accounting

________________________________________________________________________________________________________________ HBS Professor William E. Fruhan and Professor Wei Wang , Queens University, Kingston, Ontario, prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to a ctual persons or entities is coincidental. Copyright © 20 13 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1 -800 -545 -7685, write Harvard Business Publishing, Boston, MA 02163, or go to http: //www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School.

W I L L I A M E . F R U H A N

W E I W A N G

New Earth Mining, Inc.

Company Background

It was the beginning of 2013. After gold prices experienced an unprecedented boom from $300 per

ounce to $1,700 per ounce in the previous decade, Denver -based New Earth Mining, one of the

largest U.S. precious -metal producers, was enjoying rapid growth in earnings. With the continued

improvement of its operating margi ns, New Earth had accumulated a large amount of cash on its

balance sheet ( Exhibit 1 ). It had a simple debt structure and a reasonable leverage ratio with no

significant risk of liquidity.

Most of the company’s mines were located in the U.S. and Canada, bu t like many other firms in

the precious -metals industry, New Earth had made substantial investments in gold exploration

projects in other countries such as Australia and Chile. However, like many industry participants,

New Earth executives worried about th e sustainability of gold prices at their current levels. With its

strong financial condition and the desire to diversify its business through new capital investments

rather than acquisition, New Earth felt it was necessary to implement a diversification pr ogram that

would reduce its dependence on precious metals. The company started investigating the possibility

of diversification in base metals and other minerals.

New Investment Opportunity in South Africa

A new investment opportunity appeared in early 201 2. New Earth was informed of the existence

of a major body of iron ore close to the massive Kalahari manganese field in the Northern Cape of

South Africa by an independent exploration consulting company. New Earth felt an investment in

iron ore provided a strategic fit for its diversification objective.

Since steel represented almost 95% of the metal that was used in the world, iron ore was arguably

more integral to the global economy than any other mineral. The price of iron appreciated more than

five -fol d from 2002 to 2012 (see Exhibit 2 ). Unlike the price of gold, for which there was considerable

9-9 1 3 -548

R E V : O C T O B E R 1 1 , 2 0 1 3

This document is authorized for use only by Frank DeGraw ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. 913 -548 | New Earth Mining, Inc.

2 BRIEFCASES | HARVARD BUSINESS SCHOOL

speculation, the price of iron ore was not expected to fall dramatically given the strong global

demand for the commodity. According to a 2012 report by the U.S . Geological Survey, the world iron

ore market would continue to be tight, with demand exceeding supply until at least 2016. This was

due to the long lead times required to bring mines into production, a world shortage of skilled labor,

and growing natural resource nationalism, which reduced exports from some nations. Given that the

price of iron ore had appreciated dramatically after 2007 and was expected to stay above $80 per

metric ton, New Earth decided to evaluate the feasibility and profitability of d eveloping the Kalahari

mine.

New Earth hired Drexel Corporation, an engineering and construction firm, to analyze the extent

of the deposit and to determine the cost and feasibility of establishing a mine site close to Kalahari .

The engineering firm found that the field contained 30 million tons of ore with an average iron

content of 60%. At the projected extraction rate of 2 million tons per year, it would take 15 years to

deplete the ore body.

Drawing in part on its earlier evaluation of an iron ore proje ct in Sishen, South Africa, Drexel

estimated in October 2012 that the proposed venture in South Africa could be operational by the

beginning of 2015. Drexel reported that there was limited need for infrastructure investment to

support the development of th e mine, and the total investment cost was estimated to be $200 million

with 40% of the investment required at the beginning of 2013 and the rest required at the beginning

of 2014. This investment amount would include construction costs and related insuranc e, operational

costs, and $20 million in working capital. Ore would be trucked to Durban and railed to Port

Elizabeth in the Eastern Cape for export. Given the high quantity of iron contained in ore mines in

South Africa and the easy access to ports from t he mine location, the venture was expected to have

low production costs.

