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If the Mountain Mining Canada Ltd demands more money, Can-Do will have to walk away from the agreement. The main aim of this memorandum is to give recommendations of Can-Do’s walk away point.The purchase of the South Face Mine would expose Can-Do’s new costs which are related to the closure and reclamation of South Face Mine, thus the value of the walk-away point is actually the net cost savings and the new costs.As the can-Do, negotiates the strategy of acquiring the South Face Mine it will have to come up with a “walk-away” point to make sure that it is not overpaying for themine. Wilder have requested the objective of this report to be; first, give a recommendation of Walk-away point to Can-Do. Secondly, make sensitivity test that
MEMORANDUM4recommends the walk-away point. Thirdly, determine the additional risks that may affect walk-away point.DataOn top of the cost savings estimates developed by financial analysts and Can-Do’s engineers, Mountain Mining Canada Ltd. provided 2005 and 2006 internal budgets for the reclamation and closure project of South Face Mine. The budget involved year by year cash flows up to 2026.Table 1 below, gives the summary of the budgets.Table 1MMCL Budget for Closure and Reclamation ofSouth Face Mine (000)Major Category2006Budget2005 BudgetDifferenceDirect Costs6.0) Water Treatment$3,391$1,583$1,8079.0) Tailing Storage Facility Reclamation$575$345$23011.0) Facilities Demolition$2,821$2,303$51712.0) Facilities/Equipment Disposition and/or Salvage$218$347-$12914.0) Post Closure Monitoring Costs$1,319$320$999Direct Total$8,322$4,898$3,424Indirect Costs15.0) Socio-Economic Costs$19,500$15,500$4,00016.0) Consultant Services$388$225$16318.0) Owners Management (post closure)$4,075$1,600$2,47522.0) Bonding Cost$270$90$18023.0) Contracts/Commitments/Royalties$1,250$705$54524.0) Taxes (Land, Buildings etc…)$2,700$4,800-$2,10030.0) Contingency$1,760$1,021$739Indirect Total$29,943$23,941$6,002Salvage Value-$5,270-$5,511$240Grand Total$32,994$23,329$9,666
MEMORANDUM5The totals of the budget do not show the time value of the money, They include contingency allowance of 15%.Both 2005 and 2006 cost estimates are from 01/01/06 onwards. The year-year vitality of the estimates is of great concern in the reliability of the projections.The budget of 2006 involves items such as employee housing buy-back costs and severance that cannot be transferred in the event when Can-Do buys the South Face Mine. In addition, Can-Do would be able to make other costs internal and this would cost the amounts budgeted by Mountain Mining Canada Ltd. The budget above was adjusted so as to include these itemsinto account.Analysis: Methods & AssumptionsTable 2 below illustrates the projections of the value of South FACE Mine to Can-Do in different scenarios. Cash flows given by the mountain Mining Canada Ltd. and the costs savings estimated by Can-Do engineers do not consider inflation, thus inflation was at rates show in table 2. The value of South Face mine is computed as the variation between discounted estimates and inflated cost savings and cash flows.