Response To Memo From K. Abbott-Gill, The Cfo Of Antipodes Mineral Resources Company - Case Study Example

? RESPONSE TO MEMO FROM K. ABBOTT-GILL, THE CFO OF ANTIPODES MINERAL RESOURCES COMPANY (AMR) What types of investment projects would you expect to find in a minerals company? The core business in a mineral company is; mining and therefore most investments in such entities revolve around this central activity. The following are the areas I would expect AMR to make their investments: Prospecting and exploration of minerals: The process of pinpointing deposits is costly and time consuming. A mineral company must therefore, invest in the process of geological mapping to stay in business by securing the supply end of its operations. The amount of drilling and excavation involved in mining is determined at the exploration stage and therefore, this preliminary phase of the mining process determines the financial allocation required to purchase the right tools for the jobs that include among others, drilling and transportation equipment. Equipment: After locating the mineral deposits in the exploration stage, a mining company like AMR in this case, must invest in the acquisition of the correct equipment. The success of a mining process is entirely dependent on the available excavation, drilling and transportation machinery. AMR must therefore commit to continuously acquiring proper tools, something that is always a work in progress project for companies in this industry since new, more efficient equipment are manufactured everyday. Acquisition of mines: After the completion of exploration process, mining companies must make ownership of such mining locations their projects. This can be done through partnerships with both governments and local communities in the mineral rich locations. It is my expectation that a mining company should make significant investments in acquiring mines to ensure sustainability of their respective material supply chains. Value addition on minerals: Most minerals fetch better prices if value is added onto them through diverse industrial processes. I would therefore expect a mining company to make investments in value additions for their minerals that involves construction of value addition plants. Transportation network infrastructure: The process of transportation from mining field to value addition plants for a mineral company is crucial to its success. How fast and efficiently they can excavate, transport and process ores determines the consistency of mineral supplies to their customers both in their localities and the world over. A mining company must therefore invest in transportation system that include ; construction of shorter routes to their plans to reduce fuel costs, acquire large capacity transport equipment, construct railway lines as well as properly maintain their roads (Bomsel, 1990). This investment ensures that such a company is not only efficient in its operations but is also profitable through transportation cost reduction. Acquisition of mining licenses: the process of securing a mining license, in as much as it may not be tangible is a crucial project in the workings of a mining company. Securing these licenses require serious negotiations and involve the hiring of attorney services. A mining company must therefore invest in the best lawyers and trade negotiators to handle this aspect of their operations. Trainings of staff: Employees are expected to hold particular skill sets at the time of employment. To ensure efficiency in actual company operations, AMR must invest in additional training of staff so that they acquire skills specific to the company’s activities. Employees are the most valuable assets outside the balance sheet and their training therefore, is directly proportional to an organization’s operational efficiencies and profitability. Training is one project I expect to see the company invest its resources. Green energy: Energy consumption in the mining process is a major cost element and coming up with cheaper more environmentally sustainable energy sources is one area I would expect to see AMR put its money. In adopting clean cheap energy, the company shall have honored its commitment to environmentally sustainable business practices alongside minimizing operational costs which in the end will keep AMR profitable. Rehabilitation of closed mines: Mining activities leave the earth surface seriously scared and I therefore expect to see AMR invest in rehabilitated closed mining areas. This can be done by converting such sites to nature parks with elements of aquatic life so that the public can once again enjoy what would otherwise be health hazards (Cotula, 2012). Turning the excavated areas into water reservoirs is another possible way on investing in rehabilitation of closed mines with the positive impact ensuring the community’s water security after exhaustion of minerals. Social programs: As an organization doing business in rural areas, I expect AMR to invest in the local community within their areas of operation not only as part of their Corporate social responsibility, but also as an objective in nurturing potential work force and building acceptability. Through education funding to the local community and other provisions like clean safe water supply, AMR ensures that its business operations are undertaken with full supports of locals, making such activities easy. 2. You will be working in the CFO's office if you obtain this job. What activities do you expect are undertaken in this office? The head of our department who is the CFO, has the overall responsibility of coming up with initiatives to improve AMR’s profitability by enforcing strict adherence to financial regulations and principles relevant to the business. I expect the