84

C+ Pass 75 79

C Weak Pass 70 74

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