The opportunities and the threats of the FJE Limited - Essay Example

?Accounting Contents Contents 2 Mission ment 3 Objective 3 SWOT analysis 4 Task 2 7 Task 3 8 Task 4 10 Task 5 10 Task 6 11 Reference 12 Mission statement The FJE Limited is a public limited company which has recently converted from a private limited company. As the company has become public limited it wants to list itself in the Australian Stock Exchange. FJE is an exploration company which has three leases in Mali, Niger and Wiluna area of Australia. The main aim of this project is to analyze the strength, weakness, threats and opportunities of the company as whole. The mission of the project is to analyze and to identify the cash requirement of the company for doing the various exploration works. The cash requirement has to be tailor made as per the various options to be available to the company while doing the exploration work. Objective The objectives of this project are:- To analyze the strength of the company. To assess the weakness of the company. To identify the opportunities and the threats of the company. To identify the various sources of fund and probable funds of the company. To assess the cash requirement of the company. To analyze the various options of investment available to the company in exploration. To identify the financial viability of each of the exploration option. SWOT analysis SWOT analysis is a strategic tool which is used to analyze, understand and decide on the various situations which can arise in the business during its course of operations. The full form of SWOT is strength, weakness, opportunities and threats1. The SWOT analyses of the FGE Company have been done to assess the risks and also the competitive advantage of the company and the business in which it is operating. Strength: The main strength of FJE is the sector in which it is operating. Uranium is used to produce electricity from nuclear power. Uranium itself has a very big market globally. In 2008 Australia exported more than AUD 800 million dollars of uranium to the rest of the world. The royalties achieved from Australian uranium mines is about AUD 21 million dollars per year. From Australia only about 10707 tons of uranium has been exported to the rest of the world in 2008. USA, European Union and Japan are the major importers of the uranium ore from Australia2. This signifies that uranium has a major demand in most of the countries of the world. Therefore companies who are operating in this sector will always have a demand in the market as the resources available are less compared to the global demand. Another advantage of the company is that it does not have any debt in its capital structure this means that company is less risky. The company has exploration site in Niger which has 5% of world’s uranium resource. Also it has a site in Australia which has the largest resource of uranium in the world. This gives FJE competitive advantage over other firms. Figure 1: Uranium Requirement of the World (Source: Trade Tech, 2011) Weakness: Exploration companies always have to bear the risk of failing in the discovery of the uranium ore or salable uranium ore. If the exploration companies cherish the high return of the extraction and export of the mineral ore then in case of not discovering the ore many times the exploration companies have to suffer huge loss. The cost of exploration and all the associated expenses are very high. The FJE limited is a very small company which has a very small capital of AUD 4 million dollars. If the company fails to discover uranium in the proposed sites then it will be very difficult for the company to maintain its operations. More over there are many trade restrictions on uranium like non proliferation treaty etc made the market for the uranium quite narrow. Another weakness is the intense competition in this sector. The uranium exploration market is already crowded by many big companies like Western Mining Corporation, BP Minerals, and BHP Billiton etc. Opportunities: The biggest of the FJE limited is the rising market of nuclear energy. Rise in the use of the nuclear resources will automatically increase the demand for the uranium which is the main component of generating nuclear power. There has been a steady increase in the use of nuclear power generation from the time it was first used as electricity. The use of nuclear power had risen by 66% from 1980 to the year 2007. Nuclear power fulfills the requirement of the 15% of world’s power consumption. It is considered as an eco friendly product as it helps to reduce the green house gases to a large extent. With the increase in the demand for the electricity the demand for the nuclear power will also increase and so the demand for uranium. Therefore FJE can tap and use this demand for its growth in future3. Figure 2 (Source: World Nuclear Association) Threats: The Company not only enjoys the opportunities and its strengths but also faces a number of threats. As mentioned earlier that Australia has the biggest deposits of uranium in the world therefore the sector of uranium exploration has a large number of competitors operating in this sector. There are many established companies like BHP Billiton, Western Mining Corporation etc who are ruling the market. To sustain in this competitive market for any small company like FJE limited who has very small capital compared to the large companies like BHB Billiton is very tough. The rise in the use of uranium because of increase in power generation through nuclear energy has also attracted many large and financially stable companies to enter into the market of uranium exploration. There are also many types of risk specially risks are associated with the exploration of the uranium, FGE limited who has a very small capital compared to the other companies may not be able to sustain in case of any failure. Also, exploration work is seasonal and involves a huge investment which further increases the risk. Task 2 Cash budget can be defined as the budget which is made to forecast the sources of cash and the various expenses which would require the cash to be used. It gives an idea about what are the various sources of the liquid fund which be available to the company and whether those fund are enough to meet up the expected expenses4. FGE limited is good capitalized company which has no debt in its capital structure. As per the initial information a cash budget has been prepared to analyze the sources of funds. As the company requires 1 million Australian dollars for meeting the emergency expenses in the bank therefore the budget has been prepared with the remaining 3 million dollar. Apart the various given administrative expenses like salary of the accountant, director etc the expenses of the to be incurred for travelling and visiting the various exploration sites has been found out as per the average expenses to be incurred while