Pre-Negotiation Memorandum Term Paper

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Prenegotiation Memorandum (pm)

Negotiation Team

Re: Tamarack, MN and Twin Lakes Mining Company

Position Structure

Twin Lakes Mining Company

The Twin Lakes Mining Company (hereafter known as 'company') makes significant contribution to Tamarack, Minnesota - employing 21% of the residents, providing 33% of the total real estate tax base - and is considered an integral entity to the town's longevity. The city needs Twin Lakes to maintain the current standard of living the residents enjoy.

The City of Tamarack

The city operates on a zero deficit per annum decree. Twin Lakes Mining Company has directly caused some of the need for improvements concerning water quality, air quality, and effluvia and pollution management. The city also relies upon the heavy property taxation to provide economic, culture, and recreation services to the community. Twin Lakes Mining Company does not need the City of Tamarack (hereafter known as 'city') to continue operations in other locations and as a corporate entity.

Negotiation Issues and Objectives

The company recognizes the urgency from the city to deal with water, air quality, and road issues, the escalating demands from the EPA to align production with current laws and standards, and the overall climate of the industry accompanied by the financial limitations placed by the corporate office. Based on this knowledge, the following lists embody the issues and objectives to be addressed during this negotiation period.

Issues

Water treatment plant - the city has projected growth over the next few years will require an additional water source and must address this need with or without the company's presence, company must address clean up issues for EPA requirements and co-existence with city

Air and roads - although the company has already agreed to invest $8 million to improve air quality, plant improvements will not address city's needs; city must also accept partial ownership responsibility for maintenance as company owns half the roads and permits free access to citizens and tourists

Bond issue - assuming $20 million bond would 'tie' company to city for 25 years, company cannot solely float the bond, approval would require highly unpredictable elector vote

Taxes - company is paying too much in taxes, considers them unfair in structure and amount, and is unwilling to assume improvements, building, and upgrades while under current tax base

Objectives

Water treatment plant - negotiate way to build plant with updated technology for ore-effluvia recovery and eliminate need for sediment recovery ponds

Air and roads - negotiate agreement not to repave current roads but implement dust management protocols; demonstrate city's responsibility in partnership to manage road costs

Bond - negotiate agreement with city to vote the bond into project planning and accept 50% of annual interest payment

Taxes - negotiate a moratorium on taxes until building and improvements are completed (approximately 10 years with bond approval (($4 million expendable income vs. $44 million costs)) and 15 years without bond approval); reduce entire tax base (property and right-of-way assessments) by 50%

Negotiation Priorities and Potential Tradeoffs

The following list orders negotiation priorities - with maximum, minimum, and target positions - in descending order of importance.

Negotiation Priorities

Protect company's ROI (return on investment) maximum position - spend capital on investments which will build ROI directly minimum position - spend capital on investments which will maintain currently invested ROI target position - negotiate capital expenditures which meet EPA, company, and city goals without creating ROI deficits

Keep company profitable maximum position - increase company revenue on a steady basis minimum position - use only allocated funds and request no additional funding for building, repairs, or upgrades target position - negotiate balance with the city which enables both entities to cooperate in joint expenditures and remain profitable

Reduce tax base maximum position - declare moratorium on all property and right-of-way assessments until project agreements and plans are completed (10 years with bond package, 15 years without); reduce tax structure by 50% following completion of moratorium minimum position - reduce tax structure by 50% on all real estate and right-of-way assessments target position - considering all upgrades and building requirements the company is facing, tax reduction is mandatory and non-negotiable

Accept that there are mutual interests between company and city and there will be issues upon which both can agree; there will inevitably be conflict, but the company is able and willing to leave the city if all negotiations break down or fail.

Potential Trade-offs

The company may need to assume full cost for water treatment plant in exchange for acquiescence on road repaving issues (city preference).

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When pushing for tax abatements and reductions (non-negotiable), the company may be required to assume a higher percentage of the bond interest payment structure.

Cost Synopsis

The company has a ceiling on expendable funds for this location; $16 million (of which $8 million is already committed) and a $2.6 million annual return to the city.

Table 1.1 demonstrates the financial forecast without city cooperation, abatements, or bond packages. It is important to note that the data currently does not reflect day-to-day operating costs (e.g., equipment maintenance, salaries, utilities, and so on) and there are no performance demands or limitations from headquarters calculated here.

Note: normal cost of doing business will add additional overhead to this table.

Time frame

Discretionary funds

Balance

First year funds

18.2 million

Day 1

18.2 million minus $8 million previously agreed to improve roads and air quality

10.2 million

Road paving $5.1 million

5.1 million

Real estate taxes $800,000

4.3 million

Right-of-way assessments ($400,000)

3.9 million

Water treatment plant development and construction (assessed over 10-year cost period)

$20 million / 10 years = $2 million per year)

1.9 million

Increase in ore recovery revenue through use of new water collection technology (~ $40,000)

2.3 million

Table 1.1 Company expenditures without city assistance or bond package

Table 1.2 demonstrates company expenditures with city acquiescence to tax abatements, sharing project costs, and bond packages. Please note that these figures do not include normal costs of doing business and will add additional overhead to this table.

Time frame

Discretionary funds

Balance

First year funds

18.2 million

Day 1

18.2 million minus $8 million previously agreed to improve roads and air quality

10.2 million

Road maintenance (not repaving) $600,000

9.6 million

Real estate taxes ($0 for 10 years, $400,000 beginning year 11)

9.6 million

Right-of-way assessments ($0 for 10 years, $200,000 beginning year 11)

9.6 million

Water treatment plant development and construction (assessed over 10-year cost period)

$20 million / 10 years = $2 million per year)

7.6 million

Bond expenditures ($924,370 = initial payment @ 50% of share) - one time payment

7.5 million

Interest payment on bond package (at 50% of total shared with city = $1 million)

6.5 million

Increase in ore recovery revenue through use of new water collection technology (~ $40,000)

6.6 million

Table 1.1 Company expenditures without city assistance or bond package

Strategic Plan

In order to remain in the city, the company will approach the bargaining table with two non-negotiables in mind: the tax structure must be reduced and if profitability is negligible, wise ROI dictates spending the money to meet EPA requirements and closing the mine.

The negotiators will clearly know the 'break point' at which the corporate office considers the ROI to be out of balance with the investment. Using the facts in this presentation, it is clear that a collaborative effort will drastically improve the bottom line for the company; understanding how the company's presence benefits the city allows the company negotiation team to present a calm, collaborative offer with undisputed terms of goodwill.

Operate from a 'need to know' center; never revealing operating figures or profits. End each session with a statement of commitment to the best possible outcome for both sides and loyalty to both company and city.

Summary

By following the structure of this memorandum, you are addressing 12 out of the 12 negotiation points required to successfully communicate your position.

We are negotiating and not pulling back from the imminent needs of both the company and the city;

Any negotiator in this situation must know the company: its mission, profit and loss margins, and so on;

Both sides will have power in the negotiation;

There is no single-issue bargaining involved in this negotiation: both sides will win if agreements are reached and non-negotiable points are not breached;

The city has a sense of urgency in building a secondary water source, the company has an urgent need to meet EPA guidelines and prevent "profit hemorrhage";

As negotiators for the company, you will be empowered to trade off as necessary with agreement on both sides as the end goal;

You will be providing all data on a strict 'need-to-know' basis;

We will always keep the city's perception of their value uppermost in our minds during negotiations;

This memorandum will.....

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