National Mining Competition:

Academic Case 2015

Strengthening relationships through responsible development.

KPMG is proud to be the Academic Sponsor for the 4th Annual World Mining Competition.
Our Saskatoon team spent many hours sharing their knowledge to assist with this
academic case competition. We hope students leave with a better understanding of
the complexities in the global mining industry.
Have fun and good luck!

Table of contents
Case Overview
World Mining Corporation Company Background
Aurora Exploration Company Information
Mining Operation
Milling Operation
External Environment
Closing
Appendix A: World Mining Corporation Financial
Statements
Appendix B: Aurora Exploration Financial Statements
Appendix C: Mining operations
Appendix D: Milling Costs
Appendix E: Topographic Map
Appendix F: Other Information

1
2
4
5
6
8
9
10
13
15
16
17
19

Case Overview
You are about to enter a meeting with World Mining Corporation executives. As
a consultant they have requested that you develop a recommendation
regarding the potential purchase of Aurora Exploration. The Aurora Exploration
founders are former employees of World Mining Corporation; as such they
bring much of the same organizational culture and goals as World Mining
Corporation to their company.
World Mining Corporation executives have asked you to provide an analysis of
Aurora Explorations business. World Mining Corporation is considering whether
Aurora Exploration would make a suitable acquisition given the current
operations challenges, benefits, and their fit with World Mining Corporation
organizational culture.
You have just received this request from World Mining Corporation executives
and they are expecting an update by your meeting time on Sunday. They are
expecting that your presentation be delivered based on the following
information and any additional research you conduct.

World Mining Competition: Academic Case / page 1

World Mining Corporation

Company Background

World Mining Competition: Academic Case / page 2

History
World Mining Corporation is a large well-developed mining organization
spanning a number of continents with 8 production operations in Iron Ore [3],
Copper [4], and Manganese [1]. World Mining Corporation has been in
operation since 1975. Recently, the mining industry has experienced
challenges due to volatile and unpredictable commodity prices, rising costs,
and regulatory uncertainty.
World Mining Corporation specializes in mining operations and has decided to
make the decision based on current and projected industry outlooks to
diversify its holdings in order to maximize shareholder returns. They are not
concerned with diversifying geographically, as their current mines are located
in relatively stable political and well developed economic markets. They are
interested in further diversification of the minerals that they extract. They have
looked at a number of minerals and precious metals including gold, potash and
lithium. This would add variety to the current operations and is intended to
reduce the financial impact that a slump in any one products prices may have
on the overall company. World Mining Corporation is also interested in
expanding its operations vertically. Their executives believe that vertically
integrated operations could lead to increased profits down the road. World
Mining Corporation does not currently have any milling operations in its
portfolio.
The slump in the mining environment has caused the value of many mines to
decrease in value. This decrease in value has some people in the industry
concerned about the long term sustainability of mining, but World Mining
Corporation executives see the decrease in mine value as an opportunity to
purchase for the long term. World Mining Corporation has confidence in the
long term viability of the industry and the ability for their current operations to
survive the short term price declines.

World Mining Competition: Academic Case / page 3

Social and Environmental Issues

The mining industry is heavily regulated and there are numerous stakeholders
concerned with the environmental and social impacts of mining.
Social and environmental issues are a concern of World Mining Corporation.
Even though they prioritize social impacts, such as mine safety, community
involvement, and environmental impacts of their operations, they have
struggled to maintain and exemplify the values they believe are important.
Under new management, World Mining Corporation has set a new course to
rectify past mistakes. The new course of action World Mining Corporation has
set out on has had significant impacts. They have significantly improved their
environmental impact, and by preaching safety in all mines and investing in
the community they have reshaped their global image. Much of this comes
through significant investment and leadership by example that exemplifies the
values of business integrity, environmental sustainability, and community
involvement that World Mining Corporation cherishes. Leadership by example
from the executive team has resulted in strong employee buy in and dedication
to the organization and its culture.

