Bidding for Antamina Harvard Case Solution & Analysis

Bidding for Antamina Case Solution

Problem Diagnosis

The executives of one of the multinational company, RTZ-CRA were considering one of the significant bids of the Antamina mine in June 1996 in Peru. This mine has been offered for sale as a result of the privatization of the state mining company of Peru. Therefore, the decision or the problem which is faced by the executive of the RTZ-CRA company was to determine the actual worth of the mine. The sensitivity of the mine’s value to input variables and how the bidding should be done by the company in the upcoming auction.

bidding for antamina case solution

bidding for antamina case solution

            The Peruvian government had constructed two parts of the bid which consisted of the initial payment and the investment commitment which would be utilized by the new owner for the development of the Antamina mine if they opt the option of development once, the exploration phase is completed. So considering the real option inherent in this deal, the real worth of the Antamina mine needs to be derived by the executives of RTZ-CRA Company which meets the objectives of the Peruvian government.

Question 1

            The development of the Antamina mine is basically a real option and it can also be modeled as a real option. In financial terms, an option given the holder of the option the right to buy or sell something and it is the right of the owner and it is not an obligation. If exercising the options yields positive rewards then the option can be exercise otherwise it can be allowed to lapse.

            The bidding structure which has been put into place by the Peruvian government is clearly an option because after the sale of the zinc and copper mine takes place, the buyer of the mine will also have to decide for a payment for the investment commitment which would be spent over the next 5 years.  Each of the bids would be evaluated on the basis of the initial cash payment and 30% of the investment commitment therefore, it was totally the choice of the buyer to decide on the investment commitment to put aside for the development purposes for the mine. Thus, the buyer would have the option to develop the mine immediately or not.

            This is a real option and real option has basically three characteristics which are uncertainty, timing and irreversibility. In the case of the purchase of the Antamina mine, the timing of the development of the mine is 2 years and it depends on the decision of the buyer to develop or not develop the mine. The uncertainty relates to the price, costs associated with the mine, the value of the mine and the price of the metal which would be extracted through this mine.

            Lastly, the irreversibility relates to the cost of the option which is basically option premium and it is not recoverable no matter if the option is exercised or not. This option is basically just like a call option among the financial options which gives the buyer the right to buy or in other words develop the mine. Therefore, it is possible to compare the Antamina real option with a financial call option because the mechanism of both the options is same. ...................

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