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Medium Profitability Expansion Decision Capacity Planning

Digging For Gold

#Mining #Commodities
ProHub Comment

This is a classic commodity pricing case requiring candidates to understand supply curve dynamics and payback analysis. The key insight is recognizing that in commodity markets, price is set by the marginal cost of the last unit demanded, and adding 100 tons of supply shifts the entire demand curve downward, requiring quantitative modeling to assess profitability despite price compression.

Estimated Time 15 minutes
Difficulty Medium
Source Darden
50 / 100
Our client is an Australian mining company, whose main product is Gold, which it sells exclusively to China. This company is the largest producer in volume in the Chinese market with 200 tons sold each year. It is also the lowest cost producer at $1000 per ounce of production costs. We estimate the total Chinese demand for Gold today to be around 1500 tons per year. Our client has won a concession to mine a new site adjacent to its biggest mine, and increases production to 300 tons per year (i.e. 100 additional tons per year). Is this worth doing?

Clarifying Information

  1. Are there are any company criteria to approve projects? What typically constitutes success? Board typically approves projects with payback in less than 5 years. You can use payback with no discounting for your math
  2. Geography related question… Mine is adjacent to the original mine
  3. How is the market expected to grow? Consider that the market will remain flat at 1500 tons per year for the foreseeable future
  4. How much upfront investment will be required for this project? Prompt to wait until we dive into case ($750M)
  5. What is the cost of this new volume of production? Are there cost synergies or is this a more expensive mine? Prompt to wait until we dive into case (same, $1000/oz)
  6. How does the competitive landscape look like? You can choose to give Exhibit A, but may throw them off receiving before framework