I'd ask what type of financing?

Widget factory would probably make more sense to receive debt financing since it most likely has more hard assets and stable cash flows.

Mine typically would be equity seeing as there is significant downside with not many assets to fall back onto and literally no cashflows unless it hits something and if it does you want all the upside provided by providing equity financing.

 
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There is no right answer to this question. The interviewer wants to see your thought process and how you evaluate businesses.

There are many aspects you can approach this, but I would first ask what type of financing we're talking about. Project financing? Equity? Maybe even royalties?

Then I'd evaluate the competitiveness of each business. Widget factory, at first glance, might be more attractive for debt financing - the farther you get from upstream industries (e.g. oil & gas, mining), generally, the more differentiated the products. But maybe the widget factory produces shitty widgets no one really wants anymore. Or perhaps the factory is extremely reliant on a few customers / suppliers.

In contrast, while mines are victims to the vicissitudes of the commodity markets, they can be attractive too. If the mine produces a commodity that is scarce and projected to have high demand in future, it could be interesting. Or if the properties of the mine allow for lower cost operations (e.g. better infrastructure, better geology, located close to export terminal, etc.) And if the mine is owned by a large producer, like Rio Tinto or BHP, could be worth talking about economies of scale or operational expertise.

And lastly, would talk about the returns for each financing. If the interest rate charged is the same for both, yeah the widget factory is probably more attractive. But given the general lack of investor interest in the mining space, you might be able to extend financing to the mine with more attractive terms (higher rates, stricter covenants, etc.)

 

it depends...if the mine procudes rare earth metals, and the price of those are skyrocketing with no end in sight, then the mine would be a better investment.

If the widget factory makes buggy whips...and they are going out of style, then that might not be a great investment (although, maybe the factory can be retooled to produce something else that has more value...where as a mine con only produce what its got in the ground).

So, you need more information, as a lender, before making this determination.

I would assume this interview question is a prompt to get you to think about all the other questions that you should be asking as a lender, in your role as a risk manager and a steward of capital...which is kindof what finance is all about.

just google it...you're welcome
 

Thought process can get pretty complex as an earlier comment explains, and there are different ways of looking at it.

The way I'd look at it:

Lending, like all investing, is about risk and return. Some projects are riskier, but could be worthwhile if the return is high. The question doesn't state returns so assume they're similar and focus on risk.

Risk can be talked about many different ways but most of them are some form of asset coverage or cash flow coverage.

Asset coverage: the mine's asset coverage is the minerals in the ground; the value of the minerals tends to fluctuate quite a bit, so it's not terribly easy to lend against. I'd be most interested in how low the price can get; if there's a discernible "floor" then that's a good basis for lending. The widget factory's asset coverage is the machinery (unless already encumbered) and other hard assets (such as the building, if owned). Generally speaking these have a bit more stable value than minerals. It's not night and day; both go up and down with the economy. But on the margins I'd say the factory has a more stable asset base.

Cash flow coverage: obviously depends on what kind of mineral and what kind of widgets, but in general both of these have very unstable cash flows due to high fixed cost. Because of the fixed costs being so high, in leaner times cash flow will really suck and in better times it will be great. Due to the high volatility, cash flow coverage is less of a relevant concept for this decision. I would focus more on the asset coverage.

Keep in mind that in either case, if assets are already encumbered (e.g. if the factory bought the machines using secured credit) then the asset base becomes less relevant.

In the real world, being extremely general (obviously, since we don't know what kind of widgets and minerals being produced), I tend to see more low-cost financing available in manufacturing than in mining due to stability of asset base and in some cases, stability of cash flows.

The one wrong answer is anything having to do with upside, if we're talking debt. One comment above refers to lending to the mine because the value could go through the roof. Debt investors are concerned with how low it can get, not how high.

These types of questions can be a lot easier to work through if you force some assumptions. Interviewers don't mind. So let's say the minerals are currently worth $3B and can fluctuate in value between $1B and $5B. If the miner is only looking to borrow about $1B, that could be a safe financing that gets done at a low rate. OTOH if miner is looking to borrow $2B then as a lender I'm going to say the asset coverage isn't where it needs to be, because the minerals could quickly drop to 50% of loan value.