World Mining Competition: Academic Case / page 4

Capital Structure and Financial Information

World Mining Corporations executives are open to suggestions on their optimal
capital structure. Company financial statements of World Mining Corporation
and Aurora Exploration can be found in Appendix A and B.
World Mining Corporation could potentially issue debt at a rate of 4.3% given
its credit rating. World Mining Corporation could also potentially issue equity to
raise cash for the purchase.
To purchase Aurora Exploration, World Mining Corporation could offer cash,
raised from methods above or held on the balance sheet, or equity, or a
combination of cash and equity. World Mining Corporation executives would
like to know the impact the purchase would have on World Mining
Corporations financial statements and key ratios as a result of the purchase.
World Mining Corporation is traded on the New York Stock Exchange under the
ticker (NYSE:WMC). This past year, World Mining Corporation had to cut back
its dividends to preserve cash. The markets perceived the reduction to
dividends as a signal from management that times are getting tougher, and
the decision is widely believed to have contributed to the suppressed stock
price.

World Mining Competition: Academic Case / page 5

Aurora Exploration Company

Information

World Mining Competition: Academic Case / page 6

World Mining Competition: Academic Case / page 7

History
Aurora Exploration was founded by two geologists. Aurora Exploration, an
exploration company, has completed a feasibility study for a large Lithium
mine in Aurora. Aurora Exploration forecasts that the mine will be profitable,
despite the recent economic recession that hit most of the world, most notably
the two of the largest markets for lithium; United States of America and
Europe.
Aurora Exploration is headquartered out of Lyra, even though its operations are
in Aurora. The resource property and headquarters are located approximately
800 kilometres away, but located in the same country. The two founders and
company executives make regular trips to the resource property and
surrounding communities to survey the properties and establish relationships
with the local community. Aurora Exploration completed a feasibility study on
the mine. As an exploration company, they intend to sell the property based on
the feasibility study.
Aurora Exploration Resources is a publically traded company on the Toronto
Venture Stock Exchange (TSXV:AUE). They were recently listed three years ago,
and have seen their stock price grow as a result of the property and drilling
results.

World Mining Competition: Academic Case / page 8

Location
Aurora Explorations resource property is located in Aurora and headquarters in
Lyra, the largest major centre near the property. Characterized by mainly small
rural communities and sparse forest, the location features mild temperatures
ranging from -10 degrees Celsius to 20 degrees Celsius and heavy rainfall for a
quarter of the year. The exploration site has minimal infrastructure due to its
remote location, but a developed economy based on manufacturing exists
throughout other parts of the country. Other mining companies have developed
operations in the country, but none are in close proximity to the potential
reserves.
The government system is relatively stable, but recent volatility in the
commodity market and rising environmental concerns amongst citizens could
result in changing conditions. Expectations of government regulation changes
and their impact are discussed below. The current taxation system is a basic
structure that applies a 35% income tax on EBIT and 2% royalties on market
value of minerals produced. The risk free rate in Aurora is expected to be 4%
and the interest rate is expected to be 5%.
World Mining Corporation executives realize the challenges of developing a
mine in a remote area. They have experience developing and operating mines
in these conditions, but have asked for an overview of the impact that
operating in such a location/climate would have on the resource property.

World Mining Competition: Academic Case / page 9

Mining Operation

World Mining Competition: Academic Case / page 10

Mining Operation
World Mining Corporation and Aurora Exploration executives see the demand
of lithium increasing as it plays an increasingly important role in modern
society. Lithium has a variety of uses, but a primary driver for demand is
increased use in high-capacity batteries.
The current international outlook on commodity prices is concerning. The
recent price volatility and global economic concerns has tested the mining
industry. The demand for lithium is expected to increase over the next ten
years, but prices will remain volatile due to changing uses for lithium and
supply dynamics that may not change as quickly as demand. Prices for lithium
can be found in Appendix C.
Aurora Explorations exploration operates in a forested region of Aurora. Aurora
Exploration has found lithium reserves in a body of spodumene. The feasibility
study dictates that the mining operations should be an open pit mine, the
lithium is found at ground level, with a 25 degree dip, 6 degree strike NNE, and
in tabular mineral deposit formation. Proven, probable, and potential reserves
can be found in Appendix C. Reserves can be mined in the form of Li2C03. The
Li2CO3 can be refined to a purity level of 99.9%, and as such is a quality grade
of lithium, but are of a 1.25% in-situ grade. Small traces of Tantalum, TA2O5,
and quartz can also be found in the spodumene body. Much of the ground
surrounding the ore body consists of pegmatite.
At full capacity World Mining Corporation expects that they will be able to
extract 3,030 tonnes of earth per hour. Assume that the mill and mine can
operate 12 hours per day for 300 days per year. The mine is expected to last
15 years.
A number of considerations need to be made in the development of a resource
property in this location. They could include, but are not limited to, logistics,
infrastructure, and operating through rain and snow. This precipitation will
cause many issues for the mining operations including safety regulations and
infrastructure maintenance.
World Mining Corporation executives want to know about the resource
propertys viability and potential methods for mining of lithium. A plan of
action for implementation of a mine would benefit World Mining Corporation,
and raise their confidence surrounding the resource properties impact on
revenues and expenses. An overview of the potential uses for this grade of
lithium and the demand for those particular products was also requested by
World Mining Corporation executives.

