Assignment #2 – pickins mining case

two page paperPickins MiningPickins Mining is a midsized coal mining company with 20 mines located in Ohio, West Virginia,and Kentucky. The company operates deep mines as well as strip mines. Most of the coal minedis sold under contract, with excess production sold on the spot market.The coal mining industry, especially high-sulfur coal operations such as Pickins, has been hard-hitby environmental regulations. Recently, however, a combination of increased demand for coaland new pollution reduction technologies has led to an improved market demand for high-sulfurcoal. Pickins has just been approached by Middle-Ohio Electric Company with a request to supplycoal for its electric generators for the next four years. Pickins Mining does not have enoughexcess capacity at its existing mines to guarantee the contract. The company is consideringopening 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 $7.5 million on an after-tax basisif it sold the land today.Strip mining is a process where the layers of topsoil above a coal vein are removed and theexposed coal is removed. Some time ago, the company would simply remove the coal and leavethe land in an unusable condition. Changes in mining regulations now force a company to reclaimthe land. That is, when the mining is completed, the land must be restored to near its originalcondition. The land can then be used for other purposes. As they are currently operating at fullcapacity, Pickins will need to purchase additional equipment, which will cost $46 million. Theequipment will be depreciated on a seven-year MACRS schedule. The contract only runs for fouryears. At that time the coal from the site will be entirely mined. The company feels that theequipment can be sold for 60 percent of its initial purchase price. However, Pickins plans to openanother strip mine at that time and will use the equipment at the new mine.The contract calls for the delivery of 450,000 tons of coal per year at a price of $65 per ton.Pickins Mining feels that coal production will be 770,000 tons, 830,000 tons, 850,000 tons, and740,000 tons, respectively, over the next four years. The excess production will be sold in thespot market at an average of $82 per ton. Variable costs amount to $26 per ton and fixed costsare $3.9 million per year. The mine will require a net working capital investment of 5 percent ofsales. The NWC will be built up in the year prior to the sales.Pickins will be responsible for reclaiming the land at termination of the mining. This will occur inYear 5. The company uses an outside company for reclamation of all the company’s strip mines. Itis estimated the cost of reclamation will be $5.5 million. After the land is reclaimed, the companyplans to donate the land to the state for use as a public park and recreation area. This will occurin Year 6 and result in a charitable expense deduction of $7.5 million. Pickins faces a 38 percent 

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