Newcrest Mining Limited - Company Analysis - Example

Brief Summary

Newcrest Mining Limited (NCM) is a mining company with operation in the various region and is recognised as one of the global gold mining companies. The company has an interest in gold and copper mining, and mainly it utilizes open mining method. It owns various projects including Lihr which is considered to be one of the largest gold deposits across the globe (Annual Report 2015: 14). Others include Gosowong, Telfer, Hidden Valley, Bonikro, Wafi-Golpu, etc.). In 2015 NCM made several achievements including, cost reduction, increased production of gold and copper by 1% and 12% respectively, increased profit by 19% and completion of various projects (Annual Report 2015: 2). Also, the company achieved growth free cash flow and cash flow from operation by 717% and 53% respectively while the earnings before interest and tax(EBIT) increased by 19% in the same period (Annual Report 2015: 3). The improvements in NCM operations could be attributed to its growing focus on the creation of free cash flow, sustainable reduction of cost and debt, as well as cultivation of personal discipline. The company is also concerned about the sustainability of its operations and to achieve these objectives the provide support to the social outcome, positive economics and mitigation of environmental impacts caused by their mining activities (Annual Report 2015: 23). NCM current operations are focusing on strengthening cash flow and increasing earnings. NCM has good corporate governance that has played a significant role in retaining investor confidence (Newcrest Mining Limited, 2015: 4). Although the company’s 2015 financial performance has not been perfect, the directors are confident that the company is heading towards achieving its vision and objectives.

The details of the directors presented in this report reflect their situations as of the year 2015.

2. The Board of Directors

Names

Gender

Age (yrs)

Education

Career history

Remuneration

Length of service

Sandeep Biswas

(Executive Director)

Male

53

BEng(Chemical (Hons)

Currently, he is the managing director and Chief Executive Officer (MD&CEO) of NCM. Before joining NCM, Biswas was the CEO of Pacific Aluminium. Also, he had initially worked with Mount Isa Mines, Western Mining and Rio Tinto. He has expertise in operations, business development and research on various minerals. His previous appointment includes director of Minerals Council of Australia.

A$5,653,000.00

1 year

Lady Winifred Kamit

Female

62

BA, LLB

She is an independent Director a member of various committees including Human Resource and Remuneration and Safety and Sustainability. She has vast experience & skills in business. Also, she is a director of Steamships Trading Company Limited.

Her former appointments and directorship include the head of Coalition for Change, Director of South Pacific Post Ltd, Director of Anz Banking Group (PNG) Ltd, Director of Nautilus Minerals Niugini Ltd and Director of Post Courier Ltd.

February 2011.

Gerard Bond (Executive Director)

Male

47

BCom, Graduate Diploma Applied Finance and Investment, Chartered Accountant.

He is the Finance Director and Chief Finance Officer. He has prior involvement in the global finance industry with various entities such as NCM, Coopers & Lybrand, BHP Billiton, and Price Waterhouse. He performed various senior executive functions including Mergers & Acquisitions at BHP Billiton, Treasury; he served as an assistant CFO, CFO and the head of Group Human Resources at BHP Billiton.

A$2,202,000.00

3 years

John Spark

Male

66

BComm, FCA, MAICD

He is an independent non-executive director of Newcrest, a Chairperson of Audit and Risk Committee. He is a nominations committee member. His proficiency involves reconstruction of the company, financial analysis, and accounting. Also, he is an auditor of registered entities. His previous executive roles include chairperson of Ridley Corporation Ltd, managing partner of Ferrier Hodgson, director of Baxter Group Ltd, ANL Ltd, and Macarthur Coal Ltd.

251,0000.00

8 years

Peter Hay

(non-executive director)

Male

65

LLB

He has an outstanding experience in finance, corporate law, business, investment banking advisory with particularly in mergers and acquisitions. He has also served as government and government-owned enterprises advisor. Currently, he is the chairperson of Federation Limited and Federation Centres Limited (since 2015), Director of AICD and Member of AICID.

Also, has been a director of various companies such as GUD Holdings Limited, Alumina Limited, Novion Limited, Myer Holdings Limited, Australia and New Zealand Banking Group Limited, etc.

A$601,000.00

2 year

Philip Aiken AM

Male

66

BEng (Chemical), Advanced Management Program (HBS)

He works as an independent non-executive director of Newcrest. He has membership in Human Resource Remuneration Committee, Nominations Committee, and the Safety & Sustainability Committee. He has outstanding expertise in regional and intercontinental business in engineering. He has held executive positions in various companies such as BHP Billiton, BHP Petroleum, BOC/CIG, Nylex and Macquarie Capital. Currently, he is the chairperson of Aveva Group Plc and also Balfour Beatty Plc. In his career journey he has worked with various companies including Robert Walters Plc (as chairperson) and as a director of Miclyn Express Offshore Ltd, Kazakhmys plc, Essar Energy plc, Essar Oil Limited and also National Grid Plc among others.