By November 2012, New Earth was able to produce pro forma analysis on the profitability of this

new investment ( Exhibit 3 ). The analysis revealed that the investment opportunity had attractive

potential. At an assumed price of $80 per ton, the investment opportunity promised strong cash

flows. The project would produce even stronger cash flows given an optimistic price forecast of iron

ore at $100 per ton. New Earth also performed a s ensitivity analysis to analyze the impact of various

discount rates and iron ore prices on the net present value of the project’s cash flows ( Exhibit 4 ).

Despite its initial attractiveness, the project carried some substantial risks that New Earth needed t o

consider.

Market for Iron Ore

Iron ore was consumed predominantly by the steel industry. China, Japan, and South Korea were

among the top countries in both iron ore imports and steel production ( Exhibit 5 ). In 2010, China

imported almost 60% of the world’s total iron ore exports. Japan and Korea were next among the top

importers. During the previous decade, world seaborne demand in iron ore had doubled since 2000.

According to BHP Billiton, one of the world’s largest iron ore producers, global seabor ne iron ore

trade was expected to grow steadily over the next decade, at an annualized rate of 4.4% per year.

Also, according to AME Mineral Economics, an independent research house on commodities, crude

steel production in these three Asian countries was expected to grow more than 35% in the next

decade.

HARVARD BUSINESS SCHOOL | BRIEFCASES 3

South Africa

According to the U .S. Geological Survey, as of the beginning of 2012, South Africa was ranked

14th in the world in iron ore reserves, with an estimated one billion tons of crude ore. Additionally,

South Africa was ranked as the 7th largest producer of iron ore in the world ( Ex hibit 5 ). Most of the

country’s reserves were located in the Northern Cape Province in the large Kalahari manganese field,

close to the Botswana and Zimbabwe borders. Saldanha Bay was one of the primary ports used to

export iron ore, with more than 34 mill ion tons passing through it each year. Because South Africa

was positioned to be one of the major exporters to Asia, significant construction efforts had been put

into building new ports and facilities for ore exports.

New Earth was worried about a number of risk factors associated with making a large investment

in South Africa. The political system was unstable and corruption was a major ongoing concern.

Industry experts ranked it as one of the top countries in terms of political risk affecting mining

op erations. High risk of civil war in neighboring countries was a constant threat. Furthermore, there

existed the ongoing fear with all less -developed countries such as South Africa that the government

would nationalize natural resource operations.

Fortunat ely for New Earth, multiple countries including China, Japan, and South Korea were

extremely supportive of the assurance of long -term supply of raw materials to their domestic steel

producers as steel production was vital to their economic growth. Their go vernments had provided

various forms of credit guarantees to mining operations in a number of less -developed countries.

These guarantee programs made it possible for New Earth to protect itself against the significant

political risk embedded in the South A frican venture.

Negotiating a Financing Package

By December 2012, New Earth had tentatively secured a few large steel producers located in

China , Japan , and South Korea as major customers. Iron ore would be shipped to these countries via

seaborne trade. Th e two steel producers in China were contractually obligated to purchase half of

New Earth’s Kalahari iron ore output while those in South Korea and Japan were contractually

obligated to purchase the other half. The purchase would be settled at the ore mark et price at the time

of the ore shipment . New Earth would form a new subsidiary, New Earth South Africa (NESA), to

undertake the mining operation. It had tentatively negotiated a financing package with the potential

customers and a syndicate of U.S. banks for its South African venture.

Of the $200 million needed to complete the project, $100 million was tentatively negotiated with

the overseas buyers. The two steel makers in China agreed to l end NESA $60 million in senior

subordinated debt at 9% interest. This loan would be repayable at the rate of $8 million per year

between 2022 and 2028, with the final $4 million paid down in 2029. The loan was guaranteed by the

People’s Republic of China. A comparable financing agreement was arranged with the group of s teel

makers in South Korea and Japan. To induce NESA to sell half of the iron ore output to the

companies based in these two countries, a large Japanese bank and Export –Import Bank of South

Korea agreed to jointly provide $40 million senior unsecured debt at an interest rate of 7%. This loan

was payable between 2016 and 2026 at a decelerating rate ( Exhibit 6 ), and was guaranteed by the

central banks in these two countries.

