Financial Analysis of GFA Limited - Essay Example

? FINANCIAL ANALYSIS OF GFA LIMITED Table of Contents Introduction of the company 2 Mission ment 2 Strategic Plan for GFA Limited 3 SWOT Analysis of Company 3 Strengths 3 Weaknesses 4 Opportunities 5 Threats 6 Objectives for GFA Limited 7 Financial position of company 9 Operational plan of company 10 Aeromag 10 Western Sahara 10 Western Australia 11 Further leases in Senegal 12 Conclusion 13 Recommendations 13 References 14 Appendix I – Cash Budget for 13 months 16 Summary Africa is among the best countries when it comes to investment option for mining companies as there are numerous options that can be availed by them. Considering the situation of GFA Limited and its present position, the company has many chances of being a successful company in the region as it can explore many mineral areas that have not been exploited by other companies. The primary reason for investing in West African areas is that it can take advantage of its government support and also avail tax exemption offers being offered by African government. Africa is among the low cost operation country and it is highly recommended region for those companies that want to make a successful mark in mining exploration and development industry. GFA Limited has sufficient resources and skilled manpower to perform important operational activities and it should go ahead with the option of becoming a public listed company so that it can make successful progression in the sector. Introduction of the company GFA Limited known as GFA in the market is planning to get itself listed on Australian Stock Exchange (ASX). Before getting listed on the stock exchange, it wants to design its business plan so that it can prepare its prospectus. The company has just recently undergone a change from being a private limited company to public limited company. Presently, there are two gold exploration leases in Mauritania and Senegal, both of these areas are West African countries and one uranium exploration prospective is present in Western Australia’s area i.e. Kintyre area. All three areas need to be explored by making use of modern exploration methods. Presently, there are four directors who are running the company along with one accounts clerk and it has no debt with $3 million in bank. Mission Statement Our company strives to be the best miner of choice for all of our stakeholders that comprise of communities, contractors, employees and customers in which we are performing our operations and exceed the expectations of our shareholders by making use of technologically advanced technology so that natural resources can be utilized fully in our competitive work environment. GFA Limited foresees a strategy of delivering exceptionally competitive returns by Performance optimizations so that each phase of mining value chain for metals such as gold and uranium in each selected area i.e. Mauritania and Senegal of West Africa and Kintyre Area of Western Australia can be efficiently done. The value chain comprises of exploration, development along with operation that is cost effective and durable for mines. Build an attractive portfolio of precious natural resources’ opportunities to be converted into operating mines. Avail the opportunities of growing the business by including both Greenfields and brown exploration with the aim of merging in other well-known mine regions. Acquire expertise in technological field by gaining access to leading edge mining technologies. GFA Limited is focusing on growing business by acquisition of production and development of successful exploration areas that will enhance its performance in long-term. Strategic Plan for GFA Limited According to Rodrick (2006), Africa is basically a country which is enriched in mineralization of all types of mineral deposits because if its geological legacy (3). The country is well endowed with numerous reserves of diamond, cobalt, manganese, gold, bauxite and platinum (5). Western Africa has limited activities for mineral exploration and that is why it currently hosts about 30% of mineral resources present in the earth (Sharaky 2011). Realizing the potential explorations opportunities, GFA Limited has decided to implement exploration activities in Mauritania and Senegal of West Africa and Kintyre Area of Western Australia. SWOT Analysis of Company Strengths The main strengths of GFA Limited are as follows: 1. Strong team of management – In mining exploration and development field, it is important to have well-experienced and well-trained team of professionals who can understand the dynamics of this environment (Rodrick 2012, 3). GFA Limited has four directors who have years of experience in this mining field and they are well-aware of the mechanisms that need to be implemented to achieve the goals and objectives of the company. 