NORTHERN DRILLING INC. THE MOND NICKEL CONTRACT DECISION – A TACTIVAL DILEMMA IN A GROWTH STRATEGY

2970 Words Sep 20th, 2014 12 Pages
NORTHERN DRILLING INC. THE MOND NICKEL CONTRACT DECISION – A TACTIVAL DILEMMA IN A GROWTH STRATEGY
THE PROBLEM Peter Bremner, general manager for Northern Drilling Inc. (Northern) was looking over the RFP for an upcoming exploration contract for one of Canada’s largest mining companies, Mond Nickel Company (Mond). The RFP consisted of 2 projects, a Deep/Complex job (3,000m holes) and an Intermediate/Routine job (1,800m holes). The proposal was due in 3 weeks and Peter had to make a decision whether to send a proposal on either Deep or Intermediate jobs, both jobs, or whether to bid at all.
The Canadian mining exploration industry was extremely competitive and consisted of about 80 drilling contractors, many of which had little
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2. Net Present Value – Secondly, Peter needs to investigate the Net Present Value (NPV) of each project scenario, i.e. job type, gross margin, and # new diamonds drills purchased. The NPV will measure the variance of the present value of cash outflow (drilling equipment investment) versus the future value of cash inflows (future profits), at the benchmark hurdle rate of 20%. A positive NPV associated with the investment means that the investment should be undertaken as it exceeds the minimum rate of return. A higher NPV determines which project scenario will have the highest return on cash flow, hence determining the most profitable investment in terms of present money value. 3. Probabilities of Success – There are several uncertainties that could affect Northern’s ability to execute the contracts successfully, especially for the DEEP project. In addition to the holes to be 3000 meters deep, the problem is multiplied due to the geological conditions, which is expected to be poor in some areas. Given the conditions, it’s necessary to assemble a team of highly capable and experienced employees. Peter is aware that if he choses to send proposals for both projects, he would need to find 24 additional drillers. 4. Future Growth Strategy – Does the job performed align with the future growth? Northern is currently owns 34 drills rigs, of which 12 are deep diamond drills.

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