Mmcl Would Require Us To Bear The Closure And Reclamation Costs Accounting Essay

Executive Summary
The strategic location of the South Face Mine, owned by Mountain Mining Canada Ltd (MMCL), catches the attention of Can-Do to make an offer for purchasing the mine. If our company successfully acquires it, the combination of better surface logistics and optimal location of new drift mines could provide an annual cost saving of up to $1.5 million for 20 years. However, MMCL has closed the mine and currently been spending on closure and reclamation of it; undoubtedly MMCL would like to transfer those costs to us.
The purpose of this memorandum is to determine the walk-away point, which is the highest amount Can-Do would agree to offer in the negotiation with MMCL, with the use of data from the management budget provided by MMCL, the discounted cash flow model and sensitivity tests on various assumptions.
Given the data in the MMCL management budget with removal of costs which are not transferred to Can-Do or can be internalized  , and assuming a 6% interest rate for discounting, the 15% contingency allowance used in MMCL implies an inflation rate of 2.55%.
Having studied various assumptions, the sensitivity tests indicate the variance of short-term duration is the most important risk underlying as a 1-year extension of short-term costs reduces the value of acquisition by $6.6 million from $15.5 million to $8.9 million (58% of original value). A 2-year extension further reduces the value by 6.4 million to $2.5 million (16% of original value).  

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The recommended walk-away point would be $14 million, a value lower than the net values of acquisition calculated in most sensitivity tests excluding those with respect to short-term duration and estimated cost saving. It also means that an efficient cost control should be performed to avoid an extension of short-term cost and a failure to realize the estimated cost saving.
It is also worth noting that there are large discrepancies of cost items between the 2006 and 2005 budgets. A detailed review on financial data is suggested so as to find out any hidden problems or risks.
Introduction
The purchase of the South Face Mine, currently owned by Mountain Mining Canada Limited (MMCL), can provide Can-Do a very large reduction in operating cost of North Fork Mine, located adjacent to South Face Mine, by an estimated amount up to $1.5 million annually for the next 20 years, attributed to the optimal location of new drift mines and the improved logistics.
However, it is expected that MMCL would require us to bear the closure and reclamation costs. Therefore, the net value of the acquisition is the value of cost saving net of the value of those additional costs.
By considering the data provided and computing the net value of acquisition, it comes up with the walk-away point, which is critical and crucial to our negotiation with MMCL. The remaining parts of this memorandum explain the determination of the walk-away point. In particular, the purpose of this study is to:
Review the financial data provided
Do sensitivity tests for assumptions with respect to the closure and reclamation costs
Set a reasonable walk-away point
Identify other possible risks for the determination of the walk-away point
Data
Source of Data
MMCL has provided the 2005 and 2006 management budgets for the closure and reclamation costs of South Face Mine. The following table summarizes the cost projected from 2006 onwards:
Item
06 Budget ($’000)
05 Budget ($’000)
Diff. ($’000)
Diff. (in %)
Direct Cost
6.0) Water Treatment
3,391
1,583
1,807
114.15%
9.0) Tailing Storage Facility Reclamation
575
345
230
66.67%
11.0) Facilities Demolition
2,821
2,303
517
22.47%
12.0) Facilities/Equipment Disposition and/or Salvage
218
347
(129)
-37.27%
13.0) Inventory Disposition
(5,270)
(5,511)
240
-4.36%
14.0) Post Closure Monitoring Costs
1,319
320
999
312.03%
Total Direct Cost
3,052
(613)
3,664
-598.21%
Indirect Cost
15.0) Socio-Economic Costs
19,500
15,500
4,000
25.81%
16.0) Consultant Services
388
225
163
72.22%
18.0) Owners Management (post closure)
4,075
1,600
2,475
154.69%
22.0) Bonding Cost
270
90
180
200.00%
23.0) Contracts/Commitments/Royalties
1,250
705
545
77.30%
24.0) Taxes (Land, Buildings etc…)
2,700
4,800
(2,100)
-43.75%
30.0) Contingency*
1,760
1,021
739
72.40%
Total Indirect Cost
29,943
23,941
6,002
25.07%
Total Cost
32,994
23,329
9,666
41.43%
* Note: The value items above do not reflect any time value; instead the indirect cost “Contingency” implicitly bears it.
Table 1: Management Budget of Closure/Reclamation Plan Cost from 2006 onwards
There are different types of costs, including short-term costs which will be incurred within five years and long-term costs which will be incurred during the whole reclamation period. There are also salvage values of equipments remaining on site (i.e. Inventory Disposition), and they will accrue to Can-Do. Moreover, MMCL has included a 15% contingency allowance in its calculation.
From the table above, it is clearly observed that large discrepancies exist for most cost items between 2006 and 2005 budget, and this indicates a deficiency of the contingency allowance in 2005 to cover the adverse development of costs estimated from 2005 to 2006. It concerns us about the accuracy and reliability of the predictions. It is suggested a detailed review of financial data as well as other information related to the situation of the mine be conducted in order to discover any potential problems which may put our company at risk.
Data Adjustment
The data provided is subject to adjustments so as to calculate a more reasonable walk-away point. They include:
Removing costs not to be transferred from MMCL to Can-Do (e.g. severance costs)
Removing costs which could be realized from internalizing them in Can-Do (e.g. inspection costs)
The details of data adjustments are mentioned in the Appendix, and the following table shows the modified budget for South Face Mine from 2006 onwards:
Item
Modified 06 Budget ($’000)
Direct Cost
6.0) Water Treatment
3,391
9.0) Tailing Storage Facility Reclamation
508
11.0) Facilities Demolition
2,821
12.0) Facilities/Equipment Disposition and/or Salvage
218
13.0) Inventory Disposition
(5,270)
14.0) Post Closure Monitoring Costs
1,319
Total Direct Cost
2,985
Indirect Cost
15.0) Socio-Economic Costs