2. Availability of finances for exploration activities – In order to undertake mining activities in West Africa and Western Australia regions, technologically advanced equipment are a mandatory requirement (Ploeg 2010, 422). Considering the financial feasibility as shown in Appendix 1, it can be said that company has a lot of finances available to undertake mining activities. Although leasing opportunity cannot be utilized in Senegal as depicted from financial information provided and shown in Table 4 it can still consider making wise decision in other alternative investment options such as bank. 3. Excellent research and development phase – Since research and development is an ongoing field, experts of the company have taken out enough money to invest in Research and development activities for enhancement of their business. GFA Limited has made sure that it has sufficient money available for performing exploration activities so that it can do further operational mining activities. Weaknesses The weaknesses of company are as follows: 1. Limited accessibility to capital markets – Since there are some financial constraints imposed in West African region by government (Minerals and Africa’s Development 2012, 1) there is limited accessibility to capital markets by local entrepreneurs and mining companies. The government regulations are hindering accessibility to financial resources that can help the company in boosting its performance. 2. Limited geological knowledge – Although there is a geologist in management team but the person lacks expertise in detailed information about West African region. Since GFA Limited wants to enter West African regions, there is not enough information about availability of resources in Mauritania and Senegal. Both of these areas are rich in natural resources and there are many unexplored areas (Calder 2010, 320); extensive research is required to get in-depth information about potential areas for exploration 3. Limited skills for cutting resources - The resources available in the region are limited as there are very less trained workers who have less expertise in handling advanced technologies. In most of the mining companies, there are rudimentary technologies used in operations and as a result, productivity of companies has declined (Mining for Development in Africa 2012). The company has also limited number of technology available and the cost of importing machinery is an expensive option which creates problem for application of latest technologies in company. Opportunities Some of the potential opportunities that exist for GFA Limited are: 1. Increased investment in mining – Since there is attractive and fiscal regime for mining companies in West Africa (Mining for Development in Africa 2012, 8; Ploeg 2011, 400), the company can take advantage of having access to power that is available via new gas developments and inter connectivity among regions. The company can also take advantage of government royalty being offered to it for setting up production facility in Western Sahara. 2. Exploitation of unexplored mining areas – West Africa offers many opportunities for making use of known large diversity and extent of mineral deposits; exploit potential new exploration areas so that resources can be explored; the framework for mining regulation has widened as well and there is less transparency for mining in the country’s region that enhances the working of the company (Mullins 2010, 381). 3. Value added production – GFA Limited has huge potential for manufacturing units for making value added products (Economic Report on Africa 2009, 3). With the establishment of institutions for specialized training of workers employed in exploration and development field, skilled labor availability will increase which will ensure that operational procedures in mining can be made efficient. The production as a result of using technologically advanced tools and equipment will make valuable contributions in mining world (Mining for Development in Africa 2012, 6). Threats Among the threats identified after evaluation of mining industry regarding environmental and social factors impacting the industry, the most potential ones for the company are: 1. Impact of economic recession – Global economic recession has hampered the demand of minerals which reduced investment avenues for this sector (Minerals and Africa’s Development 2012, 45). Since there is high volatility in commodity prices, there is an increasing level of risk perception among people which can reduce its demand and even lead to sub-optimal decision for investment. 2. Political and legal Instability – The country has somewhat less stable political and legal framework as there are some conflicts going on among the government and citizens (Taylor, 2012). Although the financial regime has been made attractive but still there are some relaxations that investors are seeking in these policies such as reduction in import tariffs and quotas, easy accessibility to capital market and proper infrastructure development. 