Option $2$: New Mine

Ausome has been drilling and doing geochemical sampling across its sites in Northern Canada and one

site has repeatedly tested positive for the presence of gold. Preliminary estimates suggest that the

potential extraction from the site in troy ounces over the next $5$ years is as follows:

Mining operations will require $$20M$ net working capital to start and additional net working capital

investments each year equal to $10\%$ of the projected revenue increase for the following year. A full

recovery of NWC is expected at the end of year $5.$ Total fixed costs are $$100M$ per year, variable

production costs are $$2,050$ per Troy Ounce, and gold prices are currently $$2,750$ per troy ounce. The

gold price is anticipated to rise by $6$ percent per year starting in year $2,$ and variable costs are expected

to grow at $5$ percent per year starting in year $2.$

There is an enormous amount of heavy machinery that needs to be transported to the mine site. The

heavy equipment will cost $$35M$ and shipping will cost another $5M.$ The equipment falls into Class $41$

for CCA purposes $(25\%)$ and the marginal tax rate is still $35\%.$ The equipment is expected to have a

value of $$9M$ at the end of the $5-$year project.

Total expenses for the drilling and geochemical sampling Ausome completed on the site last year cost

a total of $$500,000.$

Part $3$:

a$.$ What is the NPV of the new mine?

b$.$ What is the IRR of the new mine?

c$.$ If the price of gold, variable costs, and two growth rates are considered to be accurate within

$15\%,$ what are the best$-$ and worst$-$case scenarios? Assume fixed costs will not vary.

d$.$ Which of the $4$ variables is your NPV most sensitive to$,$ and what are some suggestions you

might have for Ausome to protect itself?

e$.$ Does this project appear to be a good investment to grow Ausome?

f$.$ Would you recommend AuG focus on growth through acquisition of NuGold or through the

startup of a new mine site? Why?