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# Should We Build This Mine? You are working for a US mining company that is considering building a…

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Should We Build This Mine? You are working for a US mining company that is considering building a heap-leach gold mine in New Zealand. You need to decide whether or not to build the mine and to assess the effects of potential risks. Submit a one-page memo providing your conclusions along with your Excel worksheet. Facts about the project: (all financial amounts in New Zealand dollars (NZ\$) unless indicated otherwise). The purchase price of the land is NZ\$185M, which would be paid up front (treat all other payments as end-of-the-year payments). Construction costs would be NZ\$160M for each of the first two years. Cleanup costs a year after the mine is through producing ore are expected to be NZ\$80M Once the mine is built, it is expected to produce ore for 8 years. In each year of operation, the mine is expected to generate 10,000,000 metric tons of ore. Each ton of ore is expected to yield 1.1 grams of gold (there are 31.1 grams in a troy ounce). The operating cost of the mine is expected to be NZ\$650 per oz of gold. The gold will be sold in the world market at an expected price of US\$1,500/oz. The forecasted exchange rate between the Australian and US dollars is 0.83 US\$/NZ\$. The cost of capital is calculated to be 15%. Net cash flows will be repatriated to the US and so should be given in US dollars. Questions: 1) Given the assumptions, should we build this mine? 2) You recognize that there are uncertainties about some of these forecasts. What is the break- even yield (grams of gold per ton of ore)? What is the break-even price of gold? 3) Assume that the yield, price of gold and exchange rate are all 20% less favorable for us. Should we still build the mine?