Question

You have recently taken over the role of the Chief Financial Officer of GT Gold Chasers Ltd. (“GT Gold”). GT Gold is junior mining company, that is hoping to hit it big with their next venture. You work out of the head office that is based out of Vancouver. GT has got a reputation in the industry for being quick to act, and the management team are known for pushing the envelope to get results.

On day two of your first week as CFO, the CEO, Manny Giterdun comes storming into your office. He has a couple of an “amazing” investment opportunities that he wants to talk to you about. Normally GT has a cost of Capital of around 10%. You normally only evaluate your investment opportunities over a five-year period and will do the same here.

Investment: NorCana Mine

GT has been offered the first rights to acquire an open-pit copper mine in Northern British Columbia, known as the NorCana Mining Project (“NorCana”). NorCana requires the investor to invest 22 million dollars upfront to get the mine ready for production. It will take a year for the mine to become operational, and there will be no revenue until year 1 is done. From year 3 to 5, there will be a requirement to invest 2.0 million dollars every year to maintain equipment. The mine is estimated to produce 15,000 tonnes of grade copper ore. Copper ore needs to be processed down, for each ton of production, you can typically expect to get 200 ounces of pure copper. Our projections are that the price of copper will be at $3.0 per ounce on the open market. At the end of 5 years, we will sell old equipment we no longer need to excavate the mine for $1.0M.

Investment: YuDiamond Mine

YuDiamond Mine is located in the Yukon and is an operating mine. The owners are looking to exit and will redeploy their capital after the sale. Cost of the shares will be $15M upfront, and an “earnout”. The earnout will pay an additional 3.0M dollars for the shares at the end of 5 years, depending on whether the mine meets its production capacity (assume that it will). The mine produces 5,000 tonnes per year, and there are 0.5 diamond carats generated per ton. Typically, the price of this kind of diamond will fetch $2,000 per Carat. There will also be a remediation cost on the mine at the end of 5 years for $3.0M

Requirement:

Prepare an NPV Analysis for each investment opportunity

Prepare a PI and Payback Analysis, and then make a recommendation to Manny on which option is the more financially-sound investment.

* how to do it in Microsoft excel

Answer 1