SOE11144 Global Business Economics and Finance

Assignment Brief

Project question A regional division of a major multinational mining corporation has appointed you as a management consultant. They are planning to expand operations but are uncertain whether the corporation’s top management will support this. You have agreed to provide them with a report evaluating the new expansion project and making recommendations on:

• Whether the expansion should proceed, taking account of the risks involved, including risks relating to potential changes in costs and prices.
• How suitable performance targets can be developed for mining operations.

Your report must be addressed to the regional director, who will use it as evidence for the board of directors of the corporation.

Your report must contain:

1. An executive summary (up to 150 words)
2. An introduction (up to 100 words)
3. A methodology for evaluating the proposed investment (up to 450 words)
4. An evaluation of the proposed investment in the light of the financing opportunities available to a large multinational corporation as a whole (up to 1,000)
5. A discussion of the process of setting of financial and non-financial performance targets and reporting on performance (up to 400 words)
6. Conclusions (up to 200 words)
7. Recommendations (up to 200 words)
8. References
9. Appendices (up to 5 sides of A4)

Further Information The regional division’s management are under pressure from top management, who are based in another region, and from powerful local trade unions. Top management claim that the regional operation does not make a profit, after taking account of the multinational’s central administrative costs, cost of capital and depreciation of property, plant and equipment. The trade unions claim that health and safety measures are outdated and dangerous and that wages are below reasonable expectations. Regional management are not convinced about any of these claims but recognise that they do not have the right kind of information to evaluate them. Regional management have told you that they are planning to expand operations by acquiring land and mining rights and they face two obstacles. Firstly, they are unable to borrow money to fund new investment at a regional level. All borrowing is arranged centrally and major capital expenditure funds are allocated to regions by the Board of Directors. Regional management are required to place bids for these funds. Secondly, they have experienced high staff turnover and vacancies are taking an increasingly long time to fill. There is a risk that new mines will not be able to operate at all because of the difficulty in recruiting workers. The regional division produces generic natural materials and sells them in a competitive market. Management say that they are a large producer but have no influence at all over demand and prices and therefore do not bother with sales and marketing strategies. They simply produce as much as they can and sell it as fast as possible for whatever they are offered, normally using forward contracts to secure a commitment and to guarantee prices. All of the Regional Management’s performance targets and internal performance reports are presently focused on the production volumes for different types and grades of coal and ores. However, they produce a monthly income and expenditure statement which is monitored to establish whether they have covered their costs, including operating costs, distribution costs, local administrative costs and local licences, taxes and royalties. These statements also include expenditure on replacement of equipment and vehicles as it arises. They do not include the Corporation’s central administrative overheads, finance costs, taxes payable by the corporation as a whole or dividends.

Sample Answer

Report for the Regional Director: Evaluation and Recommendations on Proposed Mining Expansion

Executive Summary

This report evaluates a proposed expansion project for a regional division of a multinational mining company. The regional team faces challenges such as centralised control of funding, claims from trade unions, and difficulties in recruitment. The methodology used includes financial and risk analysis and considers financing options and performance target strategies. Key findings suggest that while expansion could be beneficial in the long term, risks involving labour shortages and limited funding access must be addressed. The report recommends moving forward with the expansion only after addressing workforce issues and justifying investment through strategic performance targets.

Introduction

This report supports the regional division of a multinational mining firm in evaluating a planned expansion. It assesses risks, potential returns, financing, and performance targets, and provides recommendations for consideration by the Board of Directors.

Methodology for Evaluating the Proposed Investment

To evaluate the expansion project, we use the following methods:

1. Cost-Benefit Analysis (CBA):

   • We assess potential costs, including land acquisition, mining rights, equipment, and operational expenses.

   • Benefits include increased production, economies of scale, and potential long-term profitability.

2. Risk Analysis:

   • Labour Shortage: High staff turnover and slow recruitment may delay operations.

   • Funding Access: Regional management cannot independently borrow funds.

   • Safety and Wages: Trade unions raise concerns which could lead to industrial disputes.

   • Market Risks: Commodity prices are unpredictable.

3. Net Present Value (NPV) and Internal Rate of Return (IRR):

   • We recommend projecting cash flows and discounting them using the corporation’s cost of capital to determine project viability.

4. Sensitivity Analysis:

   • Key variables such as wage increases, commodity prices, and staffing levels should be tested to evaluate best and worst-case scenarios.

5. SWOT Analysis:

   • Strengths: Existing infrastructure, skilled base management.

   • Weaknesses: Limited funding control, labour issues.

   • Opportunities: Market expansion, increased output.

   • Threats: Union actions, economic downturns.

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