Business Analysis - OZ Mineral - Case Study Example

A. Industry Analysis The global perspective of the mining industry especially related to operations focused on extraction of copper, nickel, lead and zinc has continued to experience extremely volatile situations in the past five years or so up to 2016 (IBISWorld, 2016). Numerous researches indicate that there has been sharp level of increase that have been associated with the extraction of these minerals resulting to a significant amount fall in revenues of about 9.1% within the last five or so years. It is noted that the degree of revenues distinctively reduced in the course of recession period but later took strides in recovering from this ordeal altogether. In the period starting 2011, the level of revenues significantly jumped to about 11.9%, which was a result of the ever-rising copper prices as well as a stronger demand from the Chinese market as a whole (IBISWorld, 2016). On the contrary, however; the demand for this mineral product has currently reduced due to the redundancy in the level of growth thereby resulting to a significant plummet of the revenues within the recent years. IBISWorld (2016) industry report indicates that there will be a further reduction in the level of revenues in the period between 2015 and 2016 by 14.2% to stand at $8.2B. The figure below provides pertinent analysis related to the global indices in how the overall mining industry has continued to perform the world over; It should be noted that the global indices indicate that the emerging economies have continued to steer forward with increased level of demand for resources attributed to a stronger GDP growth that include; 10% growth in China. In essence, the mining market capitalisation has continued to experience in a recovery in the period starting 2010 as many of the key industry players recover from the loss of the market capitalisation in the global financial crisis and thereby exceed the degrees witnessed in the period towards the end of 2007. The two tables below showcase the significant changes witnessed within the global mining industry in regards to revenues and capacity of the different minerals. To be specific, the Australia mineral sector is considered to be one the most flourish ones across the globe. The sector is deemed to be the top five producers of the overall world’s fundamental minerals products; especially since it is the fourth largest producer of black coal, gold and nickel and the fifth largest in the extraction of aluminium and copper (Mineral Council of Australia, 2010). Connolly and Orsmond (2008,p.20) note that the country has lots of reserves on the aforementioned minerals, which are deemed to be substantial enough to meet and sustain the level of current production for more decades to come while supply is almost guaranteed by the ongoing intensive activities related to both exploration and technological advancements. The table below shows the top 20 Australian mining companies listed in ASX as at 2000 as well as their market capitalisation in billions of dollars. The figure further provides sufficient information related to the possible mergers and acquisition witnessed within this industry within the period. It has been established that the mining sector’s contribution to the entire Australian economy as at 2014 stood at $121B within the year. In relation to export income, it was able to generate more than $138B per year thereby representing more than a half of 54% of the total goods and services (Mineral Council of Australia, 2010). Australian Bureau of Statistics (2016), note that the industry employs approximately 187,000 people directly while still supporting more than 600,000 others in other supportive sectors. Statistically, the sector spends about $35.2B on new capital investment while $4.2B in matters related to research and development. In the period between 2014 and 2015; the Australian mining industry witnessed a value added decrease of 7.4%, with the most notable reduction being witnessed within the metal ore mining sub-sector- recorded a decrease of 12.9%. The entire decrease is related to the ever-falling commodity prices. Consequently, the sector export price index decreased by 21% in the prior between 2013-2014 and 2014-15; which was a result