3. Environmental constraints – Since mining is associated with land degradation, erosion of soil, air pollution, disruption in ecosystem and deforestation (Minerals and Africa’s Development 2012, 45), company will have to ensure that it demonstrates from its operations that it focuses on environmental friendly procedures for performing all kinds of exploration and mining activities (Ploeg 2010, 430). If adequate attention is not given to environmental constraints, then there are more chances that the company is imposed some operational constraints and may be penalized as well. Objectives for GFA Limited After reviewing the financial and strategic position of GFA Limited, the objectives of company along with their strategies are as follows: 1. Short-term Objectives a. To develop highly trained workforce who is skilled in performing all kinds of mining and exploration tasks in West Africa so that productivity of company increases by 20% by the end of current year i.e. December 2012. b. To implement appropriate technology for providing access to latest tools and equipment for mining activities. Strategy Planned: GFA limited will ensure that it employee’s people from surrounding as they have more awareness about organizational culture. They will be given adequate training in handling all kinds of tool and equipment required to perform mining tasks. Since there are many institutions being developed in West Africa and Western Australia regions, labor can be made more skilled and efficient by attending the courses of these institutions. The workforce will have to pass the tests to start working with the company. 2. Medium-term Objectives a. To revamp the image of mining company has environmental friendly company by behaving in social friendly way. b. To develop cordial relations with two main concerned authorities in West Africa region in next three months. Strategy Planned: Since mining companies tend to have negative image in the market about being less environmental friendly ones, GFA Limited will undertake various marketing activities to ensure that positive image about company’s mining activities is created and management will ensure that right people are employed so that it can support the development of its country economy. Since mining industry is expanding, it is important that company’s management team develops good relations with concerned officials and exploit other available areas for them for mineral exploration. 3. Long-term objectives a. To be the best mining company in entire region taking full advantage of technological advancements. b. To implement latest machinery to exploit unexplored regions of Mauritania and Senegal along with other nearby areas so that sales of company from this region increases by 10% in next six months. Strategy Planned: Since company has adequate amount of funds available for undertaking exploration activities, it is important that company invests them in right activities. GFA Limited will ensure that it invests its money in right bank so that it can easily earn required rate of return and progress successfully. It will ensure that permission is taken from concerned authorities in the region for taking advantage of tax exemptions and grants available for mining companies. When it will successfully get market share in targeted areas, it will expand its operations into other regions to avail mineral mining options in those areas as well. Financial position of company In order to develop cash budget, it is required to incorporate all important considerations for operational activities, a cash budget has been developed which is shown in Appendix I. Some of the assumptions that have been taken to develop this budget are as follows: 1. Of $3 million available for investment, 1 million will be kept aside for listing activities and remaining 2 million will be used for exploration activities. 2. Since directors’ accumulated salary expense is $30,000 per year each directors’ monthly salary amount to $625. 3. The weekly visit of each director to Mauritania and Senegal will cost about total $124,400. The business class air ticket cost is $1500; there will be ten trips by four directors along with hotel and travelling expenses that amount to $8400 ($30 * 7 days * 10 trips * 4 directors) and $14000 ($50 * 7 days * 10 trips * 4 directors) respectively. 4. The director trip with geologist comprise of his travelling, hotel, meal and vehicle expenses that amount to $1500, $1050, $210 and $350 respectively. Likewise, geologist expenses for travelling, hotel, meal and vehicle expenses will amount to $3000 ($1000 per trip * 3 trips), $3150 ($150 * 7 days * 3 trips), $630 ($30 * 7 days * 3 trips) and $1050 ($50 * 7 days * 3 trips) respectively. 5. Since geologists will make trips after every three months so he will be making in total three trips and director will make two trips with geologist. 