New Earth turned to domestic lenders to obtain the remaining financing necessary for the South

African investment. A group of U.S. banks tentatively agreed to provide a syndicated bank loan

worth $60 million, repayable between 2016 and 2023 to NESA. The senior bank loan would carry a

4 BRIEFCASES | HARVARD BUSINESS SCHOOL

10% interest rate and be collateralized by the mining e quipment, which would be purchased from a

large U.S. manufacturer. An export facilitating arm of the U.S. government agreed to guarantee this

loan. In total, $40 million worth of loans were to be provided at the beginning of 2013 and $120

million worth of loans were to be provided at the beginning of 2014. Repayments were to be made

starting at the end of 2016 ( Exhibit 6 ). In addition, no interest was to be paid in 2013 and 2014. The

interests accrued in those years would be payable at the end of 2015 with no interests compounding.

Various loan covenants were embedded in the financing package. After deducting interest and

contractual debt repayments, NESA would use all remaining discretionary cash flow for

prepayments of debt and the issuance of dividends. The amount paid out in dividends was not to

exceed the amount allocated to prepayment of debt. Both senior secured and unsecured debt was to

be paid in full before junior debt, according to the debt prepayment schedule. The actual amount of

prepayment to e ach class of senior debt was proportional to the origina l principa l amount . Finally, no

dividends could be paid to New Earth until December 31, 2016.

To complete the investment, New Earth would invest the remaining $40 million in NESA as

equity capital, at the beginning of 2013 (Exhibit 7) . The National Assurance Corp, an insurance

company backed by the U.S. government, guaranteed New Earth’s investment in South Africa

against potential losses due to civil war and government nationalizing natural resource assets. To

further protect its investment , New Earth struck a deal with all its financing parties. It was agreed

upon with each party of the proposed $ 160 million debt financing that in the event of a cost overrun,

the amount of capital supplied would automatically increase by up to 25% on a pro rata basis for all

lenders. Hence, the project would be guaranteed for $240 million investment before New Eart h

would have to resort to additional funding. The mining operation would be carried out solely by

NESA, the new subsidiary, which would further protect New Earth against potential liabilities. New

Earth would not have to guarantee nor be responsible for NE SA’s debt obligations.

Project Valuation

The tentative financing package arranged by New Earth had the potential to turn an otherwise

unattractive project into a profitable investment opportunity. However, the complex financing plans

created some challenge s for New Earth in evaluating the investment worth of the new project. Four

different valuation approaches were proposed . Each valuation approach had a different champion.

These included the vice president of operations, the accounting officer, an outside consulting firm,

and a financial analyst within the firm. The CFO of New Earth was considering all available

approaches to determine the correct valuation of their South African venture.

Approach 1 – VP of Operations

The VP of operations called for discou nting the projected cash flows to be generated at NESA by

New Earth’s 14% weighted average cost of capital, which is obtained as the weighted average of the

cost of equity (15%) and the cost of debt (10%) with leverage assumed to be at 12% of the capital

structure. All specifics on financing of NESA were ignored. Given the projected price of iron ore

at $80 per ton , he suggested that the net present value o f the investment project was $ 83 million

(Exhibit 4 ).

Approach 2 – Accounting Officer

The accounting officer at New Earth suggested that the new investment in South Africa carried

substantially higher risks than the typical investments that had been made by the company in the

HARVARD BUSINESS SCHOOL | BRIEFCASES 5

past. He also argued that since New Earth’s major operation had been gold explor ation and

production it would be inappropriate to use the company’s cost of capital for the new venture. Based

on similar investments that were made by peer companies in iron ore development in developing

countries the accounting officer proposed to discou nt the projected cash flows at 24%, a 10%

premium above New Earth’s cost of capital. The specifics of the financing package were ignored.

Given the new discount rate the project would have a net present value of -$28 million ( Exhibit 4 ).