of extensive fall in the prices offered for quality metallurgical coal s well as iron ore as well as relatively impacts on the level of sales and services income and industry value added (Mineral Council of Australia, 2010). In fact, industry value added for this sector; fell significantly by more than 7.4% in the period between 2014 and 2015 (Australian Bureau of Statistics, 2016). Of particular interest to note, the level of employment and wage growth and development was further decreased over the aforementioned period. The degree of structural alterations witnessed due to the contraction of the mining industry has continued to impact negatively on employment demand. According to Mineral Council of Australia (2010, p.1), employment within this industry fell by at least 6.9% within the period, which represented at least 12,000 people; with a significant decrease witnessed within the exploration and other mining support services. B. Financial Analysis 1.0 ROE Analysis and Decomposing ROE Ratios 2011 2012 2013 2014 2015 ROE= Net Income/ Assets * Assets/Shareholders Equity 265.3/3,022.5 *3,022.5/2,794.2 =9.49% 152.0/3,085.6 *3,085.6/2,785.9 =19.34% (294.4)/ 2,517.1 *2,517.1/2,327.9 =-12.64% 41.6/ 2,408.7 *2,408.7/2,249.1 = 1.84% 130.2/2,566.4* 2,566.4/2,343.9 =5.55% Analysis The company’s return on equity increases in the period between 2011 and 2012 from 9.49% to 19.34% before plummeting to -12.64% in 2013. However, it gains momentum to attain a 5.55% in 2015 as can be seen in Figure-1. This is an indication that OZ Minerals has made significant efforts to come up with efficient policies on how to utilise the existing equity capital structure to realise lots of revenues. In fact, in align with the company’s new growth strategy; it continues to make capital allocation decision in relation to whether or not it will result to an effective return on investment. Notably, the firm has made decisions to purchase productive operations in form of multiple assets that include; purchasing and continual production support of the Carrapateena; conducting extensive exploration at Bellas Gate, Joint Venture at Rodinia Underway in Jamaica as well as ensured to embrace exploration strategies with Minotaur Exploration thereby resulting to a leveraging of wealth of this activity at Prominent Hill. For its inorganic options, the shareholders’ equities have been efficiently used to conduct joint exploration ventures with Minotaur Exploration in Queensland, which is situated at the Eloise Project; other explorations joint venture projects in Toro Energy as well as a complete pipeline of projects that is focused on executing value accretive growth within the company as a whole. Therefore, the company’s ROE seems to improve over the current years due to a strategy that effectively promotes aspects related to value creation whereby efficient operations that is coupled up with distinctive customer deliveries seeks to assist with the acceleration of cash flows. It has also resulted to recommendable acquisition strategies that focus on leveraging the underlying pressurized products within the market. Figure-1 2.0 Profitability Ratios Profitability Ratios 2011 2012 2013 2014 2015 Profit Margin= Net income/Sales 265.3/1,115.9 =23.77% 152.0/985.7 =15.42% (294.4)/ 644.0 =-45.71% 41.6/831.0 = 5% 130.2/879.4 =14.81% ROA= Net income/ Total assets 265.3/3,022.5 = 8.78% 152.0/3,085.6 = 4.92% (294.4)/ 2,517.1 =-11.70% 41.6/2,249.1 =1.84% 130.2/2,343.9 =5.55% EBIT Margin= EBIT/Sales 345.9/1,115.9 =30.99% 179.2/985.7 =18.17% (434.0)/ 644.0 = -67.39% 56.3/831.0 = 6.77% 186.8/879.4 =21.24% OZ Mineral’s profit margin decreases significantly between the 2011 and 2013 from 23.77% to -45.71% as a result of operational difficulties that resulted to poor production within the year. However, the ratio recovers tremendously to 14.81% in 2015 due to intensive sales activities. The return on assets (ROA) ratio also reduces between 2010 and 2013 from 8.78% to -11.70% before accelerating to 5.55% in 2015. A similar pattern is replicated by EBIT Margin that reduces from a high of 30.99% to a low -67.39% between 2010 and 2013 before accelerating again to gain momentum in 2015 at 21.24% as can be shown in Figure-2. It should be noted that improvement in the ratio can be related to