6. It is assumed that money invested will give interest rate of 10% so inflow each month will be $100,000. Since leasing option will not be availed as well so it is not incorporated in the budget. Operational plan of company Aeromag Considering the infrastructure development in these regions of West Africa that have increased significantly in the last couple of years as government has undertaken certain projects to enhance its infrastructure. Although there is lack of infrastructure facilities in this region as highlighted in the report of Mining for Development in Africa presented by Australian government but low cost production and exploration of minerals make it a worthwhile place for investment. After evaluation of the options presented by consulting team, the accumulated cost of this project will cost around $190,000. Table 1: Survey cost for Aeromag Survey cost $100 per km2 Area 1500 km2 Total survey cost $150,000 Set up cost $40,000 Accumulated cost $190,000 It is also assumed that this mining activity will help in earning $30 million and after further calculation it has been found that on average 27.5% return on this investment is possible. In order to undertake this project, the company will have to ensure that right technology is in place with required skilled labor force. If right strategy is developed and implemented, then it will be beneficial for both countries. Both of these projects need to be undertaken. Western Sahara GFA Limited has been provided the option of availing the opportunity for exploring minerals in Western Sahara region. The initial cost for this region is US $1.5 million and there is only 40% chance that this area will have gold reserves. Considering the cost of survey is $5,000,000 ($100 per km2 * 50,000 km2), the loss on investment will be 100,000 per month. The quantitative analysis of the situation shows that by paying amount of US $1.5 million, the company will be able to have earning power but it will be done on the cost of losing the investment opportunity. It means that if this money is invested in some other profitable investment opportunity, then there are more chances that it will be able to meet its exploration expenses in future. If the company is concerned more about saving its money for further investment opportunities so that money can be earned and invested in right manner in the business, then it is recommended that West Sahara is not explored as there are more chances of losing initial money invested in this region. Western Australia According to Mining for Development in Africa (2012), Australia’s mining sector is among the major contributors for the country’s economic and social growth and development. As of year 2010-11, it contributed around US $100 billion in Australia’s economy and provided employment to more than 220,000 people (7). The vast mineral resources of the country are exploited by using production efficient mechanisms and supporting developing countries in exploration of mineral resources so that it can aggressively do foreign investment in mineral sector. The mining companies in Australia are getting benefited from its regulatory environment that is environmental friendly one with low sovereign risk, highly skilled labor force along with top notch and cutting edge technologies (7). Table 2: Options available for investments in Western Australia Option 1 Option 2 Area 15,000m Area 400m Cost per m $6 Cost per m $60 Total drilling cost $90,000 Total drilling cost $24,000 Set up cost $5,000 Set up cost 0 Survey report $10,000 Survey cost 0 Total cost $105,000 Total cost $24,000 GFA Limited has been provided two options for starting its operations in Western Australia. Considering the tax benefits provided to mining companies along with other positive elements in the country and also the quantitative analysis of the two options, it is recommended that the company should go ahead with lease option which is the second one as there is considerable time available for recovering the expenditure cost. Further leases in Senegal GFA limited can avail this further lease opportunity in Senegal if it is willing to behave like a high risk investor. It can be an alternative form on investment as it will generate high risk return and only aggressive investors can go ahead with this option. The main drawback with going ahead with this option is that it will hamper company’s approach of investing in less risky investments that generate smooth flow of income. As a company analyst, the following table has been drawn to show the cost that will be incurred for choosing this option. Hence, it is highly recommended that investments are kept safe and this option should not be availed. The main risk associated with this investment strategy is country risk as the political condition of the country remains unstable most of the time. Therefore, this option should not be considered by company’s management team. Table 3: Future lease in Senegal Chances 20% Total worth 30,000,000 6,000,000 Additional investment 1,000,000 Director additional cost of trip 1500 1050 210 350 Total cost 3110 Conclusion The careful analysis and evaluation of complete scenario shows that mining should be done in West Africa recommended regions as both financially and strategically