Approach 3 – Exter nal Consulting Firm

New Earth hired an outside consulting firm to provide an independent perspective on the

profitability of the new investment. The consulting firm suggested that the NESA investment was a

stand -alone project for the company with unique op portunities and leverage properties. On the one

hand, the required rate of return on the company’s equity investment in NESA would be higher than

the company’s own 14% cost of capital because the new investment carried considerable risks. On the

other hand , the substantial leverage taken by New Earth for the new venture could result in lower

cost of capital for the subsidiary than the parent company. Therefore, the cost of capital for NESA

should be properly estimated and all cash flows from the project wou ld be discounted at this rate.

The cost of NESA’s equity was assumed to be 24% given the risks and substantial leverage associated

with the project.

Approach 4 – Internal Analyst

A financial analyst working at New Earth suggested that the company compare t he discounted

cash flows for equity holders at NESA’s cost of equity (24%) to the equity invested by New Earth,

known as the Flows to Equity approach. The rationale behind this approach was that New Earth’s

relevant investment was $40 million and the cash flows consisted of only the dividends to be paid to

equity holders. New Earth would be completely insulated from the threat of losing more than its

equity invested in NESA. Based on this approach, a full partitioning of the projected cash flows to

debt hol ders and equity holders had to be estimated. The analyst created the cash flow partition to

different providers of capital ( Exhibit 7 ) as well as the schedule of debt amortization with debt

prepayment ( Exhibit 8 ). His analysis included a faster retirement of debt principal due to the

prepayment covenant.

Exhibit 1 Key Financial and Market Value Data, 2002 -2011 (in millions of dollars except for ratios)

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Balance Sheet Cash and Marketable Securities 142 197 552 759 1,138 1,121 1,351 1,888 2,254 1,732

Total Current Assets 674 820 1,214 1,684 2,288 2,168 2,016 3,480 4,680 4,502

Net PP&E 1,817 2,303 2,466 3,052 4,804 7,648 7,661 7,818 8,303 10,274

Other Assets 1,058 1,674 2,743 3,602 4,887 2,500 3,330 4,307 4,351 4,464

Total Assets 3,549 4,797 6,423 8,338 11,979 12,316 13,007 15,605 17,335 19,240

Short -Term Borrowing and Current portion of Long -Term Debt 71 52 110 165 151 153 79 75 141 277

Total Current Liabilities 479 591 789 1,027 1,441 1,517 1,512 2,332 3,042 3,061

Long -Term Debt 647 654 610 788 1,257 1,666 1,757 2,355 2,130 2,272

Other Liabilities 897 866 1,041 1,103 2,213 1,990 2,454 2,023 1,589 2,555

Total Liabilities 2,023 2,111 2,441 2,918 4,911 5,173 5,723 6,710 6,761 7,888

Total Common Stock 1,288 2,522 3,807 4,937 6,368 6,400 6,184 7,489 8,914 9,581

Minority Interest 238 164 175 482 700 743 1,100 1,405 1,660 1,771

Total Equity 1,526 2,686 3,982 5,420 7,068 7,143 7,284 8,895 10,574 11,352

Earnings and Market Valuation

Revenue 1,321 1,852 2,456 2,879 2,966 4,851 5,322 6,218 7,864 8,860

COGS 885 1,185 1,302 1,468 1,554 2,421 2,725 2,761 3,672 4,093

Gross Profit 436 667 1,154 1,411 1,412 2,430 2,597 3,457 4,192 4,767

Operating Income 222 320 575 863 906 1,696 1,426 2,036 2,750 3,089

Net Income 98 168 332 512 489 982 812 1,150 1,635 1,840

Share Price 17.32 30.12 39.82 57.75 55.22 64.24 57.23 55.98 63.18 66.23

Number of Common Shares Outstanding 185 223 230 244 256 278 298 322 340 396

Market Value of Common Equity 3,205 6,716 9,159 14,091 14,135 17,858 17,055 18,026 21,481 26,227

Market Value of Equity/Book Value of Equity 2.1 2.5 2.3 2.6 2.0 2.5 2.3 2.0 2.0 2.3

