MA39 Problem: Sell or Process Further – Luna Company

MA39 Problem: Sell or Process Further – Luna Company

Luna Mining Company Inc. (LMC) develops mineral deposits in Canada’s north.During 20X3, the company removed 1,200,000 tons of ore from the mine; this level of  production is expected to continue for the next twenty-five years.The process of extracting valuable minerals begins with the removal of ore from the ground andcrushing it. The crushed ore is then ready to enter the refining process. The total cost of miningand crushing the ore amounts to $30.65 per tonne.In order to extract the usable minerals, the crushed ore is passed through three distinct processes:amalgamation, electrolysis and purification (see Exhibit 1). In the first stage, calledamalgamation, mercury is added to the unrefined ore. The mercury combined with the valuableminerals forms a compound which is drawn off. This compound is then heated causing themercury to vaporize leaving a residue which is 30% gold, 60% silver, and 10% platinum. Oneounce of residue is obtained for every 3 tons of ore placed in the process. The vaporized mercuryis condensed and reused the next day. The total cost of the amalgamation process is $13.51 per ounce of residue recovered. Each year the company must invest an additional $280,000.00 toreplace mercury lost during the recovery process.The second process is called electrolysis. In this process, the residue from the amalgamation process is cast into thick slabs which are hung in large vats of acid. When an electric current is passed through the vat, pure gold is transferred to separate plates. When the gold plates and acidare removed from the vat, silver is recovered from the bottom of the vat. When the acid isfiltered for reuse the next day, platinum is removed. The total cost of the electrolysis process is$9.60 per ounce of residue placed in the vat.At this point, the gold plates are 99.9% pure and can be sold on world markets. The currentmarket price for gold is $400.00 per ounce but mine officials are aware that future prices mayrise or fall from this level depending on the state of the world economy. During the past threemonths, the price has ranged from $350.00 to $420.00 per ounce.The silver can be sold after electrolysis for $4.60 per ounce or it can be further purified.Purification costs are $1.30 per ounce of pure silver, which can be sold for $6.00 per ounce (boththe $6.00 and $4.60 prices have remained relatively stable during the past year and managementexpects no significant changes during the next year). This purification process reduces thevolume of the silver product by 20%.The platinum can be sold after electrolysis for $430.00 per ounce or further purified and sold for $550.00 per ounce. Purification results in a 10% reduction in the volume of platinum. The totalcost of purification is $48.60 per ounce of pure platinum

EXHIBIT 1Luna Mining Company Inc.Summary of Mineral Processing

PROCESS INPUT OUTPUT PROCESS COSTMARKET PRICE OFOUTPUT1. Amalgamation 3 tons oreMercury1 oz. residueMercury$13.51/oz. of residue$280,000.00/year for Mercury N/A N/A2. Electrolysis 1 oz. residue .3 oz. pure gold.6 oz. raw silver .1 oz. raw platinum$9.60/oz. of input $400.00/oz. pure gold$4.60/oz. raw silver $430.00/oz. raw platinum3. Purification 1 oz. raw silver .8 oz. pure silver $1.30/oz. of output $6.00/oz. of pure silver 4. Purification 1 oz. raw platinum.9 oz. pure platinum$48.60/oz. of output $550.00/oz. of pure platinum

Required:1. Determine the optimal yearly production plan for the ore processed by LMC Inc