World Mining Competition: Academic Case / page 11

Milling Operation

World Mining Competition: Academic Case / page 12

Milling Operation
The milling operation is important to the success of the project and should
provide the best return for the mined product. One of the questions being
considered by World Mining Corporation is whether selling the raw lithium
product to an operating mill provide a better return than developing a mill
close to the resource property? World Mining Corporation assumes that milling
the product would provide a greater return than selling the raw product, but
wants to know if this assumption holds true. The closest mill that can handle
lithium is 750 km away. If WMC is able to mill the raw product, transportation
costs for 750 km will still need to be considered. The cost of different sized
plants, per quantity of inputs per day the mill can handle, have been outlined
by Aurora Exploration engineers in foresight. The mill size should be
considered in relation to the amount of lithium mined per day. Each mill will
convert the raw product into a high grade (99.9% purity) of lithium. This is the
highest expected grade of the lithium that can be mined.
World Mining Corporation has experience in downstream production in other
minerals. They are interested in the NPV analysis that they are asking you to
conduct from the information in Appendix D and any other additional
information found. Milling processes for lithium that could be considered are:
1) physical separation;
2) electrometallurgy;
3) hydrometallurgy; or
4) pyrometallurgy
Each of these milling processes could add value to the product created by
Aurora Exploration. The recovery rates of milling are 90%. World Mining
Corporation wants to know if the additional milling processes would create
sufficient value for the cost.

World Mining Competition: Academic Case / page 13

Mine Viability Concerns

The increase in precipitation in the past has raised some concerns
regarding the operations, safety and environmental impact of a mine.
Management is unsure about the impact this could have on mine viability.
The rainfall is a major issue to mine viability because the natural drainage
system crosses over the proposed mine site. The feasibility study dictates
that an open pit mine is required and as such the drainage system will
cause problems for mining operations. This drainage system is fed by
precipitation that falls in the surrounding watershed. Appendix E highlights
a topographic map that shows the proposed mining area. One of the
proposed options for diverting the stream include a low elevation dam to
deal with the water flow to control the down-stream flow of the drainage
system. The downstream tail race will have to be diverted to avoid
intersection of the mining area. Another option for diverting the water
stream would be to excavate a drainage ditch around the mining area.
In order for operations to begin production, the stream would need to be
diverted. Delays caused by inflows would render the operations
unprofitable. Aurora Exploration has an agreement in principle with the
government that is expected to extend to the acquiring firm. The
incumbent government has a history of allowing these types of projects.
World Mining Corporation executives would like your recommendation
surrounding the need for diverting the natural drainage system.

World Mining Competition: Academic Case / page 14

External Environment

World Mining Competition: Academic Case / page 15

Stakeholders
Skilled labour is a concern in Lyra. Through a joint venture with a nearby
technical school, Aurora Exploration has a plan to help provide education for
many of the citizens of the surrounding community. Aurora Exploration does
not predict that they will experience a labour shortage of skilled or unskilled
labour in the near future because of their education policy.
Aurora Exploration will be a major employer of the three communities that it
has had a significant impact on both directly and indirectly. The three
communities should see an influx of additional business and population
increases that provide a higher quality of life for all residents.
Infrastructure for Aurora Explorations operation will be expensive to maintain.
They require transport [railway and road] and power [highline power poles
connecting to existing grids] infrastructure that they maintain each year.
Infrastructure costs are outlined in Appendix C.

World Mining Competition: Academic Case / page 16

Government Regulation
Aurora Exploration is concerned about the possibility of increasing tax or
royalty rates. An increase in tax rates would have a significant impact on
profitability and sustainability of the resource property. Other areas of the
developed world have recently seen similar tax or royalty fee increases to
varying degrees. Aurora Exploration expects that the current governing body
will raise royalty rates on produced quantities by 0.3% from its current level of
2%.

