This management consulting case study is an investment decision with a political twist. A bank is weighing up a gold mine in Peru, and the numbers look attractive. The real test is whether the candidate can see the risks that sit around the numbers.
Case Scenario
A significant financial organisation called MyBank is buying an undeveloped gold mine in Peru. The mine would generate 150,000 ounces of gold per year if it was built. For around $50 million, the mine could be constructed within a year.
MyBank has considered two possibilities. The first entails permanently increasing its fixed expenses by $25 million in order to give its personnel very high salaries. In the second scenario, a 40% interest would be sold to local investors for $100 million, which would bring the seizure risk down to 10%.
The Risks Worth Raising
The significant risks in this investment include political and regulatory risk. Peru already seized this mine once, and there is a chance it could happen again. There is also brand risk: MyBank is leveraging a foreign government's weaknesses in a way that might attract criticism. If the price of gold falls by half, MyBank's investment becomes unprofitable. El Niño could devastate the mine.
MyBank should also consider whether it has a suitable personnel pipeline in place to reach annual output targets. Infrastructure and location matter too: MyBank has to think about whether it is actually able to move the gold out of Peru.
Conclusion
This Peruvian gold mine presents significant potential for MyBank because its estimated return will be much higher than the portfolio average of 10%. The mine may generate $500 million in earnings every four years once it is running. To prevent the mine from being taken again, it will be essential to build relationships with the Peruvian administration.
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