Bidding for Antamina Harvard Case Solution & Analysis


Competition in the mining industry was severe. To a great extent, competition started due to the battle for mineral reserves. If RTZ-CRA anticipated towards maintaining its competitive advantage, then the high quality mineral could be guaranteed. It was estimated that at-least for 12 years, the annual copper production would be around 313 million lbs. For the expected case, it was estimated to be around 339 million lbs per annum copper production that would have life of around 14 years and for the High case alternative, it was estimated that the mineral reserve would be around 365 million lbs per annum with a life of around 18 years. At that time, Antamina mine was very attractive. RTZ-CRA was a multinational company dealing in different currencies. In order to mitigate its currency risks, RTZ-CRA had to create more value by linking its assets, earnings and cash flows dealing in different currencies. In the past years, Peru Sol was appreciated against the US dollar that made the RTZ-CRA to keep this point in mind while making a decision regarding the Antamina Mine.

bidding for antamina case solution

bidding for antamina case solution


The NPV of Antamina was the bidding price that a bidder would pay if the winning bidder would be forced legally to develop Antamina by completing the exploration with the amount that would be paid to the Peruvian state as an up-front for this mining project. The net present value for the Antamina mine was the cash flow, which was discounted from the sales of copper and zinc and subtracting costs and expenses from it. The optimal valuation technique was the discounted cash flow with risks adjustments. RTZ-CRA was rated as AA in the bond category and its nominal cost of capital was around 7.65%. Unlevered beta for RTZ-CRA was limited to 0.53 and converting it into levered beta through debt to equity ratio of 1.26. The cost of equity was around 11.26% and the weighted average cost of capital was 10.53%. Through sales of copper and zinc, it provided the gross revenue and their exploration costs; capital expenditures on the mining project lowered the net income inclusive with the tax impact. By adding back the depreciation and subtracting the changes in working capital, the results came out as the net present value that was about 347.76 million for the High case. This net present value was expected to be the $271.84 million in expected case and in low case it was expected to be $220.83.

Although, the DCF calculation failed to retain all the value sources associated with the investment, which assumed that the decision to invest in this project was permanent. The winner was legally forced to spend minimum of $13.5 million on the exploration and development of the Antamina mining site within two years with the addition of the initial payment. After completing the exploration and development phase, the winner had a choice of whether to continue with this project or return it to Centromin. On the other side, the maximum payment that the bidder would be willing to pay was the value of the real call option. For valuing the Antamina mining project’s investment as an option, there were certain assumptions that were made on the following variables.

  • If extracted today with the available reserves of the resource:

Within this assumption, the present value of future cash flows from the minerals and capital expenditure after initial periods decreased the profitability.

  • Estimated cost for development:

Under this assumption the cost was estimated to be about $24 million, which was expected to be incurred within two years with the exploration time duration of two years and then the construction would be started.

For this Antamina Project, the option life was based on the resources as an inventory and the output rate within capacity range. In different scenarios of forecasting, the life of the option is ranged between 12 to 18 years................................

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