Southport Minerals
Southport Minerals, Inc – some points to remember
• Financial architecture (financing program) can transform a negative NPV project into a positive NPV project value addition done by financial manager.
• Southport Indonesia (SI), a wholly-owned subsidiary of Southport Minerals, entrusted with a responsibility of mining the copper ore at Firstburg, Indonesia. o Initial experiments established that Firstburg mine contained 33 million tons of copper ore with an average copper content of 2.5%. o Bechtel conducted the cost and feasibility studies and informed that the total development cost would be $120mil and could be operationalized by end of 1972 (including $4.5 mil working capital). o The ore body is expected to last for 13 years and the production costs are expected to be among the lowest in the world. o SM is concerned with the expropriation risk and output risk as these are the major risks that are yet to be mitigated. o Though world copper prices rised from 28.7 cents (in 1961) to 66.3 (in 1969), the project does not provide the minimum required return of 20% on equity (NPV is -$17 mil). Corporate-financing the project can reduce the WACC thereby making the NPV to be positive. o In 1969 (at the time of deciding this project), SM had $231 million in networth and hardly any debt apart from very good liquidity and profitability. Though SM can take the leverage on its balance sheet to fund the entire $120 million viz. corporate-financing the project, it is apprehensive of expropriation risk.
• Given the risks of SI project, SM has designed a financing-cum-risk-management program to project-finance it with an initial debt ratio of 83%. Two customer groups (Consortium of Japanese Smelters and a German Smelter) were identified and asked to absorb the major portion of the risks. o Though Japan and Germany are very large consumers of Copper, those countries don’t have significant ore deposits but have refining capacities. Hence, the output quantity
• Financial architecture (financing program) can transform a negative NPV project into a positive NPV project value addition done by financial manager.
• Southport Indonesia (SI), a wholly-owned subsidiary of Southport Minerals, entrusted with a responsibility of mining the copper ore at Firstburg, Indonesia. o Initial experiments established that Firstburg mine contained 33 million tons of copper ore with an average copper content of 2.5%. o Bechtel conducted the cost and feasibility studies and informed that the total development cost would be $120mil and could be operationalized by end of 1972 (including $4.5 mil working capital). o The ore body is expected to last for 13 years and the production costs are expected to be among the lowest in the world. o SM is concerned with the expropriation risk and output risk as these are the major risks that are yet to be mitigated. o Though world copper prices rised from 28.7 cents (in 1961) to 66.3 (in 1969), the project does not provide the minimum required return of 20% on equity (NPV is -$17 mil). Corporate-financing the project can reduce the WACC thereby making the NPV to be positive. o In 1969 (at the time of deciding this project), SM had $231 million in networth and hardly any debt apart from very good liquidity and profitability. Though SM can take the leverage on its balance sheet to fund the entire $120 million viz. corporate-financing the project, it is apprehensive of expropriation risk.
• Given the risks of SI project, SM has designed a financing-cum-risk-management program to project-finance it with an initial debt ratio of 83%. Two customer groups (Consortium of Japanese Smelters and a German Smelter) were identified and asked to absorb the major portion of the risks. o Though Japan and Germany are very large consumers of Copper, those countries don’t have significant ore deposits but have refining capacities. Hence, the output quantity