Earnings/Share 0.53 0.75 1.44 2.10 1.91 3.53 2.72 3.57 4.81 4.65

Dividends/Share 0.18 0.18 0.35 0.45 0.45 0.70 0.70 0.90 1.35 1.35

Price/Earnings Ratio 33 40 28 28 29 18 21 16 13 14

HARVARD BUSINESS SCHOOL | BRIEFCASES 7

Exhibit 2 Iron Ore Spot Price CFR China (62% Fe) from 2002 to 2012 (US$/ton)

Source: IndexMundi

$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

$200.00

Iron Ore

Exhibit 3 Cash Flow Estimation with the South African Investment Opportunity (in millions of dollars)

Lin e 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total

Cash Flow Estimation with Price at $80/ton 1 Revenue: 2 million tons @ $80 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 160.0 2,400.0

2 Mining costs a 28.8 28.8 28.8 30.4 30.4 30.4 33.6 33.6 33.6 38.4 38.4 38.4 38.4 38.4 38.4 508.8

3 Smelting, refining, and freight costs 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 720.0

4 Operating profits 83.2 83.2 83.2 81.6 81.6 81.6 78.4 78.4 78.4 73.6 73.6 73.6 73.6 73.6 73.6 1,171.2

5 Depreciation and amortization 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 180.0

6 EBIT 71.2 71.2 71.2 69.6 69.6 69.6 66.4 66.4 66.4 61.6 61.6 61.6 61.6 61.6 61.6 991.2

7 Taxes @ 35% 24.9 24.9 24.9 24.4 24.4 24.4 23.2 23.2 23.2 21.6 21.6 21.6 21.6 21.6 21.6 346.9

8 Net income 46.3 46.3 46.3 45.2 45.2 45.2 43.2 43.2 43.2 40.0 40.0 40.0 40.0 40.0 40.0 644.3

9 Cash flow from operations 58.3 58.3 58.3 57.2 57.2 57.2 55.2 55.2 55.2 52.0 52.0 52.0 52.0 52.0 52.0 824.3

10 Return of working capital b 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20.0 20.0

11 Total cash flows 58.3 58.3 58.3 57.2 57.2 57.2 55.2 55.2 55.2 52.0 52.0 52.0 52.0 52.0 72.0 844.3

Cash Flow Estimation with Price at $100/ton

12 Revenue: 2 million tons @ $100 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 200.0 3,000.0

13 Mining costs a 28.8 28.8 28.8 30.4 30.4 30.4 33.6 33.6 33.6 38.4 38.4 38.4 38.4 38.4 38.4 508.8

14 Smelting, refining, and freight costs 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 48.0 720.0

15 Operating profits 123.2 123.2 123.2 121.6 121.6 121.6 118.4 118.4 118.4 113.6 113.6 113.6 113.6 113.6 113.6 1,771.2

16 Depreciation and amortization 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 180.0

17 EBIT 111.2 111.2 111.2 109.6 109.6 109.6 106.4 106.4 106.4 101.6 101.6 101.6 101.6 101.6 101.6 1,591.2

18 Taxes @ 35% 38.9 38.9 38.9 38.4 38.4 38.4 37.2 37.2 37.2 35.6 35.6 35.6 35.6 35.6 35.6 556.9

19 Net income 72.3 72.3 72.3 71.2 71.2 71.2 69.2 69.2 69.2 66.0 66.0 66.0 66.0 66.0 66.0 1,034.3

20 Cash flow from operations 84.3 84.3 84.3 83.2 83.2 83.2 81.2 81.2 81.2 78.0 78.0 78.0 78.0 78.0 78.0 1,214.3

21 Return of working capital b 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20.0 20.0

22 Total cash flows 84.3 84.3 84.3 83.2 83.2 83.2 81.2 81.2 81.2 78.0 78.0 78.0 78.0 78.0 98.0 1,234.3

a Mining costs were assumed to go up in steps. During the first half of the mining operations , costs were expected to be relatively low as a large portion of the iron ore was covered with little overburden.

More expensive mining would not be necessary until the later years of mine operation.

b Of the original $200 million investment in capital for the project, $20 million was budgeted for working capital.