16.0) Consultant Services
388
18.0) Owners Management (post closure)
2,375
22.0) Bonding Cost
270
23.0) Contracts/Commitments/Royalties

24.0) Taxes (Land, Buildings etc…)
2,700
30.0) Contingency*
1,307
Total Indirect Cost
7,040
Total Cost
10,024
Table 2: Modified and Original Budget from 2006 onwards
Analysis: Methods & Assumptions
Contingency Allowance & Inflation Rate
MMCL has included a 15% contingency allowance in its budget while has not considered the time value of cost items. Assuming the allowance is totally for the inflation, the implied inflation rate that is equivalent to the 15% contingency allowance is found to be 2.55% (using the Excel function “goal seek”), after the data adjustment aforementioned.
Sensitivity Tests, Risks & Walk-away Point
To investigate the risks underlying, sensitivity tests have been performed to examine the uncertainties associated with the assumptions of cash flow projections (all with 0% contingency allowance). The table below summarizes the results:
Assumption
Annual Cost Saving
Value ($’000)
Scenario
Short-Term Duration
Long-Term Duration
Inflation Rate*
Discount Rate
Amount ($’000)
% of Base
Cost Saving
Add’l Cost
NPV
Base
Base^
Base^
2.55%
6%
1,500
100%
21,934
7,102
14,832
1
Base + 1yr
Base
2.55%
6%
1,500
100%
21,934
13,614
8,320
2
Base + 2yr
Base
2.55%
6%
1,500
100%
21,934
19,914
2,020
3
Base
Base + 5yr
2.55%
6%
1,500
100%
21,934
7,512
14,422
4
Base
Base
3.00%
6%
1,500
100%
22,823
7,289
15,534
5
Base + 1yr
Base
3.00%
6%
1,500
100%
22,823
13,882
8,941
6
Base + 2yr
Base
3.00%
6%
1,500
100%
22,823
20,288
2,535
7
Base
Base + 5yr
3.00%
6%
1,500
100%
22,823
7,743
15,080
8
Base
Base
4.00%
6%
1,500
100%
24,947
7,724
17,223
9
Base
Base
3.00%
5%
1,500
100%
24,904
7,715
17,189
10
Base
Base
3.00%
7%
1,500
100%
20,994
6,902
14,091
11
Base
Base
3.00%
6%
1,350
90%
20,541
7,289
13,252
12
Base
Base
3.00%
6%
1,200
80%
18,258
7,289
10,970
^ The durations in Scenario Base are the original assumptions provided in MMCL budget.
* The inflation rate of 2.55% used in the Scenario Base and #1-3 comes from the derivation mentioned in the previous part.
Table 3: Sensitivity Tests
The table consists of the net value of the acquisition under different combinations of short-term duration, long-term duration, inflation rate and discount rate (Scenario Base and #1-10). From the table, it shows that under most scenarios the value of acquisition is around $14-15 million. Therefore, it would be appropriate and conservative to set $14 million as the walk-away point.
In addition, an extra sensitivity test on estimated cost saving are conducted (Scenario #11-12). When compared to Scenario #4, it demonstrates that a 10% decrease in cost saving causes the value of acquisition below $14 million. It implies a strong control is needed to monitor that the realized cost saving is close to the estimated one.
As shown in the tables, the short-term duration should be the key risk factor as an increase in it leads to a tremendous decrease in value (by comparing Scenario Base to Scenario #1-2 or Scenario #4 to Scenario #5-6). Can-Do should therefore pay much attention to the extension of short-term cost projections.
Conclusions and Recommendations
Based upon the modified cost budget and assuming a 6% discount rate, a 15% contingency allowance implies an inflation rate of 2.55%. Also, after a study of various assumptions by sensitivity tests, a walk-away point of $14 million will be sufficient for the acquisition of South Face Mine. However, a few issues have to be highlighted:
The large variances between the 2006 and 2005 budget raise concerns of the validity and reliability of the estimated values in the budget.
The implied inflation rate of 2.55% is less than the lower bound of inflation rate projected by our economists.
The net value of acquisition is very responsive to the duration of short-term costs according to the results of sensitivity tests.
The determination of walk-away point is based on the assumption that $1.5 million can be saved annually over 20 years. A slight decrease in it can be enough to cause an overall loss for the acquisition provided that the final purchase price of South Face Mine is close to the walk-away point.
For some costs including water treatment operation/maintenance costs and salaries of accountant/environmental person, they may be internalized to a certain extent; yet they are not removed for the determination of walk-away point due to their specialty. This also provides a relatively conservative walk-away point implicitly.
It is recommended that a detailed investigation should be carried out to verify the estimated costs in the budget as well as to locate any other problems. It is also proposed that an efficient cost control should be established in order to keep the cost be aligned with the prediction if Can-Do successfully purchases the South Face Mine from MMCL.
Appendix: Data Adjustment
Some closure and reclamation costs are removed from the MMCL budget of South Face Mine from 2006 onwards since they can be either removed (not transferred to Can-Do) or internalized. The following table summarizes the data adjustment done:
Direct/Indirect
Major Category
Description
Data Adjustment
Direct
9.0) Tailing Storage Facility Reclamation
Engineering and inspections
Internalized
Indirect
15.0) Socio-Economic Costs
Severance
Not transferred to Can-Do
Indirect
18.0) Owners Management (post closure)
Tech Contract $55k/yr for 20 yr
Internalized
Indirect
18.0) Owners Management (post closure)
One manager for 4 yr at $150k /yr
Internalized
Indirect
23.0) Contracts/Commitments/Royalties
Employee Housing Buy-back
Not transferred to Can-Do
Please note that:
For some costs including water treatment operation/maintenance costs and salaries of accountant/environmental person, they can be internalized to a certain extent; yet they are not removed due to their specialty.
For the salvage values, they will accrue to Can-Do in 2006 instead of 2026.
 

