New Earth Mining Inc.

Analysis of Different Approach for Company Valuation

Approach 1- VP Operations
• Problem: Considering company’s WACC (14%) to calculate a standalone project.

• Problem: Does not consider the additional risk.

• Problem: Cost of Debt is also inflated.

• Calculated on ‘Simple Cash Flow’.

• NPV stands as $83m – though incorrect valuation but positive to accept the
project.
Approach 2 – Accounting Officer
• Problem: Does not consider Financing Packages.

• Problem: Addition of an expected return premium of 10% (resulting in a WACC of

24%), but adding a premium does not justify that the modified WACC accurately
reflect the cost of capital for NESA

• NPV stands as ($28)m – can not accept the project.

Approach 3 – External Consulting Firm
• Considers the standalone project basis.

• It is better since it considers separate cost of equity and cost of debt.

• When discounting the future cash flows and debt repayment, it omits the firm’s
prepayments, thus not providing an accurate NPV to reflect the firm’s finance
plan

• Violates the debt covenants that –

The amount paid out in dividends was not to exceed the amount allocated to
prepayment of debt.
No dividends could be paid to New Earth until December 31, 2016.
 Approach 3 – External Consulting Firm
Key Considerations:
• Capital Investment/Cash outflow is incurred in the beginning of year.
• Projected cash inflow represents year end closing balance.

Thus operation stream is assumed to be like –

Identifies the business Make primary Make final investment First financial position after
scope and finalize business investment of $ 80 m of $ 120 m commencement
decisions Base time for project Commencement of
evaluation Operation

n= 1 n= 2 n= 3
2012 Jan, 2013 Jan, 2014 Jan, 2015 Dec, 2015
Approach 3 – External Consulting Firm
• Kd = (10% + 7% + 9%)/3 = 8.67%

• Ki = (.1(1-.35) +.07(1-.35)+ .09 (1-.35)) = .169/3 = 5.63%

• WACC

Capital Provider Aggregate Amount Weight Kd Ki & Ke WACC

SSD - US Banks 60 30% 10% 6.50%
SUD - Japanese and Korean Banks 40 20% 7% 4.55%
SSD - Chinese Steel Makers 60 30% 9% 5.85% 9.42%
Equity - New Earth Mining Inc. 40 20% 24%
Total Capital 200 100%
 Approach 3 – External Consulting Firm – NPV (Cash Flow from Operations)
(All amount in USD million, when price is $80/ ton)

Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029

Cash flow from

operations 58.3 58.3 58.3 57.2 57.2 57.2 55.2 55.2 55.2 52 52 52 52 52 72

Discounting rate 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42%

PV of Cash Flows 44.50 40.67 37.17 33.33 30.46 27.84 24.55 22.44 20.51 17.65 16.13 14.75 13.48 12.32 15.58

Aggregate PV Cash
371.37
Inflows

Initial Investment 80 120

PV of Outflow 189.67

NPV 181.70
 Approach 3 – External Consulting Firm – NPV (Free Cash Flow)
(All amount in USD million, when price is $80/ ton)
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Year
0 1 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
EBIT     71.2 71.2 71.2 69.6 69.6 69.6 66.4 66.4 66.4 61.6 61.6 61.6 61.6 61.6 61.6
Tax @ 35% 24.92 24.92 24.92 24.36 24.36 24.36 23.24 23.24 23.24 21.56 21.56 21.56 21.56 21.56 21.56
NOPAT 46.28 46.28 46.28 45.24 45.24 45.24 43.16 43.16 43.16 40.04 40.04 40.04 40.04 40.04 40.04
Add: Depreciation ((cost-
salvage value)/expected 12 12 12 12 12 12 12 12 12 12 12 12 12 12 12
life)
Return of WC 20
Total cash available for
discounting 58.28 58.28 58.28 57.24 57.24 57.24 55.16 55.16 55.16 52.04 52.04 52.04 52.04 52.04 72.04
Discounting Rate 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42% 9.42%
PV 44.49 40.66 37.16 33.35 30.48 27.86 24.53 22.42 20.49 17.67 16.15 14.76 13.49 12.33 15.59
Aggregate PV of Inflow 371.41
Discounted PV of Inflow 283.58
Cash Outflow 80 120
Discounted PV of 189.67
Outflows
NPV 93.91
Approach 4 – Internal Analyst

• Considers the project as an independent entity (i.e. NESA).

• Considers the special financing package including prepayments.

• Matches with debt covenants.

• Considers high rate of return that equity investors require on this project.
Approach 4 – Internal Analyst

• Focus on debt retirement thus cover the default and liquidity risk.

• Ke = 24%

• Unlevered cost of equity = BL/[1+(1-Tc)X(D/E) = 13.61%

Approach 4 – Internal Analyst
NPV
(All amount in USD million, when price is $80/ ton)

2013 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Year
0 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Cash
available for
  0 18.6 19.9 27 27.7 55.1 55.2 55.2 55.2 52 52 52 52 52 72
equity
holders
Discounting
24% 24% 24% 24% 24% 24% 24% 24% 24% 24% 24% 24% 24% 24% 24%
rate
Cash Outflow 40
PV of Inflows 0.00 9.76 8.42 9.21 7.62 12.22 9.88 7.96 6.42 4.88 3.93 3.17 2.56 2.06 2.30
Aggregate of 90.40
PV inflows
NPV 50.40
Recommendations

• Among the proposed methods, ‘Approach – 4’ is best.

• The project is expected to be profitable

• Minimum NPV is $ 50.40 m

• Separate entity WACC is 9.41%

• NPV at WAC is $ 93.91 m (on free cash flow basis).