Bankable Feasibility Study for Vega Resources

This case concerns the preparation of a bankable feasibility study (BFS) to support a proposed investment by Vega Resources in a silica sands project in Western Australia. It assumes familiarity with the basic tools of project evaluation - an understanding of cash flows, time value of money and the selection of an appropriate discount rate - and financial analysis. Financial modelling will be performed using Excel.

Preliminary Questions

1 What is meant by the term 'non-recourse finance' in relation to project financing? Why is this particular financing method employed?

2 A project lender will typically insist that the term of any project debt finance is less than the project life. Why?

3 Estimate the project's weighted average selling price per tonne, sales revenue and cash operating costs (in A$ millions) in year 1.

4 Complete the EXCEL spreadsheet model Vega Resources - Preliminary Analysis to evaluate the economic viability of the silica sands project. You should assume the corporate tax rate is 30% and that Vega Resources has estimated the project cost of capital at 15%. Be prepared to present your modelling work in class.

5 Assume that a project lender is willing to provide a $20 million loan with a five-year term at an interest rate of 10% p.a. The principal of the loan is repayable in five equal end-of-year instalments and interest is payable annually in arrears. Can the project satisfy these debt servicing requirements?

6 Commodity price risk and exchange rate risk are two obvious risk factors for the project but why do mining companies in Australia often not bother with attempting to hedge these risks?