To What Extent Do Effective International Institutions Require the Existence of a Global Hegemon?

Introduction

Global Hegemonic power relies on the effective manipulation of social institutions as well as of culture. Antonio Gramsci 1920s from Italy was considered as the social theorist who proposed the concept of Hegemony. The Modern Concept of Hegemony describes that how a certain group with the social power of economic power dominate the society without upholding the state of fear. The control can be through economic power, through cultural means or a mixture of both. The Global Hegemon either describes the supremacy of one power on the international stage or a dominance of one country on the certain region around the globe. For instance, the US practiced its Hegemonic power through different institutions and several key mechanisms. The dominance of US power can be seen in key international organizations such as UN, WTO, and NATO. The US Role in WTO is highly influential due to its financial contribution and Veto power. This study is aimed to discuss the impact of global Hegemon on the functioning of WTO with reference to world politics. The discussion is made in the context of a neo-liberal institutionalist notion of hegemony. All information is obtained through secondary sources, and after reviewing all discussion a conclusion is drawn.

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The Global hegemony and WTO

The concept of Hegemony was introduced by Antonio Gramski, and it has gained the reputation in numerous academic disciplines including International relations, cultural studies, world politics, anthropology, literary studies, colonial and neo-colonial studies and social studies (Fontana, 2005). The term “Hegemony” is derived from the Greek word that simply means “Dominance Over”. Gramski was studying the survival of capitalist state in various advanced countries in West. The theory of Gramski is in an extension of Karl Marx, that describes the possible ways in which material forms and various institutional forms explains the predominant mode of rules. According to Gramski concept, the brute dominance is involved in the supremacy of a certain class and behind imitation of its related mode of production. A hegemonic class is that which is successful in attaining the consent of other social classes and able to retain its consent. Gramski also suggested that the civil society institutions are largely involved in shaping the mass cognitions. The success of Hegemony of a certain power or class is linked with the articulation and circulation of particular ideas outside contracted class interest (Dirzauskaite, 2017).

