Moving Mountains: The Case of the Antamina Mining Company (A) Net Present Value (NPV) / MBA Resources

Introduction to Net Present Value (NPV) - What is Net Present Value (NPV) ? How it impacts financial decisions regarding project management?

NPV solution for Moving Mountains: The Case of the Antamina Mining Company (A) case study

At Oak Spring University, we provide corporate level professional Net Present Value (NPV) case study solution. Moving Mountains: The Case of the Antamina Mining Company (A) case study is a Harvard Business School (HBR) case study written by Felipe Portocarrero, Cynthia Sanborn, Elsa Del Castillo, Martha Chavez. The Moving Mountains: The Case of the Antamina Mining Company (A) (referred as “Cma Antamina” from here on) case study provides evaluation & decision scenario in field of Organizational Development. It also touches upon business topics such as - Value proposition, Leadership, Operations management, Social responsibility, Strategy, Sustainability.

The net present value (NPV) of an investment proposal is the present value of the proposal’s net cash flows less the proposal’s initial cash outflow. If a project’s NPV is greater than or equal to zero, the project should be accepted.

NPV = Present Value of Future Cash Flows LESS Project’s Initial Investment

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Case Description of Moving Mountains: The Case of the Antamina Mining Company (A) Case Study

The Antamina Mining Company (Compania Minera Antamina, or CMA) is the world's 3rd largest producer of zinc, 7th of copper, and the largest combined operation for both minerals. This Peruvian company, whose operations are located between 4,200 and 4,700 m.a.s.l., is a leader in environmental and social responsibility. Although CMA was a fairly new company (the exploration and construction phases of the mining operations took place between 1997 and 2001, the year in which the production phase began), it had to face a series of complex challenges in order to become an economically viable organization that was both socially and environmentally responsible. Meeting these objectives has implied developing institutional capacities (conflict resolution, management of adverse social contexts, multiculturalism, self-learning, and innovation) that normally appear much later in a company's evolution. Shows some of the typical challenges that managers must face when engaging in large-scale initiatives. CMA's executives worked with tight deadlines and in a high-risk context to make quick decisions whose consequences would have long-term implications, since they would determine the type of relations the company would maintain with diverse stakeholders. In order to make these decisions, they had to establish priorities among at least three distinct logics: i) that of construction and production, where tight time limits, engineers' technical criteria, and cost reduction predominate; ii) the environmental logic, where caution predominates along with impact assessment and an active international community of stakeholders; and iii) the community-based logic, where to co-exist with the primarily indigenous and poor peasant families directly affected by the project it is necessary to obtain a so-called "social license". This phase took place in a context in which CMA had the pressing need to secure financing from international banks.

Case Authors : Felipe Portocarrero, Cynthia Sanborn, Elsa Del Castillo, Martha Chavez

Topic : Organizational Development

Related Areas : Leadership, Operations management, Social responsibility, Strategy, Sustainability

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Calculating Net Present Value (NPV) at 6% for Moving Mountains: The Case of the Antamina Mining Company (A) Case Study

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 6 %	Discounted Cash Flows
Year 0	(10017550)	-10017550	-	-
Year 1	3444958	-6572592	3444958	0.9434	3249960
Year 2	3967670	-2604922	7412628	0.89	3531212
Year 3	3955141	1350219	11367769	0.8396	3320813
Year 4	3229540	4579759	14597309	0.7921	2558098
TOTAL			14597309		12660083

The Net Present Value at 6% discount rate is 2642533

In isolation the NPV number doesn't mean much but put in right context then it is one of the best method to evaluate project returns. In this article we will cover -

Different methods of capital budgeting

What is NPV & Formula of NPV,
How it is calculated,
How to use NPV number for project evaluation, and
Scenario Planning given risks and management priorities.

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Capital Budgeting Approaches

Methods of Capital Budgeting

There are four types of capital budgeting techniques that are widely used in the corporate world –

1. Internal Rate of Return
2. Net Present Value
3. Payback Period
4. Profitability Index

Apart from the Payback period method which is an additive method, rest of the methods are based on Discounted Cash Flow technique. Even though cash flow can be calculated based on the nature of the project, for the simplicity of the article we are assuming that all the expected cash flows are realized at the end of the year.

Discounted Cash Flow approaches provide a more objective basis for evaluating and selecting investment projects. They take into consideration both –

1. Magnitude of both incoming and outgoing cash flows – Projects can be capital intensive, time intensive, or both. Cma Antamina shareholders have preference for diversified projects investment rather than prospective high income from a single capital intensive project.
2. Timing of the expected cash flows – stockholders of Cma Antamina have higher preference for cash returns over 4-5 years rather than 10-15 years given the nature of the volatility in the industry.

