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

2985 words 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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Does it make sense for Northern to invest in additional diamond drills (1-8) to shift focus on the specialized work and differentiate itself from the highly competitive market and secure contracts at higher margins? Is the market demand for such specialized work sustainable given that nothing is for certain?
ALTERNATIVES
Don’t Bid
Only Bid Intermediate Job
Only Bid Deep Job
Bid Both Jobs
ANALYSIS
1. Financial Impact of the Investment The case explains that Northern’s October year-to date revenue is Cdn $43 million with an EBIT of 26 %. We can use this information to compute the expected total Revenue and EBIT for 2011 as $57.3 million and $14.9 million respectively. After a 30% corporate tax, this predicts that Northern’s Net Income will be over $10 million, Exhibit 8. This shows that Northern has enough money to invest in the 8 diamond drills, at $900,000 each or $7.2 million total, without requiring an additional back loan. Therefore this criterion has little effect on either of the alternatives.
2. Net Present Value
A positive Net Present Value (NPV) will demonstrate whether or not the investment exceeds the minimum rate of return. Comparing the NPVs also shows which proposal will yield the highest future value. To analyze this, it’s required to run several simulations at different variable, i.e. job types, number of drills purchased, and gross margins to determine the appropriate price.
The Intermediate project, requiring an upfront investment of 4

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