The man focus of the literature and scholarly work is on US Hegemon in international relation and world politics. According to Brown and Ainley (2005) since the end of Cold War US has been emerging as the unmatched superpower in global state. But in the last few years, the US Hegemony has been falling. The emergence of US as unipolar world system and Hegemony is difficult to explain with liberalism and realism. Therefore, the concept of Hegemony is mostly criticized in literature. According to Mowle & Sacko (2007), the existence of different theories of Hegemony lacks one consistent idea. The Role of “Hegemon or Leader” can be explained through various concepts. Similarly, the impact of hegemon or the dominant state in the context of international relations as well as the relation of Hegemon and the stability of the international system is explained through different theories with different ideas. According to Mowle (2007), the concept of Hegemony is much criticized and the only discussed element of it is power while the other important factors of Hegemony are different according to different scholars. Hegemony can also be described as the relative shares of economic power, political power and the military capability of a hegemon. According to Gadzey (1994), the term Hegemony describes the capacity of a State to control the other states according to its own approach to focus on its rivals.

Worth (2015) explains the different ideas of Hegemony in ideological, global and regional perspectives. According to him, Hegemony can give different meanings in different ontological assumptions in international relations. The US has emerged as the most powerful state with unmatched ascendancy in the international context in different fields such as science, the popularity of culture, weaponry, science and the entrepreneurship (Schuster, 2001). Several scholars have made their discussion in nominating the US as the extraordinary power in a Global monetary system. The World Trade Organization is a marketplace and the US uses its bargain power to obtain its desired outcomes. The US Hegemony is certainly impacting the dynamics of international trade. The US is involved in the ministerial administration of World Trade organization meetings being a host. The previous decade has seen a significant merging both in economic and expansion policies of WTO (Goldstein, 2007).

There is an essential relationship between international anarchy and the United State Hegemony. The international Institutions such as WTO depends on US hegemony to shape the world economy in a better way.  US is considered as the hegemonic power that is influencing the international institutions such as WTO, IMF and wWorld bank.  WTO’s General Agreement on Tariffs and Trade System is a clear indication of the importance of US Hegemony in international trade and economy. The international Institutions also imposing a noteworthy constrain to the other states under the Hegemonic power of US. The International institutions such as WTO were seen acting as instruments of US private interests. One hegemonic perspective is that other states must follow the US policy level to address the Human rights abuses, pollution, misdistribution of wealth and child labour in international trading. The WTO policies involve around United State interest against Japanese Trade barriers. WTO exercises the US decision making power for making international trade policies (Chorev, 2009).

The international trade and Competition policy are made to work pleasantly together with the main objective of consumer welfare. But the reality is different the majority of trade policy is made by sacrificing the consumer welfare to achieve other goals, both in case of carrying economic development or protecting the hegemonic power. The competition policy of WTO also works to protect the global hegemonic power and to prevent the industrial consolidation. The US policies of disciplinary damages, pretrial discovery, and other arrangements of contingency fee are contributing in US supremacy in international trading. WTO is making unilateral efforts to impose US competition policy on the other states (Roper, 2005).

The impact of US hegemony on International Trading is seen as common sense as US integration and cooperation both are crucial for the economic expansion of International Trading. This is in collaboration of Neo-liberalist notion of Hegemony.  In neo-liberalism school of thoughts, hegemony is the result of the interaction of ideas, institutions and material capabilities. The US supremacy is explained to start with national hegemony that further expanded to the international scale. Neo-liberalism described this US Hegemony is not the newly established world order but in fact, the dominance that is spread through culture, institutions and production to the globe (Engel, 2008). Neo-liberalism explains why states cooperate in international relations and international trading and why is important for WTO. The theory also focuses on the arrangements of mutual profitability of different international institutions as WTO. It defines the importance of the anarchic nature of international systems which is overestimated in other schools of thoughts. The neo-liberal theory provides a wider concept of state interest and international institution interests. It is highlighted that international corporation is required for the effective international institutions that can be possible by creating regimes and norms even in the anarchic autonomous Hegemony (Overbeek, 2002).

