1.0. Executive summary
This study gives an analysis and appraisal of New Earth Mining (NEM) company investment prospect in the Iron Ore mining industry in South Africa. It looks at the current financial position of NEM and prospective success of the investment via a subsidiary New Earth South Africa (NESA). The analysis methods delve into the estimated returns on investment by use of approximated cash flows. Results of the analysis show that the returns from the investment are likely to be positive. The case study also investigates the financial soundness of NEM and so its susceptibility to new investments (Fruhan & Wang, 2013). The company’s data used is up to date and hence it is reliable making this study meticulous. The project should commence in year 2015 with an initial Investment cost of $200 million, 40% of which will be required in early 2013 and the remaining 60% in early 2014.
The investment will include construction, insurance, operating assets and will have $20m worth of working capital. $40 million of loans will be required in 2013 and $120 million of loans required in 2014 (interest accrued over 2013 and 2014 and paid in 2015). Iron ore has high demand from the steel manufacturing industry. It is mined and transported from South Africa by sea to other countries that manufacture steel. This trade has recorded a steady increase of 4.4% over the years. South Africa produces 1 billion tons of ore annually, which puts it at position 14 worldwide in terms of ore reserves, and the seventh leading producer of iron ore. Prices of raw materials have increased steadily over the years and NEM is undoubtedly bound to succeed in this venture as shown in the cash flow analysis (Fruhan & Wang, 2013). The company has a strong financial background and positioning with easy access to debt finance due to its credit worthiness. It has a strong form of equity finance at its disposal that has gained value over a long period. From the analysis, it is clear that NEM’s investment in iron ore in South Africa is a viable option.
As a global enterprise in U.S, New Earth Mining (NEM) has become one of the largest precious metal producers since the increase in global gold prices. To gain more potential and sustain the risks associated with gold exploration, the management of NEM decided to diversify their main business from the precious metal industry to the mineral industry (Fruhan & Wang, 2013). The appropriate decision making for a new investment is very important towards the improvement of a company’s operating margins and its future development. According to the United State Geological Survey (2012), South Africa, as the one of the top ten largest producers in the word, had produced over 53 million metric tons of iron ore in 2009. In this respect, the iron ore investment in South Africa is a new diversification project of NEM, which the CEO is going to examine the relevant data, evaluate the risks, and analysis the investment opportunity in this specified report (Fruhan & Wang, 2013).
2.1. Investment opportunity
The iron ore industry has proved to be very profitable over the years with a large market scope in Asia, specifically China, Japan and Korea. These countries have extensive manufacturing industries for steel. In addition, the prices of iron ore have had a steady increase as indicated in figure 1 below which shows the price trends in China from 2002 to 2012.
2.2. Financial structure
The investment will require an initial Investment of $200 million. $40million of loans will be required in 2013 and $120 million 2014. The interest that accrues over these loans will be paid in 2015. $100 million will be obtained from foreign Iron Ore buyers as debt finance at 7% interest payable by 2026. Banks in the U.S will issue $60 million loan to the NEM at 10% interest repayable by 2023. Equity finance invested in NESA by NEM will consist of $40 million (Fruhan & Wang, 2013).
2.3. Shareholders and debt holders
Unrestricted cash flows shall be used to repay debt and issue, but the dividend payments will not exceed debt prepayments according to the agreement in place.
3.0. Reference list
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Fruhan, W. & Wang, W. (2013). New Earth Mining, Inc. Harvard Business School.
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