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Medium Profitability Capacity Expansion Investment Decision

Digging for Gold

#Mining #Commodities
ProHub Comment

This is a commodity market expansion case requiring analysis of supply curve dynamics, price impact, and NPV calculations. The candidate must recognize that increasing supply in a commodity market shifts the supply curve, reducing price for all producers, and calculate whether volume gains offset margin compression. The case tests quantitative ability, market structure understanding, and competitive strategy thinking.

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. Board typically approves projects with payback in less than 5 years. You can use payback with no discounting for your math
  2. Mine is adjacent to the original mine and has
  3. Consider that the market will remain flat at 1500 tons per year for the foreseeable future
  4. Prompt to wait until we dive into case ($750M)
  5. Prompt to wait until we dive into case (same, $1000/oz)