New Earth Mining

INTRODUCTION

This memo addresses the feasibility of the NESA project and provides a brief overview of: our financial condition, the iron ore market, major risks associated with this project, estimated project NPV, and the benefits of the financing packages. From our analysis, the NPV of this project is $137.36M - $104.31M. While there is risk associated with venturing into an unfamiliar market in a politically volatile country, the debt financing packages mitigate this risk. Thus, we believe that the project should be accepted.

FINANCIAL CONDITION

We experienced growth in earnings from $98M in 2002 to $1.84B in 2011, due to improved operating margins (Appendix 1). The improvements in ROE and ROA have outpaced our competitors, implying that we are getting higher returns for each dollar invested in shareholder’s equity and assets. Although we have a more aggressive debt strategy, our D/E ratio never exceeded 50% from 2002 to 2011. Despite the slight 4% decrease in our cash and current ratios, their values are still well above one. We are still in a good financial position as we have accumulated a lot of cash and our debt is being used effectively to take advantage of investment opportunities. Therefore, we are in an excellent position to take on new projects.

NEW INVESTMENT OPPORTUNITY AND ASSOCIATED RISKS

The iron ore investment in South Africa is an attractive opportunity since it allows us to diversify our operations and lessen our dependence on unsustainable gold prices. With the price of iron increasing and high demand for the commodity, entering the iron industry has high potential for returns. Demand from the top importers of iron consisting of China, Japan and South Korea, is expected to continue increasing as crude steel production is expected to grow more than 35% over the next 10 years. By partnering with these steel companies, we can guarantee all of the produced iron to them. Moreover, with iron ore located near the large Kalahari manganese field, existing facilities have access to resources via export ports.

The largest risk of taking on this project is South Africa’s unstable and corrupt political system. Strikes and violence can affect NESA’s bottom line. The country's president also wants to add a mining tax and have a greater state intervention in this industry. This would decrease our profit margins. The South African government might also nationalize natural resources operations which could result in them taking over our mine. There are also economical risks with this project. The variability in discount rates may cause the iron ore to be worth less than the company originally anticipated. A 1% increase in the discount rate will decrease the NPV by at least 10%, dropping as low as 70%. The geological facts surrounding this project could be incorrect with Drexel Corp’s assessment of 60%