adoption of the new growth strategy that resulted to a stronger operational performance in Prominent Hill, which was combined with efficient customer requirements and concentrated production levels hence resulting to a record year of production that was easily translated to sales revenues. The project’s ability to post significant results can be attributed to the early commissioning of the Malu Underground mine; an activity that was conducted three months ahead of the planned launching; intensive execution of the open pit stability programs that resulted to a rather stable open pit that fostered production activities. These performance can also attributed to the average A$ copper price, which was positioned at its lowest in 2014 as that of gold was 10% higher in comparison to that offered in 2014. Thus, the significant reduction in the copper price was countered by the higher gold price thereby realising a mark to market adjustment of more than $5.6M, which were recognised at the very end of the year in order to depict the revaluation of trade receivables to the alterations made in regards to both copper and gold price on the already improved sales structure. Figure-2 3.0 Asset Management Ratio Asset Management Ratios 2011 2012 2013 2014 2015 Total Asset Turnover= Sales/Total Assets 1,115.9 /3,022.5 =0.37 985.7/3,085.6 =0.32 644.0/2,249.1 =0.29 831.0/2,249.1 = 0.37 879.4/2,343.9 =0.38 Receivables turnover= sales/ accounts receivables 1,115.9/86.8 =12.85 985.7/171.7 =5.74 644.0/127.6 =5.04 831.0/120.1 =6.92 879.4/91.4 =9.62 Average Collection Period= 365 days/ sales/ Accounts receivables 365/12.85 =28 days 365/5.74 =63 days 365/5.04 =72 days 365/6.92 =52 days 365/6.92 =52 days Analysis Total asset turnover ratio increases slightly within the five-year period of 0.37 to 0.38 in 2011 and 2015 respectively. The receivables turnover reduces slightly from 12.85 to 9.62 in the same period while the average collection period for the company increases tremendously within the period from a low of 28 to a high of 52 days within the period as shown in Figure-3. Despite this mixed performance, the entire asset management ratios remain above the industry averages. The favourability of these ratios is a clear indication that the management has taken strides to improve operation performances and this can be associated with the formulation and implementation of effective policies. For instance, the company‘s management came up with new strategy and execution policies that were focused on leveraging the value locked within its overall assets while at the same time making sure to endure the underlying cyclical pressures of the overall mining sector and distinguishing itself from other notable companies across the globe. It is crucial to note that one of the underlying foundations related to the strategy rests with capital disciplinant that also focuses on the multiple benefits. Some of the notable efficient asset turnover policies include the decision to purchase the Carrapateena; execute exploration activities in Bellas Gate and another Joing Venture in Rodinia-Jamaica. To ensure the efficiency of its receivables turnover, the management has been seen to come up with policies that reflect on the supplier review that was launched in November 2015 that resulted to early gains of the annualised savings of more than $5M. The increase in the average collection period is an indication that the firm allows its customers enough time to come up with cash resources for goods sold on credit. Figure-3 4.0 Liquidity Ratio Liquidity Ratios 2011 2012 2013 2014 2015 Current Ratio = current assets/current liabilities 1,172.4/ 113.3 =10.37 1,004.0/116.5 =8.61 646.4/144.0 =4.48 500/91.8 =5.44 799.2/82.9 =9.64 Cash Ratio= Current assets-Inventory/Current liabilities 1,172.4-192.4/ 113.3 =8.65 1,004.0-162.3/116.5 =7.22 150.8-646.4/144.0 =-3.44 500-147.7/91.8 =3.84 799.2-143.2/82.9 =7.91 Operating cash flow ratio=Cash flows from operations Current liabilities 647.1/113.3 =5.71 344.8/116.5 =2.96 179.1/144.0 =1.24 221.5/91.8 =2.41 429.8/82.9 =5.18 OZ Mineral’s current ratio reduces insignificantly within the five year period from 10.37 to 9.64 in 2011 and 0215 respectively. The cash ratio also decreases within the period from 8.65 to 7.91 while the same pattern is