A$241,000.00

2 years

Vince Gauci

Male

73

BEng (Mining)

He is an independent non-executive director. He is a member of the Human Resource and Remuneration Committee, and also the Safety and Sustainability Committee. He is a former MD of MIM Ltd., former Chairman of Runge Ltd and Broken Hill Community Foundation and a former director of Liontown Resources Ltd and the Coat Hire Ltd.

A$241,000.00

6 years

Richard Knight

Male

74

BSc (Mining Engineering), MSc (Mine Production Management), Chartered Engineer.

He is an independent non-executive director at Newcrest, and he chairs the Safety and Sustainability Committee. He has diverse expertise and skills accumulated over 40 years in mining industry across global jurisdictions. His other current appointments include the Director of Mining Education Australia and the Chairmanship of the Mining Engineering Advisory Board at Monash University. He formerly served as the Director of Asia Pacific Ltd, Barbara Ltd, Northern Orion Resources Inc, OZ Mineral Ltd, St. Portman Ltd and Zinifex Ltd. Also, is a former Executive Director of North Ltd, president, and CEO of Iron Ore Company of Canada and CEO of Energy Resources Australia Ltd.

256,000.00

7 years

Rick Lee AM

Male

65

BEng (Chemical) (Hons), MA (Econ) (Oxon) FAICD.

He is an independent non-executive director of Newcrest where he chairs the Human Resource and Remuneration Committee and is a member of the Audit and Risk Committee. He has broad experience and skills in banking, finance, and international commerce. Also, he chairs the board of directors of Oil Search Ltd. He is a former executive role includes CEO of NM Rothschild Australia Ltd and CSR Ltd, Chairperson of directors of the Australia Institute and C.Czarnikow, and director of CSR Ltd, former deputy chair of Ridley Corporation Ltd and Chairman Salmat Ltd.

A$266,000.00.

8 years

Greg Robinson

Male

53

BSc (Hons), MBA (Columbia University), MAICD.

He was an MD and CEO since 2011 and a director of finance (2006-2011) in NCM. Also, he performed various executive functions in BHP Billiton Group such as Chief Finance and Chief Development Officer, a member of executive committee, and Energy and CFO, petroleum. He is an ex- Director of St. Vincent’s Institute and Investment Banking at Merrill Lynch & Co.

A$22,000.00

10 years

Tim Poole

Male

46

BCOMM, CA

Tim was an Independent Non-executive Director and a member of audit committee, and human resource; remuneration committee and the nominations committee.

He was a director and a chairperson of various companies in different industries. Also, he served as MD of Hastings Funds Management Ltd and Chair of Asciano Ltd., chair of Lifestyle Communities Ltd, director of Aurizon Holdings Ltd, Director of Macmillan Shakespeare Ltd, Director of Japara Healthcare Ltd, and the Chair of Westbourne Credit Management Ltd.

A$247,000

9 Years

(Source: Annual Report 2015)

Characteristics Summary of the Board

The summary of the board is crucial because it shows how the entity is implementing the policies and principles of corporate governance. It shows the level of expertise of all the executive and non-executive directors, their remunerations, diversity regarding age, gender and education background, etc. This summary can provide the investors with a glimpse of how the organization is performing its functions. Therefore, this is crucial for promoting and retaining of investor confidence.

3. Corporate Governance Recommendations (400)

Corporate governance embodies the framework of rules procedures, relationships, and structures for the exercise and control of authority within the corporations. Good corporate governance is crucial for cultivating investors confidence that enables the entities listed in ASX to compete effectively in the market. The Newcrest Mining Limited policy on corporate governance provides a clear framework for the company to issue a public report regarding the public declaration of company’s exploration results, ore reserves and mineral resources (Newcrest Mining Limited, 2015: 2). The NCM framework of “corporate governance is based on the corporate governance principles and recommendations published by the ASX Corporate Governance Council” (Annual Report, 2015: 32).

• The listed entities should disclose the duties and responsibilities of the board members, management and monitoring and controls systems and distinguish them from those of managers.

• The listed entity should conduct thorough background check f the proposed persons before appointing them as director and furnish the security holders with their findings.

• All the appointments of directors and senior executives should be documented with details of their terms of engagement.

• The company’s secretary is directly answerable to the board via the chair regarding the governing of the board.

• The entity should establish and disclose the procedure of assessing the performance of all board committees, individuals, and directors.

• The board should have a nomination committee composed of majority independent directors, and the chairs should also be an independent director.

• The entities should have skills matrix of the board to help identify and fill the gaps of skills and expertise.

• The corporation should have the policy to guide on the recruitment of new directors and provide the directors with opportunity for career development to achieve the organization goals.

• The entities should have a code of conduct for the directors, senior executives and the staff to promote ethics and responsibility in the organization.

