Question 3 (30 marks). Valuing an Abandoned Coking Coal Mine You are assessing the value of the right to develop an abandoned coking coal mine in New Zealand, which still have significant deposits. The right allows you to develop the mine within the next five years only. 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 NZS100 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 5% per year. The mining right expires in 10 years. The price of coking coal per tonnes is NZDS55 at the end of year 1 and the average cash production cost is expected to be around NZDS50 per tonne at the end of year 1. You can ignore tax and calculate project cash flows as (sale price-cash cost) production. The production cost is expected to grow at 3% per year, once initiated. The annualised standard deviation in asset values of comparable coking companies is 30% (in New Zealand dollar terms), and the 5-year New Zealand riskless bond yield is estimated to be 3% pa. Requirements: (1) 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 (10 marks) (2) Estimate the value of the mine based on the Black Scholes Option Pricing Model. Show (15 marks) (3) How would you explain the difference between the two values from (1) and (2) above? valuation model as Appendix 3(1) your detailed steps and result in the main text. Answer the question in the main text. (word limit: 60)