 

Got asked this during interviews (can't exactly remember who- Moelis or PJT). As has been mentioned, it's more of a case question that's probing your thought process.

Anyway,

Everything that has been said here is important but no one has said the key point the interviewer is looking for: a mine has a finite life.

This affects a few things.

First, obviously you need reliable estimates that it will outlive the tenor of the note (you would ask this to the interviewer). Second, how you value of the underlying asset changes too, because you can't use Gordon growth for terminal value, so you need to talk through a well reasoned valuation.

You can infer a few more things, but the interviewer told me that finite life was the big difference.

Array
 

Eh. Fair enough I guess. I mean, I don't think all the commenters overlooked the limited life because they don't know as much as this banker. I think they overlooked it because its assumed that the life is long enough to not be a factor. Besides, who says a factory lasts forever? Both the mine and the factory are secured by the underlying assets for some period of time that's generally not forever.

But whatever. There are always interviewers who think one random aspect of an open-ended question is "the thing".

 

I mean...no it's not inferred that the factory also has a finite life. It's a pretty large difference (especially when you get the "would you invest" theoretical instead of "would you finance".) The crux of accounting and valuation is based on firms being a going concern, and the mine is not necessarily a going concern, while the factory most certainly is.

I just bring it up because it is the key point my interviewer was making and I think it is the point of the question.

Array
 

I've given my share of technical interviews for associates an analysts when I worked in banking. I have to say that this is a pretty dumb interview question, if the crux of the interview depends on someone first having to somehow figure out that mines have a finite life....unless you were interviewing for an natural resources group (in which case, this would be fair game because these are the companies you would be working with). The interviewer would have been better off just telling the interviewee upfront that the mine has a finite life so that the interviewee can work through the implications of that difference, which seems far more important and relevant as far as testing a candidate's understanding of finance.

 

Yeah it's stupid to ask a "let's see how you think" question where the interviewer thinks it all turns on one key item. Especially a key item that one set of candidates simply won't know, and another set of candidates will understandably overlook because who the fuck finances a mine for longer than its life?

I think the interviewer referenced in this instance is just an idiot. I've seen a lot of dumb midlevel bankers who think there's a magic key to a question when there isn't, so I'm not surprised.

 

I don't want to echo the points that have already been said about cash flow, asset values, the need for more information, and the like. I would throw in asking some basic questions about the output of both options. Are the widgets a standardized item, or is it like the iPhone where a new model is released every few years and the previous model is then sold at a reduced price? How commoditized and price sensitive are the goods being mined? What are the economic conditions we're assuming going into this, particularly over the X-Year time horizon of the potential lending agreement?

There are two things I want to add which I don't believe were covered though. The first is what are the minimum breakevens for both options. While this is less important for the widget factory, as there are only two real factors that drive being able to break even, this becomes an issue for the mines. Since output prices fluctuate greatly, knowing what the minimum breakeven price will be can provide you a good sense of what the repayment risks could be. Using oil as an example, Permian Shale, depending on the field, has a breakeven between $32 and $47 USD/BBL. As long as oil stays above 50/BBL, the Permian Base continues to be viable. If it drops below that, then not every oil field will be viable. At Sub-$32 USD/BBL, the entire Permian Base will be losing money. The same concept should apply for mining. This poses a potential risk depending on the price of the goods being produced and needs to be factored into the discussion. At the same time, you also need to tie out that future cash flows for the mine can fluctuate based on pricing more than the widget factory.

The second thing I will add, and it shows that you're thinking in a broader sense, is asking about the value of each relationship. Is this a new business or a pre-existing relationship? Do either opportunity have a real shot at growing into a long term relationship? How much can be levered by relationships across the firm (ex. this is a new business for lending, but one of the choices has a relationship with Sales and Trading or IBD already)? What are the economic conditions faced by both companies? How does that impact their ability to grow in the future? What other services can you provide directly or refer to across the firm? Things like that show you grasp the bigger picture. By being cognizant of the relationship, you are showing that you understand the nuances of the relationship aspect of finance and banking as well as the financial aspects of this deal.

 

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