Advanced Financial Management: Valuing an Abandoned Coking Coal Mine.

You are assessing the value of an abandoned coking coal mine in New Zealand, which still have significant deposits. A mining expert’s report suggests that there might be 10 million tonnes of coking coal in the mine still, and that the cost of reopening the mine will be NZD$100 million.Assume that, if the owner decides to develop this mine, the NZ$100 million will be spent at year 0, and all the operational cash flows occur at the end of each year from year 1 to year 10. The annual production is estimated to be 1 million tonnes, and the nominal price of coking coal is expected to increase by 4% per year. (Hint: assume the asset to be a dividend paying stock with a dividend yield of 10%). The price of coking coal per tonnes is NZD$55 and the average cash production cost is expected to be around NZD$50 per tonne at the end of year 1. You can ignore tax and calculate project cash flows as The production cost is expected to grow at 4% per year, once initiated. The annualised standard deviation in asset values of comparable coking companies is 30% (in New Zealand dollar terms), and the 10-yearNew Zealand riskless bond yield is estimated to be 6% p.a..

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• Estimate the value of the mine using static NPV analysis. Assume that all cash flows occur at the year end and a Weighted Average Cost of Capital (WACC) of 10%.Show your valuation model as Appendix 3(1) (10 marks)
• Estimate the value of the mine based on the Black Scholes Option Pricing Model. Show your detailed steps and result in the main text (15 marks)
• How would you explain the difference between the two values from (1) and (2) above? Answer the question in the main text. (word limit: 60)  (5 marks)