World Mining Competition: Academic Case / page 17

World Mining Competition: Academic Case / page 18

Closing
World Mining Corporations management has requested that financial
projections and a valuation of the mining operation be undertaken before
decisions can be made. Although engineering consultants have already
estimated capital costs of the various projects, your task is to put the capital
costs into a useful financial evaluation of the project and add in any other
items that need to be taken into account during financial evaluations. Also,
take into account the different types of financing options available, and the
considerations, for World Mining Corporation and Aurora Exploration, when
using cash, equity, or debt financing.
Furthermore, commodity prices prepared by management reflect current
estimates, but would obviously be subject to fluctuation going forward.
Management is open to your recommendations on where the commodity prices
might be headed and is interested in how you might handle expected
commodity price fluctuations in the analysis of the project options.
World Mining Corporation is considering entering into a diversification strategy,
but is a diversification and complication of the value stream adding more
benefit to World Mining Corporation?
As you enter the meeting with World Mining Corporation executives in addition
to considering shareholder returns you are also ensuring that you consider the
environmental, social, and economic impact for both the community and World
Mining Corporation.
Your checklist considered both the engineering and business aspects of the
potential purchase to ensure that it would create long term, sustainable value
for World Mining Corporation.

World Mining Competition: Academic Case / page 19

INCOME STATEMENT

CURRENT YEAR

PRIOR YEAR

1,712,050,000

2,107,851,003

Mine and Tailings

368,698,219

387,922,374

Service

194,122,351

222,564,400

Camp

280,477,194

333,815,347

Technical Services

199,212,557

212,301,840

Administration

15,141,092

20,100,890

Transportation

228,223,216

252,866,543

$1,285,874,629

1,429,571,394

Gross profit

426,175,371

678,279,609

Depreciation, Depletion and Reclamation

102,295,366

102,295,366

2,204,000

3,634,088

321,676,005

572,350,155

46,362,525

48,006,825

112,586,602

200,322,554

162,726,878

324,020,776

Revenue
Costs of sales:

Total cost of sales

Marketing
Earnings Before Interest and Taxes
Interest Expense
Income Taxes
Net income

Appendix A: World Mining

Corporation Financial Statements

World Mining Competition: Academic Case / page 20

BALANCE SHEET
Cash and Cash Equivalents
AR
Inventories
Prepaid Expenses
Other
Current Assets
Property Plant and Equipment
Intangible Assets
Total Assets
Accounts Payable

CURRENT YEAR

PRIOR YEAR

370,277,110

275,425,840

40,015,310

42,658,723

125,365,680

142,461,000

9,043,165

8,953,629

14,675,255

14,529,955

559,376,520

484,029,147

2,537,757,504

2,455,394,256

1,297,648

1,177,539

3,098,431,672

2,940,600,942

12,839,218

12,988,650

Accrued Expenses

20,533,440

20,639,000

Current Portion of Long Term Debt

32,886,000

32,886,000

Current Liabilities

66,258,658

66,513,650

Long Term Debt

894,364,500

Provision for Reclamation

927,250,500

215,634,843

101,890,000

Total Liabilities

1,176,258,001

1,095,654,150

Share Capital

1,303,482,000

1,303,482,000

618,691,671

541,464,792

3,098,431,672

2,940,600,942

Retained Earnings
Total Liabilities and Equity

World Mining Competition: Academic Case / page 21

CASH FLOW

CURRENT YEAR

PRIOR YEAR

Net Income

162,726,878

324,020,776

Add DDR

102,295,366

102,295,366

43,831,200

44,680,522

2,643,413

2,100,200

17,095,320

11,800,000

(145,300)

(652,300)

(89,536)

(90,000)

Accounts Payable

(149,432)

100,537

Accrued Expenses

(105,560)

(550,600)

328,102,349

483,704,501

(114,744,970)

(136,651,789)

(120,109)

250,872

(114,865,079)

(136,400,917)

Debt Repayment

(32,886,000)

(32,886,000)

Dividends

(85,500,000)

(165,500,000)

Cash from Financing Activities

(118,386,000)

(198,386,000)

