MBA 777A Case 1- Antamina

ADVANCED Piyush Kumar

VALUATION (20125045)
Brief about the case
 PeruGovernment wants to sell Centromin, a state-owned Mining Company
• Antamina was Copper & Zinc mine which was up for sale

 There was lots of uncertainty about the amount of ore reserves

• Engineering reports stated presence of 126.8 million MT of ore
• While, Management estimated the ore reserve of 913 million MT
• Most of the studies were done 20 years ago and on a small part of the block
 A large investment ($622 million) was required for developing the site
 Investors were not sure about the profitability of the mine

• A Real option was provided by the Peru Govt.

• There was large volatility in Spot price of Copper & Zinc

 In 1991, bidding process for copper and zinc
deposits at a place in Centromin, Peru were
opened by Peruvian government.

Executive RTZ-CRA, the world’s largest mining

company wanted to place bids for getting
Summary mining rights for Antamina mine.

The Business development team at RTZ-

CRA had to find the true value of those
deposits before the company places a bid.
Antamina - Specifications

Based on the Engineering

According to Centromin
reports – 128.6 million Exploration before bidding
Management – 913 million
metric tons deposits 1.61% was not possible.
metric tons, seems inflated.
copper and 1.33% zinc.

After bidding exploration

costs 24 million USD and 2 Capex ranges from $581
years. Removes uncertainty million to $622 million.
up to a range of 20%.
 Rules for the bidding
It was a sealed bid auction
 Bid amount was summation of two parts

• A initial payment, with minimum value of $17.5 million

• 30% value of the investment commitment made for mine development, with min $135 million

• 30% fine was applicable on the difference that the bidder committed and the amount that the bidder
actually invested

Embedded Real Option in the Contract

 The winner of the bid can explore the mine for two years and if the project was not feasible return
the mine
 The winner had to invest at least $13.5 million for site development while exploration
 The estimated cost of exploration was $24 million over the period of two years

Minimum option premium which needs to paid according to the rules:

- 17.5+13.5+24 = $55 million with PV= $50.07 million

 • Three cases - One with lower cashflows than

Scenarios and Options

expected. Other with expected cashflows and last
one with higher cashflows than expected.
• Option Juncture – After Initial exploration cost of
24 million USD.
Results:-

Explore Decision Produce

(0-2 Years) (2 years ) Metals(5 Years)

Close Mine.
Make Capital
Investment
Pay Penalty(If 5
Bid & Win
Years later)
Walk Away
 Option Pricing for different Scenario :
Based on Risk
 For the low it is 14.57.
 Expected it is 114.24.
 For high it is 212.76.
  Low Medium High

NPV(S0) 57.9512621 151.791312 250.311321

Tax Rate 30% K= 50.07 50.07 50.07
Inflation 3.50%
Volatility= 18.13% 18.13% 18.13%
15 year AA Corporate Bond return 7.65% Time = 2 2 2
Debt to total Capital Ratio 0.15
d1= 1.14763475 4.9031568 6.85403357
Beta of the stock 0.53
d2= 0.89123783 4.64675988 6.59763665
Market Return Rate 10%
N(d1)= 0.87444031 0.99999953 1
Risk free rate of return (1-year Treasury Bond) 5.76%

Cost of Equity 8.01% N(d2)= 0.8135992 0.99999831 1

WACC 7.61% Call Option= 14.370677 107.169538 205.689543

Answers
• The bidding rules also affect the outcome in another way, by giving a comparative
advantage to smaller, less-capitalized companies. Ultimately, only three firms submitted
bids for Antamina. Two were among the largest and best capitalized in the industry. The
smallest of the three, a joint venture of Rio Algom and Inmet, had a combined market
capitalization of only $1.5 billion, or 10% that of the largest bidder and 33% that of the
next bidder. Under an allcash auction, the joint venture of the smaller mining companies
would likely be unable to raise sufficient funds to match the bids of the larger firms.19
However, under the Peruvian bidding rules, smaller bidders could make future promises
to develop the mine without having to raise much money today. This type of bidding
structure could therefore encourage smaller players to bid aggressively, given their
comparative advantage in bidding future promises
Results:-
• The Antamina NPV was the bidding price that a bidder would pay if the winning bidder
was legally obligated to develop Antamina by finishing the exploration and paying the
Peruvian state an up-front fee for this mining project. The Antamina mine's net present
value was calculated by discounting the cash flow from copper and zinc sales and
removing expenditures and expenses. The discounted cash flow with risk adjustments
was the best valuation method.
• The weighted average cost of capital was 7.61%, and the cost of equity was roughly
8.01%. It provided gross revenue and exploration costs through copper and zinc sales;
capital expenditures on the mining project reduced net income, including the tax
impact.
• The net present value for the High case came out to be around $251 million. In the
expected situation, the net present value was expected to be $151 million, while in the
low case, it was expected to be $57 million.