Robert Kohane and Joseph Nye are considered as founders of the neo-liberal school of thoughts (Keohane & Nye, 1989). They explained the importance of informal governmental ties on the multinational organizations and companies in the WTO. The existences of multiple channels that link different societies are involved in international politics. The neo-liberal thoughts describe the hegemony as the core phenomenon to attain economic dominance. The Global hegemony is important in the preponderance of material resources. Global Hegemonic power is crucial to control over sources of capital, to control the raw materials, to control the market and generating competitive advantage in the manufacturing of high significance goods. These four sets of resources are crucial for the World Trade Organization and through these; a state can provide aid to its allies and also punish its enemy states. The global Hegemony can act as a direct instrument for the coercive economic diplomacy or it can effect indirectly to reduce the domestic costs. International institutions such as WTO favour the global Hegemon as it provides protection and stability to other states (Kiely, 2005).

According to Ranieri (2012), WTO is working to provide bases for the relative economic gains that are not in favour of US interest. Therefore, it is setting a ground that shifts the distribution of power which can alter the present global hegemony. This concept is in reference to the Neorealist school of thoughts that emphasis on the global hegemonic decline. The Neoliberal approach suggested the US-centered power setting of the international Trading. The multilateral trading order required the existence of global hegemon. The Global Hegemon is linked with the market stability and open world market is considered as the public good and there is important that some global hegemon is present to take control of expensive tasks. In the current order of Global hegemony, the role of US supremacy is important in the WTO’s cultural and structural shift from multilateralism to supernaturalism. The World trade organization also requires global hegemon to create and maintain market-opening trade policies and agreements. GATT was involved in shifting the global hegemony from British supremacy to US supremacy, and now China is emerging as the new superpower. The existence of Global Hegemon is mandatory for the establishment and enforcement rules for equal opportunities and judicial equality to the other states in International Trading (Ranieri, 2012).

Conclusion

The Modern Concept of Hegemony describes that how a certain group with the social power of economic power dominate the society without upholding the state of fear. Global Hegemonic power is crucial to control over sources of capital, to control the raw materials, to control the market and generating competitive advantage in the manufacturing of high significance goods. The Global Hegemon either describes the supremacy of one power on the international stage or a dominance of one country on a certain region around the globe. The impact of hegemon or the dominant state in the context of international relations as well as the relation of Hegemon and the stability of the international system is explained through different theories with different ideas. The international trade and Competition policy are made to work pleasantly together with the main objective of consumer welfare. The neo-liberal thoughts describe the hegemony as the core phenomenon to attain economic dominance. The neo-liberal theory provides a wider concept of state interest and international institution interests.

 

References

Brown, C. and Ainley, K., 2009. Understanding international relations. Macmillan International Higher Education.

Chorev, N. and Babb, S., 2009. The Crisis of Neoliberalism and the Future of International Institutions: A Comparison of the IMF and the WTO. Theory and society, 38(5), pp.459-484.

Dirzauskaite, G. and Ilinca, N., 2017. Understanding Hegemony in International Relations Theories.

Engel, S., 2008. The world bank and neoliberal hegemony in Vietnam. In Hegemony (pp. 171-195). Routledge.

Fontana, B., 2005. Hegemony. Retrieved May 25, 2017, from Encyclopedia.com: http://www.encyclopedia.com/social-sciences-and-law/political-science-and-government/international-affairs-diplomacy/hegemony

Gadzey, A., 1994. Theory of International Politics .Palgrave Macmillan UK.

Goldstein, J.L., Rivers, D. and Tomz, M., 2007. Institutions in International Relations: Understanding the Effects of the GATT and the WTO on World Trade. International Organization, 61(1), pp.37-67.

Keohane, R.O. and Nye, J., 1989. 1977. Power and Interdependence: World Politics in Transition, pp.3-37.

Kiely, R., 2005. Empire in the age of globalisation: US hegemony and neoliberal disorder. Pluto Press.

Mowle, T. S., & Sacko, D. H., 2007. The Unipolar World: An Unbalanced Future. New York: Palgrave Macmillan. Retrieved April 10, 2017, from http://14.139.206.50:8080/jspui/bitstream/1/2749/1/Mowle&Sacko%20-%20The%20Unipolar%20World,%20An%20Unbalanced%20Future.pdf

Overbeek, H.W. ed., 2002. Restructuring hegemony in the global political economy: The rise of transnational neo-liberalism in the 1980s. Routledge.

Ranieri, R., 2012. Thinking Situationally About the Role of International Institutions: The Dynamics of Change in the International System and the Role of the World Trade Organization (Doctoral dissertation, University of Cincinnati).

Roper, J., 2005. Symmetrical communication: Excellent public relations or a strategy for hegemony?. Journal of Public Relations Research, 17(1), pp.69-86.

Schuster, S., 2001. Does America Need a Foreign Policy? Toward a Diplomacy for the 21st Century:17. New York.

Worth, O., 2015. Rethinking hegesmony. Macmillan International Higher Education.