HARVARD BUSINESS SCHOOL | BRIEFCASES 9

Exhibit 4 Sensitivity of NPV (in millions of dollars) to Ore Prices versus Various Discount Rates

Discount rates Iron ore at $80 Iron ore at $100

5% $336.64 $581.42

6% $294.51 $519.25

7% $256.97 $463.80

8% $223.43 $414.23

9% $193.41 $369.81

10% $166.46 $329.90

11% $142.23 $293.97

12% $120.39 $261.56

13% $100.66 $232.24

14% $82.80 $205.68

15% $66.61 $181.57

16% $51.89 $159.63

17% $38.50 $139.63

18% $26.29 $121.36

19% $15.13 $104.66

20% $4.93 $89.34

21% ($4.43) $75.29

22% ($13.01) $62.37

23% ($20.91) $50.46

24% ($28.17) $39.49

25% ($34.87) $29.35

26% ($41.05) $19.97

27% ($46.77) $11.28

28% ($52.05) $3.22

29% ($56.95) ($4.26)

30% ($61.50) ($11.21)

10 BRIEFCASES | HARVARD BUSINESS SCHOOL

Exhibit 5 World Top 10 Countries in Iron Production, Consumption, and Steel Production

(Million Tons)

World Iron Ore Production by Smelter Location

Country 2005 2006 2007 2008 2009 2010 2011

China 420 588 707 824 880 1,070 1,200

Australia 262 275 299 342 394 433 480

Brazil 280 318 355 355 300 370 390

India 140 140 180 220 245 230 240

Russia 105 110 105 85 100 101 100

Ukraine 73 76 80 56 72 78 80

South Africa 40 40 42 53 55 59 55

US 54 53 52 54 27 50 54

Canada 30 34 33 31 32 37 37

Iran 19 20 32 32 33 28 30

Rest of World 267 246 315 248 262 134 134

World Total 1,690 1,900 2,200 2,300 2,400 2,590 2,800

World Iron Ore Consumption

Country 2005 2006 2007 2008 2009 2010 2011

China 524 649 746 750 865 937 1,005

Japan 133 135 139 138 107 132 130

Russia 77 82 82 77 68 77 77

South Korea 44 44 47 50 44 53 68

India 41 44 46 48 46 62 62

Brazil 54 52 57 56 41 51 53

US 58 61 57 55 31 44 48

Ukraine 58 61 57 50 41 44 46

Germany 46 49 50 47 32 47 44

Taiwan 16 16 17 15 13 15 21

Rest of World 195 195 206 197 142 179 175

World Total 1,246 1,388 1,504 1,483 1,430 1,641 1,729

World Steel Production by Smelter Location

Country 2005 2006 2007 2008 2009 2010 2011

China 348 421 488 499 567 626 684

Japan 112 116 120 119 88 110 108

US 93 99 97 91 58 81 86

India 39 43 50 55 58 66 72

Russia 65 70 72 68 59 67 69

South Korea 48 49 51 53 48 58 68

Germany 45 47 49 46 33 44 44

Ukraine 39 41 43 37 30 33 35

Brazil 32 31 34 34 27 33 35

Turkey 21 23 25 26 25 29 34

Rest of World 263 276 286 276 204 247 256

World Total 1,105 1,216 1,315 1,304 1,197 1,394 1,491

Sources: US Geological Survey and Bloomberg

Exhibit 6 Tentative Capital Takedown Plan and Loan Principal Repayment Sc hedule (in millions of dollars)

Line 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total

Capital Takedown Schedule a 1 Senior secured debt —U.S. banks (10%) 10.0 50.0

60.0

2 Senior unsecured debt —Japanese and Korean banks (7%) 10.0 30.0

40.0

3 Senior subordinated debt —Chinese steel makers (9%) 20.0 40.0

60.0

4 Equity —New Earth Mining, Inc. 40.0 0.0

40.0

5 Total capital 80.0 120.0

200.0

Loan Principal Repayment Schedule a

6 Senior secured debt —U.S. banks (10%) 0.0 8.5 8.1 8.5 8.2 7.8 7.1 6.1 5.7 0.0 0.0 0.0 0.0 0.0 0.0 60.0

7 Senior unsecured debt —Japanese and Korean banks (7%) 0.0 5.4 5.2 5.1 4.8 3.9 3.5 3.2 2.3 2.1 2.2 2.3 0.0 0.0 0.0 40.0

8 Senior subordinated debt —Chinese steel makers (9%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 8.0 8.0 8.0 8.0 8.0 8.0 8.0 4.0 60.0