replicated with the operating cash flow ratio, which decreases slightly from 5.71 to 5.18 in 2011 and 2015 respectively as shown in Figure-4. It is important to note that despite this decrease, the liquidity position of the firm still remains above the recommended standard of 2:1 meaning that it is able to meet its short-term obligations whenever they fall due. The efficiency in these ratios can be explained as follows; First, it is ascertained that the operating cash flows for the year that ended 2015 increased significantly from $208.3 to $429.8 due to a subsequent improvements in the amounts of sales; a reduction in the activity levels within the open pit as well as a cessation of exploration drilling at the newly acquired mining site; Carrapateena. Notwithstanding, the overall payments that were made to suppliers as well as employees remained to be lower at$90.5M; while the receipts from the company’s customers increased tremendously within the period as the overall exploration expenditure decreased by about $15.6M. Notably, the firm’s overall current asset base increased within the period as a result of imminent increase in the level of profits that was partially countered by payment of dividends as well as a significant reduction of the value of investments in equity securities. In essence, it is still within this period that OZ Mineral opted to sell its underlying investments in Sandfire and other insignificant investment ventures thereby realising a total of $126.5M in cash resource. Subsequently, there was a subsequent reduction in the lease receivables due to imminent amortisation of the lease receivable in the course of the operational period. As a result, the overall consideration was paid in 2012 in order to acquire equipment that was to be recognised as a lease receivable is expected to be regained in a much more progressive manner over the mining services contract with another company; Thiess through a reduced service mining cost. It can also be a result of increased inventories levels for which the non-current ore stockpiles improved by more than $80.9M in relation to surplus production in the open pit mining facility Figure-4 5. Leverage Ratios Leverage Ratios 2011 2012 2013 2014 2015 Total Debt Ratio= Total Equity/Total Assets 2,794.2/3,022.5 =0.92 2,785.9/3,085.6 =0.90 2,327.9/2,517.1 =0.92 2,249.1/ 2,408.7 = 0.93 2,343.9/2,566.4 =0.91 Times Interest Earned= EBIT/Interest 345.9/2.9 =119.27 179.2/3.6 =49.78 (434.0)/ 5.4 = -80.37 56.3/3.7 = 15.21 186.8/4.7 =39.74 The company’s total debt ratio reduces slightly within the five-year period from 0.92 to 0.91 in 2011 and 2015 respectively while the times interest earned ratio decreases significantly within the period from 119.27 to 39.74 within the same period as shown in Figure-5 below; These ratios are favourably positioned in comparison to the industry average meaning that OZ Mineral has ensured to strike a balance between equity and debt funds. The fall in the times interest earned ratio can be clearly explained by the recent negotiations made by the company in order to rectify the debt facility that was set to reduce the level of costs that was to be incurred in order to sustain the commitment while at the same enjoying the flexibility that could foster the newly adopted growth strategy. References List Australian Bureau of Statistics, 2016. Mining Operations, Australia, 2014-2015. Retrieved on May 27, 2016 from http://www.abs.gov.au/ausstats/abs@.nsf/mf/8415.0 Connolly, E & Orsmond, D. 2008. The Mining Industry: From Bust to Boom. Reserve Bank of Australia. Retrived on May 27, 2016 from http://www.rba.gov.au/publications/rdp/2011/pdf/rdp2011-08.pdf IBISWorld. 2016. Copper, Nickel, Lead & Zinc Mining in the US: Market Research Report. Retrieved on May 27, 2016 from https://www.ibisworld.com/industry/default.aspx?indid=117 Mineral Council of Australia, 2010. The Australian Minerals Industry and the Australia Economy. Retrieved May 27, 2016 from http://www.minerals.org.au/file_upload/files/publications/Aus_min_industry_fact_sheet_March_2010.pdf OZ Minerals. 2015. 2011-2015 Annual Reports. Retrived from https://pwlab-files.s3.amazonaws.com/instructions/488641_6?AWSAccessKeyId=AKIAJ7JMF56FAIF7SEVQ&Expires=1464350435&Signature=bVVxYTrTw26%2B9R2c7DSFXQfaWgU%3D Read More