Antamina Case Report

Case Analysis: Bidding for Antamina

Advanced Corporate Finance

The economic value of the Antamina mine is the value of the discounted stream of expected future sales of copper and zinc, less any development and extraction costs.

If we run 10,000 trials Monte Carlo simulation for the Antamina mine, under the situation that the mine forced to be developed by the winner at the end of year two, the mean value of NPV is about $454 million, the project has a negative NPV in 39% of the trials. So the most they want to pay under this auction process would be $454 million.

If the winner has the option to abandon development after two years, in this case, by eliminating all negative-NPV outcomes, excel runs out a NPV of $704 million, which are the most amounts they want to pay.

From the result that excel ran out, there is a 39% chance we get a negative NPV and should walk away after two years under medium ore scenarios, the rest 61%, we should continue to develop.

The higher the investment commitment, the higher chance the penalty will occur. Through run the simulation, expected value of penalty is about 8% of investment commitment if it is higher than the sum of required capital expenditures of year 1998, 1999, 2000, which is 581, 602 and 622 millions for low, expected and high scenarios. So the estimated value of the bid under these rules would be $704*92% = $648 millions, the most amount you want to pay.

One official said: “We obviously want to sell at an interesting price, but the principal objective is to maintain and develop the sector by attracting quality companies.” By setting up a scheme that not only delivers little money up-front but also reduces the likelihood of development later on, the government seems unlikely to meet its stated goals. So the proposed rules did not seem like meet the government’s stated objectives.

Monte Carlo simulation model is more suitable for the case because, this option is a European style and, it allows varying...