9 Total repayments 0.0 13.9 13.3 13.6 13.0 11.7 10.6 17.3 16.0 10.1 10.2 10.3 8.0 8.0 4.0 160.0

a Capital was to be supplied at the beginning of the year and repaid at the end of the year.

Exhibit 7 Projected Cash Flows for New Earth Equity Inve stment (in millions of dollars)

Line 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total

Cash Flow Estimation with Price at $80/ton 1 EBIT (based on iron ore at $80/ton) 71.2 71.2 71.2 69.6 69.6 69.6 66.4 66.4 66.4 61.6 61.6 61.6 61.6 61.6 61.6 991.2

2 Interest 31.9 10.9 8.0 5.1 2.7 0.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 58.8

3 Pre -tax profit 39.3 60.3 63.2 64.5 66.9 69.4 66.4 66.4 66.4 61.6 61.6 61.6 61.6 61.6 61.6 932.4

4 Taxes @ 35% 13.8 21.1 22.1 22.6 23.4 24.3 23.2 23.2 23.2 21.6 21.6 21.6 21.6 21.6 21.6 326.3

5 Net income 25.5 39.2 41.1 41.9 43.5 45.1 43.2 43.2 43.2 40.0 40.0 40.0 40.0 40.0 40.0 606.1

6 Depreciation and amortization 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 12.0 180.0

7 Cash flows from operations 37.5 51.2 53.1 53.9 55.5 57.1 55.2 55.2 55.2 52.0 52.0 52.0 52.0 52.0 52.0 786.1

8 Working capital changes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 20.0 20.0

9 Cash flow for debt repayment and dividends 37.5 51.2 53.1 53.9 55.5 57.1 55.2 55.2 55.2 52.0 52.0 52.0 52.0 52.0 72.0 806.1

10 Contractual debt repayment 0.0 13.9 13.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 27.2

11 Debt payment under loan covenants 37.5 18.6 19.9 27.0 27.7 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 132.8

12 Cash available for equity holders 0.0 18.6 19.9 27.0 27.7 55.1 55.2 55.2 55.2 52.0 52.0 52.0 52.0 52.0 72.0 646.1

13 Equity investment 40 0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40.0

Exhibit 8 Schedule of Debt Amorti zation Including Prepayments (in millions of dollars)

Line Loan Principal Payment Schedule 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 Total

Senior secured debt —U.S. banks

1 Contractual repayment 0.0 8.5 8.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 16.6

2 Prepayment 22.5 11.2 9.7 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 43.4

3 Annual debt amortization 22.5 19.7 17.8 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 60.0

4 Cumulative debt amortization 22.5 42.2 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0

Senior unsecured debt —Japanese and Korean banks

5 Contractual repayment 0.0 5.4 5.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 10.6

6 Prepayment 15.0 7.5 6.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 29.4

7 Annual debt amortization 15.0 12.9 12.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 40.0

8 Cumulative debt amortization 15.0 27.9 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0

Senior subordinated debt —Chinese steel makers

9 Contractual repayment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

10 Prepayment 0.0 0.0 3.3 27.0 27.7 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 60.0

11 Annual debt amortization 0.0 0.0 3.3 27.0 27.7 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 60.0

12 Cumulative debt amortization 0.0 0.0 3.3 30.2 58.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0 60.0

13 Total contractual repayment 0.0 13.9 13.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 27.2

14 Total prepayment 37.5 18.6 19.9 27.0 27.7 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 132.8

15 Total debt amortization 37.5 32.5 33.2 27.0 27.7 2.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 160.0