David Freimuth

André Pedro

1. Case Background

•RTZ-CRA, meanwhile Rio Tinto Group

In 1996:

8 billion USD revenue

10 billion USD market value

51.000 employees

The other bidders: Noranda Inc. (meanwhile Xstrate), Inmet Mining Corporation and Rio Algom Limited (meanwhile BHP Billiton)

**Agenda**

• Uncertainty about the potential ore body - 3 scenarios

• Feasibility study after bidding - lasts 2 years

• 4000m above sea level, 200km to the ocean - high site development costs - take 3 years

• Copper & zinc mine - core importers are North America, Europe and Asia

DCF for all 3 cases

Expected (1996 - 2014)

High (1996 - 2018)

9. Valuation Results - Comparison

All Antamina's average expected valuation results fall in the range:

• U.S. $ 312 to 487 million

The Rio Tinto Group was not successful in its bid. Today, Antamina is owned by a joint venture of BHP Billiton, Glencore, Teck and Mitsubishi Metals Group.

Thank you for your attention

André, Rodrigo, David

Low (1996 - 2012)

**3. The bid**

• Political interest to ensure the development of the property, promote investments - ability to affect the country's balance of trade

• Initial cash payment for a bid (min. 13.5 million USD)

• Investment commitment (min. 135 million USD)

• Option to return the property after 2 years

• After 5 years, pay a penalty = 30% x (Investment commitment - Actual investment)

Prof. Carlos Tudela Martins

4. The rules set by the Peruvian Government

• Winning bid = Initial cash payment + 30% x (Investment commitment - Actual investments)

• The winner would have to spend >= 13,5 million USD on exploration and development - non-binding contraint

(feasibility study costs = 24 million USD)

• 3 different DCF valuations for each case scenario (low, expected, high)

• Assumptions:

- Zinc and copper prices grow with annual inflation of 2,6% (exhibit 1) - futures are not applied due to complexity (even though they are used to avoid price uncertainty)

- All of the investment is fully depreciated at the end of the mine life

- Cash flows discounted by RTZ-CRA's WACC

- All values in USD (Antamina exports most of its production and prices are in USD)

**5. DCF Valuation**

**DCF Valuation - WACC calculation**

• Risk free rate = 7,02% = 15 year US Treasury bond yield (exhibit 2)

• ß = 0,53 = ß of RTZ-CRA (exhibit 4)

• Risk premium = US risk premium + Peruvian country-specific risk premium = 5% + 2,85%

• rE = rf + ß(US RP + Peruvian RP) = 11,18%

• D/V = 0.15 (text information)

• rD = 7,65% (AA US corporate industrial bond yield - exhibit 4)

WACC = D/V x rd x (1-t) + E/V x rE

(...)

(...)

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6. Abandonment Option

• Standard DCF approach cannot calculate the value impact of managerial flexibility

Manager reacts to changes in the economic environment by adjusting strategies

• Abandonment option - winning bidder has the possibility to abandon the mine project after the feasibility study (in 1997, depending on the ore reserves)

• Black-Scholes Model & Monte Carlo Simulation

6.1. Black-Scholes Model

• Used "abandon“ Excel spreadsheet from Aswath Damodoran website

• Put option value:

- Stock Price = PV (Expected CF)

• Used expected case scenario NPV

- Exercise/Strike Price = Proceeds from abandoning the project (not incurring in capital investments) - abandonment costs (closure costs)

- 2 years to maturity

- Project life = 17 (expected scenario mine life's 14 years + 3 years of capital investment)

• Abandonment Option Value = 377,728,798.72 USD

6.2. Monte Carlo Simulation

• Even though this is not a common approach to value a real option (additional)

• Probability distribution for the case scenarios (text information):

Black-Scholes Model

Monte Carlo Simulation

Use =RAND() to get 1,000 different output observations of DCF's NPV-Penalty

=MAX(0;0.3*(Investment commitment - Actual Investment))

• Output divided by 5 different output values

• For each, calculated mean and standard deviation

• Choose the one with maximum NPV

• With the abandonment option: negative NPV values can be changed to zero

• This leads to a higher NPV

•Value of the abandonment option = Difference between higher NPV (with no negative values) and lower NPV (with negative values) = U.S. $ 11,160,401.72

• Did not use it in our forecasts (value is constantly changing due to Excel refresh)

• Too low to be considered

7. Antamina Value & Sensitivity Analysis

• Final Expected Value of Antamina Project = Average of DCF's NPV + Abandonment Option Value = U.S. $ 388,460,652.96

• Sensitivity variables to change:

- WACC (± 0,1 p.p.)

- Annual Inflation Rate (± 0,6 p.p.)

• There are not many variables that the firm can choose - we are evaluating natural resources and the production is highly correlated with the amount of ore available

8. Two other questions

• Senior Management Team of RTZ-CRA was worried about:

- What is the value of Antamina if there is a 5% per year risk of expropriation?

• Multiply the annual expected cash flows by 100-5=95% (isolate -> 95% x Antamina Value = U.S. $ 369,037,620.31)

• Does not affect the discount rate!

- What is the value of Antamina if there is a possibility of a two year block funds?

• With the block funds the money generated stays in the host country (Peru) for two years with a bellow market rate, the Risk Free Rate

• (Antamina Value)/((1+rf)^2) = U.S. $ 339,169,774.41

10. Conclusion

• Calculated Expected Value of Antamina = U.S. $ 388,460,652.96

• Our Recommendation:

- RTZ-CRA to bid U.S. $ 13.5 million in cash and

- An investment commitment capable of competing with the other companies’ bids

•

Bidding rules created by the Peruvian government:

- Safer to bid future promised investments that can be cancelled than to bid a high nonrefundable amount of cash and suffer from the “winners curse”

1. Case Background

2. Mine Overview

3. The bid

4. The rules set by the Peruvian Government

5. DCF Valuation

6. Abandonment Option

6.1. Black-Scholes Model

6.2. Monte Carlo Simulation

Monte Carlo Simulation

7. Antamina Value & Sensitivity Analysis

8. Two Other Questions

9. Valuation Results - Comparison

10. Conclusion

11. Ending

**2. Mine Overview**

Firm Valuation

Bidding for Antamina

DCF's NPV - Comparison

**11. Ending**