• The entity should have audit committee composed of at least three non-executive directors.

• The audit committee must attend the AGM to respond to any question regarding the audit report.

• Every entity should have a written policy on disclosures of company’s information.

• The listed entity should plan and implement an investor relations program to enhance effective interactions with the investors.

• The entity should provide policies and procedures to facilitate security holders’ participation at meetings.

• The entity should establish risk management and monitoring committee.

Source, (ASX Corporate Governance Council, Nd.)

In the year ended 30th June KPMG were the NCM external auditor and taxation advisor. The auditor’s total remuneration for the year was A$585,000.00 (Annual Report, 2015: 68).

The external auditor is responsible for conducting an objective, unbiased evaluation of the client’s resources to establish whether they are being managed responsibly and efficiently to meet the set objectives and goals (The Institute of Internal Auditors, 2012: 5). Therefore, auditor helps the investor to gain confidence with the entity by promoting integrity, accountability and enhanced performance of the organisations. However, the auditor may fail to achieve these functions in case of poor coordination between the auditor and client, or both the client and the auditor decides to work unethically through collusion to conceal malpractices of the client.

5. NCM’s Investor Characteristics

Greg Robinson

141,270

Debra Stirling

68,707

Collin Moorhead

49,899.

Gerald Bond

33,838

As of 30 June 2015 the members with largest shares in NCM is as provide in the list above. The share owners influence the power of control of the shareholders in the company. This implies the four persons have about 80% of the company’s share have the strong influence in the operations of the company. For instance, during the annual general meeting they can pass resolutions on how the directors should carry out the business operations. Also, they can decide who should be appointed as the new director and who should have quite the directorship. Furthermore, they can influence the remunerations of directors, executives and the managers by either upscaling of downscaling it due t their majority voting power (Annual Report, 2005: 72). Therefore, having a few individuals owning the majority shares of the company puts the operations of NCM at the fate of those four shareholders.

4. Financial Statement Analysis

Ratio

Calculation

Comment

Current ratio

Total Current assets/total current liabilities (1384m/663m) = 2.09

This is a liquidity ratio used to evaluate the ability of the company to meet short-term obligations. This ratio is high, and it implies that the NCM is in good liquidity position and can meet all its short-term cash obligations without facing the liquidity challenges.

Quick ratio

(Current assets – inventories)/current assets = (1384m-806m)/663m = 0.87

This is also a liquidity ratio. The quick ratio of NCM is less than one (a higher value than one is preferred) thus it implies most of the company’ current assets are tied up in the inventory and cannot clear its current liabilities within a short time. Therefore, this is not very healthy for the company although it does not mean it has liquidity challenges.

Inventory turnover

Cost of goods sold or net sales/average inventory = 3318m/2108m = 1.574.

This is an activity ratio assessing how fast the company can convert its inventory into cash. This turnover is rate low. Thus it may imply the company is overstocking the products or is having challenges with marketing its products. However, a meaningful requires the support of other ratios.

Account receivable turnover

Net credit sales/Average account receivables = 1589m/187.5m =8.75

This is an activity ratio used to assess how the company uses its assets to generate income. This high ratio could have many implications. For instance, it could imply that the company has restrictive credit policies or its only lending to customers who have good credit worthiness. Although this helps to eliminate bad debts, it may result in loss of customers to the competitors.

Asset turnover

Revenue or sales/total assets= 4,344m/15,368m = 0.283

Asset turnover ratio measures the efficiency with which the business is generating income from the assets. The NCM has a low turnover which could imply it is inefficient.

Debt equity ratio

Total liabilities/owner's equity = 6309m/8918m =0.707

This leverage ratio examines the efficiency with which the business is generating income about owner’s equity. The NCM has a low ratio, and this could imply that it is not very aggressive in financing its projects with resources provided by the business owners.

Gross profit margin

Gross profit/total revenue = 1025m/4344m*100 =0.24 or 24%.

A higher percentage is preferred because it demonstrates the ability of the business to cover its operating expenses and finance other projects. The gross profit margin for NCM is not very good hence they should become more active to increase their profitability.

Profit Margin

It is a percentage of net revenue to revenue =net income/revenue = 560m/4344m = 0.13 or 13%

The profit margin of 13% implies NCM earns $0.13 for every dollar of its investment. A higher profit margin is preferable.

Return on assets

Net income/Total assets = 560m/15,368m = 0.036 or 3.6%

Return to assets measures the company’s profitability about the assets. This is ratio implies that NCM is earning $0.036 for every dollar of assets it owns. This is not profitable enough hence the company should improve its activities to earn more returns.

Return on equity

Net income/shareholders equity = 560m/9,059m = 6.2%

Return on equity ratio measures the company’s income relative to owner’s equity. It is a measure of profitability as well as the efficiency of the company. This implies the company is likely to depend on credit for capital to make a profit.

(Source: Annual General Report, 2015: 75)