Question 1 CASE STUDY: Proposed Gold Mine in Namibia February 2, 2021: RBM's firm acquires the rights to an ore body in the Namibian Oshana Region. The firm is considering developing a new mine there, and RBM is responsible for proposing a project plan to the board in October. The mine will take a few years to reach full production, and there is much uncertainty as to the price of gold when that happens. RBM includes in his proposal a history of gold prices (Figure1 below.) July 20, 2021: RBM meets with Bruce, a mining engineer with two decades of experience in South African gold mines, and Shirley, a geologist who, a few years back, did exploratory work on gold deposits in the Namibian Oshana region. They discuss known facts about the ore body, the likelihood of unforeseen geological phenomena that could jeopardize mine development, production figures that might be achieved, and production costs and technical problems that might be experienced in extracting gold from such ore. A quick calculation shows that 300 000 ounces of gold per year at US$1 500 per ounce would be very lucrative, but a figure of 150 000 ounces at US$1 000 per ounce, 3 years from now, would lead to large losses that could ruin the company. Current information about the ore body is inadequate, however, and it will be necessary to drill exploration holes to learn more about the general geology of the area. RBM summarizes: To the best of our knowledge, we could produce anywhere between 150 000 and 300 000 ounces a year. The capital cost for developing the shaft will be US $160 million to $260 million, and annual operational costs could be US $80 million to $120 million. Exploration to provide information on the ore body would require drilling 200 exploration holes at a cost of somewhere between US $1.25 million and $1.75 million. Rock samples from these holes will be analysed in the NUST laboratory to determine the gold content. RBM instructs Shirley to review the data from her previous exploration work and prepare a report of her recommendations concerning the future exploration. She is authorized to spend no more than US $50 000 on her "desktop exercise". They agree that, should the exploration holes yield good results, a "demonstration shaft" will be sunk to haul out a sample of 50 000 tons of ore to be processed to extract gold. Results from this demo would increase confidence about the amount of gold present, reduce uncertainty about processing the ore, and provide a good indication of potential yields. They estimate that the demo shaft and analysis would cost US $10 million, which, however, could be deducted from the cost of the full-fledged mine should it go ahead. Only if these results are positive and the gold price is relatively high and stable as of that stage, would the development of a full-fledged shaft be authorized.