Question

read the HBR case study Evaluating the Organization: New Earth Mining, Inc. This case study can be located in your custom textbook/case study bundle. what are the risk the company faces

Answer 1

Answer-

The company New Earth Mining, Inc. which is one of the largest U.S precious-metal producers found great success with gold prices increasing. The increase of gold prices resulted in improvements of operating margins, rapid growth earnings and large amount of cash displayed on the company’s balance sheet. While the increase of gold prices provided New Earth Mining, Inc. success quickly, executives of the company felt concern of the sustainability of these prices in the future. After looking into diversification programs to reduce the dependence on precious metals, a new investment opportunity presented itself in the Northern Cape of South Africa with iron ore. This investment opportunity in iron ore initially showed potential however there were substantial risks to consider as well. To evaluate the risk and rewards of this investment, important quantitative and qualitative information must be strategically investigated by New Earth Mining, Inc.

After evaluating this case, there was a lot of important non-numerical qualitative information provided impacting either the success or failure of New Earth Mining, Inc. investment opportunity. An important qualitative piece of information derived from the price of iron ore showing no signs of decreasing dramatically due to the strong global demand from other countries. According to a 2012 report by the U.S. Geological Survey, the world iron ore market would continue to be tight, with demand exceeding supply until at least 2016. This was due to the long lead times required to bring mines into production, a world shortage of skilled labor, and growing natural resource nationalism, which reduced exports from some nations (Fruhan, Wang 2013). Also, important qualitative information was observed when countries like China, Japan, and South Korea were extremely supportive of the assurance of long-term supply of raw materials. This qualitative information was important for New Earth Mining, Inc. because it provided a reassurance that raw materials were vital to these county’s economic growth. There was important qualitative information associated to New Earth Mining, Inc. protecting its investment in South Africa against potential losses due to civil war and government nationalizing natural resource assets. Industry experts deemed South Africa to be one of the top counties in terms of political risk resulting in negative effects on mining operations. It was vital for New Earth Mining, Inc. to evaluate the important qualitative information within the guarantees of credits for mining operations in less-developed countries. This allowed New Earth Mining,Inc to fall back on protection against the well-known political risk throughout South Africa.

      There was also plenty of important quantitative information to evaluate which focused more on numerical data found in reports such as balance sheets opposed to qualitative which focuses more on subjective judgment based on non-quantifiable information (Smith, 2019). There was important quantitative information evaluated when New Earth Mining, Inc. conducted an pro forma analysis on the profitability of this new investment. The pro forma analysis provided insights that the investment opportunity had attractive potential because of strong cash flows due to an assumed price of $80 per ton. Also, cash flows could become even stronger if iron ore’s price increased to $100 per ton. The negotiations of New Earth Mining, Inc. financial package provided important quantitative information because of the $200 million to complete this project, $100 million was negotiated in complex terms with overseas buyers. For example, two steel makers in China agreed to lend NESA $60 million in senior subordinated debt at 9% interest. This loan would be repayable at the rate of $8 million per year between 2022 and 2028, with the final $4 million paid down in 2029. The loan was guaranteed by the People’s Republic of China. New Earth Mining, Inc. would invest the remaining $40 million in NESA as equity capital, at the beginning of 2013.