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Final

COPPER/MINECO -CASE STUDY

  1. Copper Company, Inc. (“Copper”) is a publicly traded company organized under the laws of the State of Ohio in the United States of America that makes and sells various copper and brass kitchenware products. The Company’s products are made under proprietary formulas created and owned by and labelled on the Company’s premises, and sold to distributors in North America under the company’s various trademarks. Over the last three years, Copper’s net revenues have averaged about US $10 million on gross sales of $75 million. Its assets are valued at $25 million, of which $2 million are cash or other liquid assets. It has about $20 million of debt.
  2. Copper would like to sell its products in the Africa market by opening up a production plant in an African country that has reliable supplies of raw materials (zinc and cooper) and electric power, a favourable business environment and an ample labour supply. It wants to purchase, or joint venture with, a mining company by establishing a local company (JVco) which would operate a factory to produce kitchenware products using Copper’s equipment and technology and the raw materials from a local mine.
  3. Copper has identified Mineco PLC (Mineco) in the fictional southern Africa country of Sabania as a potential acquisition or joint venture partner. The majority of the Mineco shares is owned by private investors who are citizens in Sabania, with a minority interest owned by a foreign investor. Mineco owns and is licensed to operate a small mine with zinc and copper deposits; it also owns land and an abandoned building near the mine that could be converted into a manufacturing facility.
  4. Mineco has a contract to sell 75% of its zinc and copper ore production to China Smelter, a diversified global mining company situated in China, under a long term supply agreement expiring in another 7 years. This long term supply contract has a “force majeure” event clause. The remaining 25% of Mineco’s production is supplied, under a long term supply contract, to Zambia Copper, a copper smelting company located in Kitwe, Zambia. Mineco has not been profitable and its revenues are barely covering expenses due to the aforementioned long term contracts which were poorly negotiated. As a result, Mineco’s expensesbarely cover its costs.
  5. Copper requires at least 125% of Mineco's current production for the Sabania venture to be successful. If Mineco is to increase its production, the company also requiresan additional 200 MW of electricity which the Sabanian power utility is unable to provide. However, the power utility of Tabania (Sabania's neighbour) has just terminated a power purchase agreement with a gold mining company in Tabania and is looking for an off-taker for 500MW of electricity which can only be supplied to Mineco through the Sabanian national grid.
  6. Copper has used, excess equipment with a depreciated value of US $6,000,000 which could be shipped to Sabania; however, to replace this equipment and to expand production, new equipment would be needed by year 4; it could be leased for US $3,000,000/annum.
  7. Sabania has experienced some economic instability, but welcomes foreign investment. It has Bi-lateral Investment Treaties with several European countries (including the Nertherlands, Germany and France) and a few African countries (including South Africa and Gabon). Sabania has also concluded a double tax treaty with Mauritius and South Africa. Sabania is a member of the Common Market for Eastern and Southern Africa (COMESA) which is governed by the COMESA Competition Commission (CCC). However, by law, companies doing business in Sabania must be at least 51% owned or controlled by Sabania citizens (or Sabanians). Sabanian Mining legislation also prohibits the disposition of a mining licence or the transfer of ownership in an entity that owns a mining licence, without the prior written consent of the Sabanian Minister of Mining. There is alsoa recent law (i)banning any export of copper and zinc ore;and (ii)requiring that these minerals be refined in the country and sold to local manufacturers to stimulate economy of Sabania and to promote job creation for the benefit of its citizens ("Beneficiation Laws").
  8. Copper and Mineco have agreed that data on the attached sheet are reasonable estimates of revenues and expenditures over the next 10 years.
  9. Copper has basic objectives about the project, including:
  1. Price: If the deal is the sale of Mineco to Cooper, Cooper needs to defer payment of at least some of the purchase price because of uncertainties about deal’s profitability, its own financial needs in North America, and its unwillingness to incur more debt.
  2. Control: Whatever the deal, Coppers wants to retain full control of JVco’s production and business operations, including control of JVco’s directors and senior management.
  3. Intellectual Property: Because it has invested so much in the development of its intellectual property, Copper wants to retain total control of all intellectual property and other trade secrets. If the project is a joint venture, it expects royalty payments of 10% of gross revenues.
  4. Profit Distributions: If the project is a joint venture, Copper is willing to contribute working capital until JVco has positive net revenues, but expects to receive all dividend distributions until those distributions equal the amount of its capital contributions. Thereafter, it would be willing to share some divided distributions with Mineco.
  5. Raw Materials: Copper needs assurance that adequate supplies of raw materials will be available from the Mineco mine or another source at reasonable prices; it also needs assurance of reliable electric power supplies.
  6. Business Environment: Coppers needs assurance that Sabania’s favourable business environment (e.g. a 10-year tax holiday, ease of divided repatriation, “common market” trade, investment treaties) will not significantly change and that if it does the deal can be re-negotiated.
  7. Termination: Coopers and Mineco need to agree upon an “exit strategy” that allows parties to disengage from the deal on reasonable terms.
  8. Disputes: Disputes that cannot be resolved by the parties need to be resolved by a neutral forum outside of Sabania, and enforceability of the forum’s awards must be assured.
  1. The owners of Mineco are attracted by the deal since it provides a ready market for their mine production. They are open to a sale at a reasonable price but are concerned about the uncertainties of Cooper’s proposal for deferred purchase price payments. They are also open to sharing in the future profits of a joint venture but are concerned about Copper having total control of JVco and about the inherent risks of the project, including the continuation of the country’s current business and regulatory environment. Aside from the property it owns, Mineco has no ability or willingness to contribute any resources to a joint venture.
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In the programme, you will be asked to assume that you have been engaged to represent either Copper or Mineco in the negotiation of a Term Sheet that addresses each of the bulleted points. Thus, in thinking through the issues presented here, you will first need to understand your client’s business objectives, and then identify how those objectives can be contractually achieved.

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