You are a consultant to the Executive Management Committee of Heavy Metal Incorporated (HMI), a large, publicly traded mineral exploration and development corporation with mines on several continents. Due to rising commodity prices, HMI has recently returned to profitability after several lean years including one year of substantial losses due to a mine explosion which resulted in loss of life and closure of the affected mine for six months.
Currently, there are significant strategic issues facing two of HMI’s other mines:
Mine 1. The workers at HMI’s mine in eastern South Australia have been on strike for four months, causing significant harm to the affected workers and local community. The mine and related facilities are not efficient, the wage base of the striking workers is at the high end for the industry and local corporate and employment taxes are also high.
During the strike, the mine has been earning significant revenue from its own hydro- electric facility as a result of diverting power that it would otherwise use for its operations, into the provincial electrical grid. These factors have combined to produce a profit for HMI of approximately $1 million per month since the strike started. A significant portion of these earnings is going into the executive bonus pool for distribution to senior management at year-end. Recently some incidents of violence and vandalism have occurred on the picket lines despite injunctions obtained by the mine against the union Political pressure to settle the strike and return to normal operations is increasing.
Mine 2. This mine is also in South Australia and is nearing the end of its productive life due to exhaustion of the mineral body. The mine will close within 12 months with substantial loss of employment for a community that has become heavily dependent on the mine for economic benefits over the previous 15 years. In addition, there are significant environmental issues as a result of the open pit mine and adjacent tailings pond leaching into the surrounding water basin. HMI has budgeted $10 million in mine closure and remediation expenses to deal with these issues.
Complying with applicable mining and environmental laws in the jurisdiction would result in costs of $15 million to repair the site and environmental damage although the mine manager has been told that spending $5 million on mine closure combined with payment to a key political figure of $1 million would ensure that there were no legal actions taken against your corporation.
Independent consultants have advised that to close and remediate the mine in accordance with accepted international mining standards will cost approximately $20 million. Any expenditures over the $10 million budgeted for this expense will result in a financial loss for HMI and decline in share price which will substantially impact the value of the options portion of your compensation package.
The board of directors of HMI is generally aware of the situation at each of the mines and has requested a report and recommendations from management. The board has scheduled a meeting to hear and discuss your proposals for dealing with each of them.
You are a consultant to the Executive Management Committee of Heavy Metal Incorporated (HMI), a large, publicly traded mineral exploration and development corporation with mines on several continents. Due to rising commodity prices, HMI has recently returned to profitability after several lean years including one year of substantial losses due to a mine explosion which resulted in loss of life and closure of the affected mine for six months.
Currently, there are significant strategic issues facing two of HMI’s other mines:
Mine 1. The workers at HMI’s mine in eastern South Australia have been on strike for four months, causing significant harm to the affected workers and local community. The mine and related facilities are not efficient, the wage base of the striking workers is at the high end for the industry and local corporate and employment taxes are also high.
During the strike, the mine has been earning significant revenue from its own hydro- electric facility as a result of diverting power that it would otherwise use for its operations, into the provincial electrical grid. These factors have combined to produce a profit for HMI of approximately $1 million per month since the strike started. A significant portion of these earnings is going into the executive bonus pool for distribution to senior management at year-end. Recently some incidents of violence and vandalism have occurred on the picket lines despite injunctions obtained by the mine against the union Political pressure to settle the strike and return to normal operations is increasing.
Mine 2. This mine is also in South Australia and is nearing the end of its productive life due to exhaustion of the mineral body. The mine will close within 12 months with substantial loss of employment for a community that has become heavily dependent on the mine for economic benefits over the previous 15 years. In addition, there are significant environmental issues as a result of the open pit mine and adjacent tailings pond leaching into the surrounding water basin. HMI has budgeted $10 million in mine closure and remediation expenses to deal with these issues.
Complying with applicable mining and environmental laws in the jurisdiction would result in costs of $15 million to repair the site and environmental damage although the mine manager has been told that spending $5 million on mine closure combined with payment to a key political figure of $1 million would ensure that there were no legal actions taken against your corporation.
Independent consultants have advised that to close and remediate the mine in accordance with accepted international mining standards will cost approximately $20 million. Any expenditures over the $10 million budgeted for this expense will result in a financial loss for HMI and decline in share price which will substantially impact the value of the options portion of your compensation package.
The board of directors of HMI is generally aware of the situation at each of the mines and has requested a report and recommendations from management. The board has scheduled a meeting to hear and discuss your proposals for dealing with each of them.
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