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HSE_CASE_NR: 204-015 | status: active
Authors: Lievonen, Jari
Gasiorowska, Anna (supervisor)
Material: 27 pages
Publication year: 2004  Language: eng
Keywords: cash flow analysis; gold mining industry; gold price fluctuations; project management; real options; uncertainties
Abstract: Valkeavaara gold deposit is located in Northern Finland about 1,000 kilometres from Helsinki. Practically all gold produced in Finland is enriched from ore containing other metals, like copper. Gold is only a side product. There is only one other operational gold mine in Finland near Tampere.

The claim at Valkeavaara looks promising to Jackpot Mining Oy. The initial finding with 6 g/t gold ore content was good but since then the estimate came down to ca. 3 g/t, which may still be satisfactory.

Managing director of Jackpot Oy faces a decision of recommending to the CEO of Jackpot Mining Ltd John Sniffgold III wether to open the Valkeavaara mine. He has the information needed but there are uncertainties involved, including the gold price fluctuations, EUR/USD exchange rate and ore gold content.

To make matters more complicated, Mr Karjalainen’s decision has political implications as well. Unemployment in the area is very high and the Finnish state is ready to grant a subsidy to the mining operation. If Mr Karjalainen turns this offer down, will he still be invited to the Prime Minister’s crayfish party in the future? Valkeavaara case is a straightforward project evaluation to be solved with free cash flow analysis. Alternatively the case can be analyzes using real options. An example solution based on simulation is included together with a traditional cash flow analysis.

The case has some ground for discussion on business ethics and human resources.

Related teaching note:
Notes: 16 pages
Publication year: 2004  Language: eng

Case is available from ecch case collection:
» ecch case info (20486)
[reference nr 604-058-1]