Case

Bidding for Antamina

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Vikas Singal (19125051) co rc
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 Brief About the Case

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• Peru Government wants to sell Centromin, a state-owned Mining Company

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• Antamina was Copper & Zinc mine which was up for sale

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

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• Engineering reports stated presence of 126.8 million MT of ore

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• While, Management estimated the ore reserve of 913 million MT

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• Most of the studies were done 20 years ago and on a small part of the block

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• A large investment ($622 million) was required for developing the site
• Investors were not sure about the profitability of the mine co rc
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• A Real option was provided by the Peru Govt.
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• There was large volatility in Spot price of Copper & Zinc

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 Rules for Bidding

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• It was a sealed bid auction

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• Bid amount was summation of two parts

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

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• 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

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invested

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• Embedded Real Option in the Contract

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• The winner of the bid can explore the mine for two years and if the project was not feasible return the mine
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• The winner had to invest at least $13.5 million for site development while exploration
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• The estimated cost of exploration was $24 million over the period of two years
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• Minimum option premium which needs to paid according to the rules:

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• 17.5+13.5+24 = $55 million with PV= $49.93 million

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 Present Value using DCF

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Tax Rate 30% Scenario Low Expected High

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Inflation 3.50%
Mine Life (Years) 12 14 18
15 year AA Corporate Bond return 7.65%
Copper production (million lbs/year) 313 339 365

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Debt to total Capital Ratio 0.15
Beta of the stock 0.53 Zinc production (million lbs/year) 155 168 181

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Market Return Rate 10% Operating costsa (millions of 1996 U.S. $) 131 138 145
Risk free rate of return (1-year Treasury Bond) 5.76% Copper treatment charge (1996 U.S. dollars/lb) 0.28 0.28 0.28

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Cost of Equity 8.01% Zinc treatment charge (1996 U.S. dollars/lb) 0.22 0.22 0.22
WACC 7.61% Feasibility study

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1996 (millions of 1996 U.S. $) 6 6 6

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1997 (millions of 1996 U.S. $) 18 18 18
Spot Price of Copper in 1996, ($/lbs) 0.95 Capital expenditure

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Spot Price of Zinc in 1996, ($/lbs) 0.46 1998 (millions of 1996 U.S. $) 54 55 55
Current Date
co rcJun-96 1999 (millions of 1996 U.S. $) 246 255 264
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2000 (millions of 1996 U.S. $) 281 292 303
Per year after 2000 (millions of 1996 U.S. $) 8.7 9 9.3
Closure costs (millions of 1996 U.S. $) 45 45 45
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NPV $87.04 $217.48 $383.09

Option Premium ($49.93) ($49.93) ($49.93)
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Strike Price, K ($421.53) ($436.67) ($451.01)

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 Project Value due to Real Option

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Production Black Scholes Option Pricing

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Volatility Ratio
Volaltility in Copper Prices 0.22 0.67 Continuous Compounding Risk free rate, r 5.6002%

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Volatility in Zinc Prices 0.18 0.33 Volatility of the asset 18.126%

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Correlation between Copper and Spot Price of the asset, S0 (million $) $723.14
Zinc Prices 0.44
Strike price of the asset, K (million $) $505.65

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Combined volatility 0.1813
Time to maturity, T 2

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co rc d1 3.921381743
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d2 3.665041691
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Call option Price, C $271.09

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 Thank You

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