these areas have a lot of exploration potential. Although initial cost is on relatively higher side but there are more chances that the company is able to earn good return on this wise investment decision. The country is best for all kinds of exploration and mining companies as the legal and regulatory framework is quite supportive for such companies and there is easy accessibility to various infrastructure facilities in the region. Recommendations Some of the recommendations that are suggested for GFA Limited are as follows: 1. African government is offering various attractive mining policies for attracting foreign investments in its region; the mining companies should exploit them. Although there are few hurdles present in the country at this point of time but considering strategically based approach being implemented by government the conditions will get favorable in future. 2. The company should ensure that employees are given adequate amount of training so that they can handle all latest tools and equipment. By investing in its workforce, it will be able to maintain its low cost strategy and take advantage of skilled labor force. References Calder, Jack. 2010. “Resource tax administration: the implications of alternative policy choices.” In The Taxation of Petroleum and Minerals: Principles, Problems and Practice, edited by Philip Daniel, Michael Keen and Charles McPherson, 319-39. Oxon, United Kingdom: Routledge. “Economic Report on Africa.” 2009. Economic Commission for Africa and African Union. Last modified April 2009. http://www.uneca.org/era2009/ “Minerals and Africa’s Development: The International Study Group Report on Africa’s Mineral Regimes.” 2012. Economic Commission for Africa. Accessed September 5, 2012. http://www.africaminingvision.org/amv_resources/AMV/ISG%20Report_eng.pdf “Mining for Development in Africa.” 2012. Australian Government AusAID. Accessed September 5, 2012. http://www.aa-partnerships.org/downloads/Mining_for_Development_in_Africa_ENG.pdf Mullins, Peter. 2010. “International tax issues for the resources sector.” In The Taxation of Petroleum and Minerals: Principles, Problems and Practice, edited by Philip Daniel, Michael Keen and Charles McPherson, 378-401. Oxon, United Kingdom: Routledge. Ploeg, Federick van der. 2010. “Aggressive extraction and precautionary saving: coping with volatility.” Journal of Public Economics 94: 421-33. ___. 2011. “Natural resources: a curse or a blessing?” Journal of Economic Literature 49: 366-420. Rodrick, Dani. 2006. “Economic Growth in the 1990s: Learning from A Decade of Reforms, Goodbye Washington Consensus, Hello Washington Confusion? A Review of the World Bank.” Journal of Economic Literature 44(4): 973-87. Rodrick, Dani. 2012. “Normalizing Industrial Policy.” The World Bank. Accessed September 5, 2012. http://dev.wcfia.harvard.edu/sites/default/files/Rodrick_Normalizing.pdf Sharaky, Abbas M. 2011. “Mineral Resources and Exploration in Africa.” Cairo University. Accessed September 5, 2012. http://african.cu.edu.eg/Dr_Abbas/Papers/Minerals_2011.pdf Taylor, Joanne. 2012.“West Africa has potential for top-five gold spot.” Mining Weekly. Last modified February 24, 2012. http://www.miningweekly.com/article/west-africa-has-potential-for-top-five-gold-spot-2012-02-24 Appendix I – Cash Budget for 13 months September October November December January February Revenue 100,000 100,000 100,000 100,000 100,000 100,000 Expenses Directors salary -2500 -2500 -2500 -2500 -2500 -2500 Admin expenses -15,000 -15,000 -15,000 -15,000 -15,000 -15,000 Directors travelling expenses air ticket 0 -6000 -6000 -6000 -6000 -6000 hotel -4200 -4200 -4200 -4200 -4200 meal -840 -840 -840 -840 -840 vehicle -1400 -1400 -1400 -1400 -1400 Director trip with geologist air ticket -1500 hotel -1050 meal -210 vehicle -350 Geologist trip exp air ticket -1000 -1000 hotel -1050 -1050 meal -210 -210 vehicle -350 -350 TOTAL EXPENSES -20110 -29940 -29940 -29940 -35660 -29940 NET INCOME 79,890 70,060 70,060 70,060 64,340 70,060 Bal brought forward 79,890 149,950 220,010 290,070 354,410 424,470 Continued on next page March April May June July August September ANNUAL Revenue 100,000 100,000 100,000 100,000 100,000 100,000 100,000 700,000 Expenses Directors salary -2500 -2500 -2500 -2500 -2500 -2500 -2500 -17,500 Admin expenses -15,000 -15,000 -15,000 -15,000 -15,000 -15,000 -15,000 -105,000 Directors travelling expenses air ticket -6000 -6000 -6000 -6000 -6000 -6000 -6000 -42,000 hotel -4200 -4200 -4200 -4200 -4200 -4200 -4200 -29,400 meal -840 -840 -840 -840 -840 -840 -840 -5,880 vehicle -1400 -1400 -1400 -1400 -1400 -1400 -1400 -9,800 Director trip with geologist air ticket 0 hotel 0 meal 0 vehicle 0 Geologist trip exp air ticket -1000 -1,000 hotel -1050 -1,050 meal -210 -210 vehicle -350 -350 TOTAL EXPENSES -29940 -29940 -32550 -29940 -29940 -29940 -29940 -212,190 NET INCOME 70,060 70,060 67,450 70,060 70,060 70,060 70,060 487,810 Bal brought forward 70,060 140,120 207,570 277,630 347,690 417,750 487,810 Read More