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Formula and Steps to Calculate Net Present Value (NPV) of Moving Mountains: The Case of the Antamina Mining Company (A)

NPV = Net Cash In Flowt1 / (1+r)t1 + Net Cash In Flowt2 / (1+r)t2 + … Net Cash In Flowtn / (1+r)tn
Less Net Cash Out Flowt0 / (1+r)t0

Where t = time period, in this case year 1, year 2 and so on.
r = discount rate or return that could be earned using other safe proposition such as fixed deposit or treasury bond rate. Net Cash In Flow – What the firm will get each year.
Net Cash Out Flow – What the firm needs to invest initially in the project.

Step 1 – Understand the nature of the project and calculate cash flow for each year.
Step 2 – Discount those cash flow based on the discount rate.
Step 3 – Add all the discounted cash flow.
Step 4 – Selection of the project

Why Organizational Development Managers need to know Financial Tools such as Net Present Value (NPV)?

In our daily workplace we often come across people and colleagues who are just focused on their core competency and targets they have to deliver. For example marketing managers at Cma Antamina often design programs whose objective is to drive brand awareness and customer reach. But how that 30 point increase in brand awareness or 10 point increase in customer touch points will result into shareholders’ value is not specified.

To overcome such scenarios managers at Cma Antamina needs to not only know the financial aspect of project management but also needs to have tools to integrate them into part of the project development and monitoring plan.

Calculating Net Present Value (NPV) at 15%

After working through various assumptions we reached a conclusion that risk is far higher than 6%. In a reasonably stable industry with weak competition - 15% discount rate can be a good benchmark.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 15 %	Discounted Cash Flows
Year 0	(10017550)	-10017550	-	-
Year 1	3444958	-6572592	3444958	0.8696	2995616
Year 2	3967670	-2604922	7412628	0.7561	3000129
Year 3	3955141	1350219	11367769	0.6575	2600569
Year 4	3229540	4579759	14597309	0.5718	1846500
TOTAL					10442814

The Net NPV after 4 years is 425264

(10442814 - 10017550 )

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Calculating Net Present Value (NPV) at 20%

If the risk component is high in the industry then we should go for a higher hurdle rate / discount rate of 20%.

Years	Cash Flow	Net Cash Flow	Cumulative     Cash Flow	Discount Rate @ 20 %	Discounted Cash Flows
Year 0	(10017550)	-10017550	-	-
Year 1	3444958	-6572592	3444958	0.8333	2870798
Year 2	3967670	-2604922	7412628	0.6944	2755326
Year 3	3955141	1350219	11367769	0.5787	2288855
Year 4	3229540	4579759	14597309	0.4823	1557456
TOTAL					9472435

The Net NPV after 4 years is -545115

At 20% discount rate the NPV is negative (9472435 - 10017550 ) so ideally we can't select the project if macro and micro factors don't allow financial managers of Cma Antamina to discount cash flow at lower discount rates such as 15%.

Acceptance Criteria of a Project based on NPV

Simplest Approach – If the investment project of Cma Antamina has a NPV value higher than Zero then finance managers at Cma Antamina can ACCEPT the project, otherwise they can reject the project. This means that project will deliver higher returns over the period of time than any alternate investment strategy.

In theory if the required rate of return or discount rate is chosen correctly by finance managers at Cma Antamina, then the stock price of the Cma Antamina should change by same amount of the NPV. In real world we know that share price also reflects various other factors that can be related to both macro and micro environment.

In the same vein – accepting the project with zero NPV should result in stagnant share price. Finance managers use discount rates as a measure of risk components in the project execution process.

Sensitivity Analysis

Project selection is often a far more complex decision than just choosing it based on the NPV number. Finance managers at Cma Antamina should conduct a sensitivity analysis to better understand not only the inherent risk of the projects but also how those risks can be either factored in or mitigated during the project execution. Sensitivity analysis helps in –

What are the uncertainties surrounding the project Initial Cash Outlay (ICO’s). ICO’s often have several different components such as land, machinery, building, and other equipment.

What will be a multi year spillover effect of various taxation regulations.

Understanding of risks involved in the project.

What are the key aspects of the projects that need to be monitored, refined, and retuned for continuous delivery of projected cash flows.

What can impact the cash flow of the project.

Some of the assumptions while using the Discounted Cash Flow Methods –

Projects are assumed to be Mutually Exclusive – This is seldom the came in modern day giant organizations where projects are often inter-related and rejecting a project solely based on NPV can result in sunk cost from a related project.

Independent projects have independent cash flows – As explained in the marketing project – though the project may look independent but in reality it is not as the brand awareness project can be closely associated with the spending on sales promotions and product specific advertising.

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Negotiation Strategy of Moving Mountains: The Case of the Antamina Mining Company (A)

References & Further Readings

Felipe Portocarrero, Cynthia Sanborn, Elsa Del Castillo, Martha Chavez (2018), "Moving Mountains: The Case of the Antamina Mining Company (A) Harvard Business Review Case Study. Published by HBR Publications.