Case ID: 297054
Solution ID: 14
Words: 1716
Price $ 75

Best Bidding for Antamina Case Solution

Abstract

In June 1996, professionals in the multinational mining company RTZ-CRA contemplate bidding to obtain the Antamina copper and zinc mine in Peru. The Antamina project excel continues to be offered available by auction incorporated within the privatization of Peru's condition mining company. RTZ-CRA needs to determine exactly what the mine might be worth and select whether and the way it must bid inside the approaching auction. The bidding rules setup with the Peruvian government dictate that each company's bid contain two components: an up-front cash amount plus an amount the bidder invested to develop the house if development is warranted after further exploration is completed.

Basically what the model does is to calculate the PV of cash flows of the three different probability scenarios (high, expected, low) and the register the value obtained in the simulations results sheet, the three different values obtained are the weighted averaged according to the probabilities defined in the parameters sheet. This process iterates according to the number of trials set in the summary sheet. In case that the PV is negative then the model automatically identifies this event, the real option is exercised and the PV is recorded then as 0 in another column for this particular simulation trial. The value of the investment is then weighted summed for values. 

The process is identical as the one described above, only that in case that the value of the investment is lower than the one initially committed then a penalty is applied. The penalty is calculated as followed: committed investment less real investment times 30% after the number of trials is completed then the model proceeds to calculate the value of the project according to the following scenarios. No option to abandon: Mean of weighted averaged PVs, less the required investment (High scenario) less the feasibility study equals the project NPV Option to abandon at year 2: Mean of weighted averaged PVs, less the required investment (Average) less the feasibility study equals the project NPV Option to abandon at year 2 with penalty: Mean of weighted averaged PVs, less the required investment (average) less the penalty less the feasibility study less initial payment equals the project NPV.

Apart from the obvious sources of uncertainty, the model works with a set of defined outcome probabilities for the high, expected and low scenarios. These are based on "expert" opinion, meaning that the results could be biased. The model assumes no uncertainty from prices after year two, which is not totally accurate; companies do no usually hedge to 100%, especially when volumes are so high. Using the spreadsheet, bid.xls, calculate values for the project, and then submit a bid representing how much you will pay for the property. You may work in teams, but identify the members of your team when submitting your bid. You will submit three different bids, each one under a different set of auction procedures. If the winning bidder was legally forced to develop Antamina case pdf after completing the exploration phase, and was required to pay the Peruvian government up- front for this project, what is the most they would be willing to pay?

If the winning bidder could choose to whether or not to develop Antamina at the end of two years, but was required to pay the Peruvian government a single fee up-front for the right to develop the project, what is the most they would be willing to pay? Under this alternative, there is no investment commitment or penalty; the firm merely pays the government up front, and has the right to develop at the end of two years. If they don't develop at year two, they lose the right to develop the field.

Under the current bidding for antamina case rules, the winning bidder states both an initial cash payment as well as an investment commitment that is paid only if they choose to develop the field. Bids are evaluated by summing up-front amount and 30% of the investment commitment. If you proceed with development, but fail to spend the full investment commitment, the Peruvian government will fine you 30% of the difference. What is the most that you would be willing to bid under these rules? How would you trade off these two components of the bid? What are the incentives brought about by the different auction rules?Do the rules seem to meet what you perceive to be the goals of the Peruvian government? What the government seeks is not only to secure the development of the mine but also the committed capital from firms.

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Excel Calculations

Raw Data

DISCOUNT RATE PARAMETERS

OUTCOME PROBABILITIES

COMMODITY PARAMETERS

WACC CALCULATION

CORRELATION TABLE

 

Simulation and Results

Commodity Prices and Yields

No Real Option Case 1

Case 2 No Penalty

Case 3 With Penalty  

 

2-yr prices

Correlation Table

Mean Reversion Parameters

 

High Case, Expected Case, Low Case

WACC Calculation

capital cost

Feasibility study

DCF

PV

Questions Covered

1.     In what way is the development of a copper mine like Antamina a real option?  In what way is the bidding structure put in place by the Peruvian government an option?  What is the correspondence between these real options and financial options?  What other real options does the owner of the Antamina have?

2.     Conceptually, how would you build a real options model to value the Antamina project?  What data and assumptions would you need?  What would be the key assumptions and limitations of the model?  Review the model suggested in the reading on the basis of your reactions to these questions.

3.     Consider the bids that should be made for the property under these three different sets of auction procedures:

If the winning bidder was legally forced to develop Antamina after completing the exploration phase, and was required to pay the Peruvian government up-front for this project, what is the most they would be willing to bid?

If the winning bidder could choose whether or not to develop Antamina at the end of two years, but was required to pay the Peruvian government a single fee up-front for the right to develop the project, what is the most they would be willing to pay?  Under this alternative, there is no investment commitment or penalty; the firm merely pays the government up front, and has the right to develop at the end of two years.  If they don’t develop at year two, they lose the right to develop the field.

Under the current bidding rules, the winning bidder states both an initial cash payment as well as an investment commitment that is paid only if they choose to develop the field.  Bids are developed by summing up-front amount and 30% of the investment commitment.  If you proceed with development, but fail to spend the full investment commitment, the Peruvian government will fine you 30% of the difference.  What is the most you would be willing to bid under these rules?  How would you trade-off these two components of the bid?

4.     What are the incentives brought about by the different auction rules?  Do the rules seem to meet what you perceive to be the goals of the Peruvian government?