visiting that country. The company would have to bear about AUD 15639 as air fare per trip to Mali and AUD 19239 as air fare per trip to Niger if the directors travel by KLM Royal Dutch airlines and Ethiopian airlines to Mali and Niger respectively in business class. The company also has to bear AUD 160 per trip as car expenses if the director and the geologist visit the Wiluna site by any compact car. If the other tasks are considered then the cash budget would have to be changed. The cash budget given above does not consider the expenses likely to be incurred if the company starts exploring in the area of Niger and Mali. The cost of survey to be done in these areas and also the cost of drilling and other expenses to be incurred by the company for doing the exploration work in Wiluna has not been included. The cash budget given in table 2 includes all these expenses except the cost of the leases as they can b e delayed for a year. Task 3 The FGE limited’s geologist after doing the research work found that the two most promising sites for doing the exploration work are Mali and Niger. There is thirty percent chance to extract economic uranium and twenty five percent chance to get economic uranium from Mali and Niger respectively. The discovery of uranium in each of the case will fetch the company with about thirty million dollar. But, as there is a risk associated the exploration work that is the chance of discovering uranium therefore a scenario analysis has been done in order to find out whether the company should proceed with the activities or not in any of the two countries or in any both the countries. As the case is silent about the time of discovering and selling the uranium and also the cost to b e incurred for the exploration and research work therefore it has been assumed that the aforesaid cost and the revenue expected to be generated by selling the uranium has be made during the same year. Therefore for calculating the net present value the present value factor has been taken as 1.   Niger Mali forecasted revenue 30000000 30000000       forecasted expenses     cost of survey 150000 150000 set up cost 20000 20000 total expenses 170000 170000 npv 29830000 29830000 probability 0.25 0.3 probability*npv 7457500 8949000       if uranium is not found     npv -170000 -170000 probability*npv -127500 -119000       expected value of npv 7330000 8830000 As the NPV is positive therefore the company can do the activities in both the countries. Task 4 The FJE limited’s management is having a number of leases in Wiluna where the geologist has found 10% chance of getting the economic value of uranium but if the company discovers the uranium then it would be able to fetch thirty million dollar as revenue by selling it to the large companies. To keep the lease the company has to pay 100000 dollar every year which can be delayed up to one year. The decision that the company should keep the lease solely depends upon whether keeping the lease ifs financially viable for the company. To check the financial viability of the proposal capital budgeting technique has been used. If the uranium ore is discovered then the company would able to earn AUD 2724298.8 after recovering the expenses. If the company fails to discover the ore then it would suffer a loss of AUD 2481310. This means the expected net present value will be positive. Therefore the company can keep the lease for at least three years. As the cost to be incurred in the project by second option therefore the company should choose the second option for exploration. option 1   option 2   drilling 90000 re-flying survey 24000 set up cost 5000 drilling 60000 cost of buying the survey result 10000     total cost 105000 total cost 84000 Task 5 The FJE limited has been offered some more leases in Niger where it is already holding land of hundred meter squire for uranium exploration. As per the report of the geologist there is only twenty percent chance of getting economic ore which will be worth thirty million dollar. But the cost associated with this proposal is quite larger than the other costs of exploration in the other site of Niger. Moreover there is only twenty percent chance of discovering mineral ore. This makes the project riskier compared to the other project in the same country. As risk and return are both associated with the proposal, therefore the financial viability of the proposal has been measured with the help of capital budgeting techniques. The total expense to be incurred if the proposal is accepted is AUD 1190210.64. This includes the cost of the land, survey cost set up cost and director’s expense including his travelling, transportation, accommodation and meal. After doing the scenario analysis it can be said that the proposal can be accepted as the expected NPV is positive (4809789.36) but analyzing the financial constraints it would be advised to not to accept the offer as this can enable the company to run out of cash. Task 6 The directors have been offered to buy large areas of land which is very near to the present area of exploration. There is forty percent chance of getting uranium this in turn makes the proposal quite risky. To accept the proposal the FGE limited would have to shell out 1.5 million of US dollar that is about 1.4 million of Australian dollar. Therefore the financial viability of the proposal has been analyzed to assess whether it is viable to invest 1.5 million of US dollar for the investment. Also, the proposal has a component of risk too. There is only forty percent chance of getting economic ore, therefore scenario analysis has been done to assess whether the directors should accept the proposal. If the proposal is accepted then the company has to bear not only the cost of the land and the royalty but also undertake the cost of survey and setup which is required for any exploration. If the survey and set up cost remains same as the cost incurred for Niger and Mali then the total expenditure would be AUD 12927327.5. expenses   cost of land 1407327.5 royalty 1500000 survey cost 10000000 set up cost 20000 total 12927327.5 revenue 30000000 probability 0.4 probability of not getting 0.6 npv if ore is found 6829069 npv if ore is not found -7756396.5 expected npv -927327.5 As the expected NPV is negative therefore the proposal should be rejected. Reference Pehlchen, B. (2007). Analysis of the Chilean Tourism Market - Products and Opportunities for the Destination Pucon and the IXth Region. Germany: GRIN Verlag. Prasad, M. (1986). Cost Accounting Theory, Typical Problems with Full Solution. India: Motilal Banarsidass Publisher. World Nuclear Association. (No Date). Australia's Uranium. Retrieved on September 3, 2011. from http://www.world-nuclear.org/info/inf48.html. World Nuclear Association. (No Date). World Energy Needs and Nuclear Power. Retrieved on September 3, 2011. from http://world-nuclear.org/info/inf16.html. Read More