Bethesda Mining Case

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FIN 620 – Business Case: BETHESDA MINING COMPANY

Background:

Bethesda Mining is a midsized coal mining company with 20 mines located in Ohio,

Pennsylvania, West Virginia, and Kentucky.

The company operates deep mines as well as strip mines. Most of the coal mined is sold under

contract, with excess production sold on the spot market. The coal mining industry, especially

high sulfur coal operations such as Bethesda, has been hard hit by environmental regulations.

Recently, however, a combination of increased demand for coal and new pollution reduction

technologies has led to an improved market demand for high sulfur coal.

Bethesda has just been approached by Mid-Ohio Electric Company with a request to supply coal

for its electric generators for the next four years. Bethesda Mining does not have enough

excess capacity at its existing mines to guarantee the contract. The company is considering

opening a strip mine in Ohio on 5,000 acres of land purchased 10 years ago for $5.4 million.

Based on a recent appraisal, the company feels it could receive $7.3 million on an after tax basis

if it sold the land today.

Strip mining is a process where the layers of topsoil above a coal vein are removed and the

exposed coal is removed. Some time ago, the company would simply remove the coal and leave

the land in an unusable condition.

Changes in mining regulations now force a company to reclaim the land; that is, when the

mining is completed, the land must be restored to near its original condition. The land can then

be used for other purposes. As they are currently operating at full capacity, Bethesda will need

to purchase additional equipment, which will cost $49 million. The equipment will be

depreciated on a seven year MACRS schedule. The contract only runs for four years. At that

time the coal from the site will be entirely mined. The company feels that the equipment can be

sold for 60 percent of its initial purchase price.

However, Bethesda plans to open another strip mine at that time and will use the equipment at

the new mine. The contract calls for the delivery of 500,000 tons of coal per year at a price of

$70 per ton. Bethesda Mining feels that coal production will be 750,000 tons, 810,000 tons,

830,000 tons, and 720,000 tons, respectively, over the next four years. The excess production

will be sold in the spot market at an average of $64 per ton, Variable costs amount to $29 per

ton and fixed costs are $4.2 million per year. The mine will require a net working capital

investment of 5 percent of sales.

The NWC will be built up in the year prior to the sales. Bethesda will be responsible for

reclaiming the land at termination of the mining. This will occur in Year 5. The company uses an

outside company for reclamation of all the company's strip mines. It is estimated the cost of

reclamation will be $3.9 million. After the land is reclaimed, the company plans to donate the

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land to the state for use as a public park and recreation area as a condition to receive the

necessary mining permits. This will occur in Year 5 and result in a charitable expense deduction

of $7.3 million. Bethesda faces a 38 percent tax rate and has a 12 percent required return on

new strip mine projects. Assume a loss in any year will result in a tax credit.

Considerations:

Considering concerns today about environmental impacts of fossil fuel, you have been

approached by the president of the company with a request to analyze this project based on its

business merits and social impacts.

For the business merits, compare options using net present value, internal rate of return,

payback period, and profitability index for the new strip mine.

For the social impacts, quantify factors considered using (1) sensitivity analysis and (2) scenario

analysis with your rationale. Among the factors considered, analyze the impact of a carbon tax

in Ohio. Review the following references related to a carbon tax:

Reference:

https://ohiovalleyresource.org/2019/07/15/death-spiral-how-a-carbon-tax-could-end-some-

coal-towns-or-fund-a-new-future/.

https://www.brookings.edu/blog/planetpolicy/2016/04/26/coal-economy-workers-need-help-

and-a-carbon-tax-could-provide-it/.

Assignment:

(1) Conduct analysis to address these conditions, including both business merits and social

impacts. Answer whether the contract is a good choice? List any assumptions you made

to a complete your analysis of both the business merits; and social impact.

(2) Prepare a professional PowerPoint presentation with your recommendation to the

company president to justify your recommendation.

(3) Also, submit a supplemental document with details of your analysis. Output from step 1

above.