Net Change in Cash

94,851,270

148,917,584

Other Non-cash Items

Changes in Working Capital
AR
Inventories
Other
Prepaids

Cash from Operating Activities

Capital Expenditures
Other Assets and Intangible Assets
Cash from Investing Activities

Cash at Beginning of Period

275,425,840

Cash at End of Period

370,277,110

126,508,256
275,425,840

World Mining Competition: Academic Case / page 22

BALANCE SHEET

CURRENT YEAR

INCOME

CU

STATEME

RR

RI

NT

EN

YE

YE

AR

PRIOR YEAR

Appendix B: Aurora Exploration

Financial Statements
R

Exploration

CASH FLOW

8,4

8,

81,

23

38

4,

35

CURRENT YEAR

PRIOR YEAR

(12,773,996)

(12,407,861)

150,654

150,654

ion
Accounts Receivable 0

4,006

251,980

Consultant
22
Inventories
s Fee
6,6
Accounts Payable
00

22

9,665

86,532

2,817

322,000

Accrued Expenses

3,179

192,050

Net Income
General
60
Add DDR
and
3,5
Changes
in Working
Administrat
80

58
6,
Capital
00

0,
00

Depreciatio
15 15 Activities
Cash
from Operating

(12,603,674)

(11,404,645)

n
0,6
0,
Capital Expenditures
54 65

(849,999)

(1,250,600)

Other Assets and Intangible

Assets
4

(100,200)

(207,962)

Cash
from Investing
Earnings
(9, (9, Activities

(950,199)

(1,458,562)

(13,553,874)

(12,863,207)

20,394,793

33,258,000

6,840,919

20,394,793

Before
46 19
Net Change in Cash
Interest
2,2
1,
Cash
at Beginning
Period
and Taxes
19) of00
8)
Cash at End of Period
Income

(3,

(3,

Taxes

31

21

1,7

6,

77)

85
3)

Net

(1

(1

income

2,

2,

77

40

3,

7,

99

86

6)

1)

World Mining Competition: Academic Case / page 23

Appendix C: Mining operations

World Mining Competition: Academic Case / page 24

Lithium prices
Grade

Price ($/t)

99.99%

$15,250

99.90%

$14,000

99.50%

$12,000

99.0% - 99.5%

$ 9,000

**Assume lithium prices are certain for next year

World Mining Competition: Academic Case / page 25

Reserves and Resources

Reserves and Resources
Proven (Tonnes)

148,200

Probable (Tonnes)

63,600

Possible (Tonnes)

10,500

Average grade (in-situ)

1.25%

World Mining Competition: Academic Case / page 26

Infrastructure Requirements
Infrastructure Requirements Cost
Power

35,000,000

Roads

28,520,600

Railways

15,200,384

Mine Development
Mine Annual Operation

350,235,000
65,000,000

World Mining Competition: Academic Case / page 27

Appendix D: Milling Costs

Milling Development ($)
2000T

3000T

4000T

5000T

99.99%

111,153,958

111,784,750

112,261,700

112,994,040

99.90%

83,365,469

83,838,563

84,196,275

84,745,530

99.50%

62,524,102

62,878,923

63,147,206

63,559,148

<99.0%

46,893,076

47,159,191

47,360,405

47,669,361

Milling Operating Costs ($/Tonne/Hour)

2000T

3000T

4000T

5000T

99.99%

125

139

141

145

99.90%

125

130

131

133

99.50%

118

123

125

128

<99.0%

115

130

132

142

Summary of Mill Costs

99.99%

99.90%

99.50%

<99.0%

2000T

3000T

4000T

5000T

1,363,500,00

1,516,212,00

1,538,028,00

1,581,660,00

1,363,500,00

1,418,040,00

1,428,948,00

1,450,764,00

1,287,144,00

1,341,684,00

1,363,500,00

1,396,224,00

1,254,420,00

1,418,040,00

1,439,856,00

1,548,936,00

Cost of Transportation for Product

Quote ($/tonne/km)
Price for Raw Product ($/t)

3.04
2,280

World Mining Competition: Academic Case / page 28

Appendix E: Topographic Map

World Mining Competition: Academic Case / page 29

World Mining Competition: Academic Case / page 18

Appendix F: Other Information

World Mining
Corporation

Aurora
Exploration

Market Capitalization ($M)

1,956

112

Stock Price ($)

52.94

12.02

1.28

1.08

Unlevered Beta

kpmg.ca/mining
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