following activities to be undertaken at this office to help the CFO and the department as a whole achieve its core objectives: Development continuous evaluation systems for short and long term strategic financial objectives for the entire company. This system will ensure that progress is evaluated and variances addressed. Overseeing and providing directions on financial as well as accounting functions throughout AMR. This will entail departmental audits and review of accounting systems in use in the entire company. Coming up with a job costing system or maintain the existing one. Regular reports on this system should also be generated and interpretations done at this department. Developing budgets, financial forecast and trends alongside providing precise analysis of operational happenings. Forecasts developed at this department will help decision making processes in the entire company (Stenzel, Catherine, and Joe, 2004). Performing an evaluation on long term company plans to help in the introduction of new programs and ensuing necessary regulation actions in line with the company’s core objectives (Petty et al 2005). The department will therefore properly evaluate the financial aspects of any new programs before adoption by the management. Coming up with business solutions to mitigate challenges faced by senior executives. The department will therefore facilitate forums where ideas and shortcomings can be shared between these executives and staff in the CFO’s office. Coming up with statistical data to help in providing advice to the management on the financial implications surrounding their decisions and choices. Forecasts and regression analysis are useful tools in supporting these decision making processes. Carrying out routine internal audits. Cooperate with external auditors by availing information useful in their duties. Ensuring compliance with the GAAP by establishing and constantly improving existing internal controls. Preparation and filing of periodic tax returns in accordance to government regulations. Preparation of monthly employee payroll. Preparation of final financial reports. Periodic and final reports presented to both the management and shareholders are generated at the CFO’s office and therefore (Petty et al 2005), I expect the activities undertaken at this office to include coming up with what constitutes these final reports. Payment of vouchers and petty cash for routine company operations. Training employees on other departments on the need to adhere to internal controls. 3. AMR is a public company, listed on the stock exchange. How does this fact have a bearing on the goal we should bear in mind when managing our finances? Given the public nature of AMR through stock exchange listing, we should always remember management’s obligation to the public who either hold shares or are planning to acquire stock. Their decision to buy or sell stock is founded on financial management practices within the company that result into either profitability or loss, information that the public regularly receives through media briefs and unofficial reports on AMR’s activities. The company through the CFO’s office must therefore, embody absolute transparency in its financial dealings to maintain shareholder’s confidence and ensure general stability of share prices at the stock market (Hope, 2006). Any suspicion of improper dealings by the public can trigger panic on the future of AMR among shareholders and lead to collapse, transparency is therefore pivotal. In managing AMR’s finances, adherence to reporting standards that cover public listed companies must take center stage. Listed companies follow strict reporting standard as outlined in GAAP and must therefore never divert from these reporting regulations as covered in the companies Act. The reason for such regulations is to ensure a company’s responsibility to shareholders is not lost through inaccurate financial reports because holders of stock depend to a large extent, on these reports to monitor the growth of their wealth. Seeking board approval in major projects must therefore be sought before releasing any finances towards such. All financial dealings must be to the benefit of shareholders who hold the ultimate power in AMR. Committing the company’s resources must therefore be done in the shareholders best interests. Decision making processes, management structures and reporting standards must therefore comply with statutory regulations governing listed companies. 4. Does or should AMR have any other accountabilities apart from responsibilities to the firm's owners? Even as a public listed company, AMR has responsibilities beyond its owners. The company is accountable to: The environment: Given the operations of AMR affect the physical environment through drilling, excavation and drilling, the company has the responsibility to conduct business in an environmentally sustainable manner. It must therefore adopt operational procedures and corporate social responsibility that corrects damages caused by its mining activities. It should embody sustainable business practices around environmental conservation by reducing green house emissions through fuel efficient machinery and organized transportation systems. External stakeholders: These are interests groups without direct stake in terms of shareholding at AMR. They include the community and consumers of mining products. To this group of people, the company must carry out its operations in ways that does not harm their interests through production of quality goods and corporate social responsibility by funding programs that touch the heart of the community. Government: Operations of mining companies are closely guided by government regulations. AMR therefore, has a responsibility to do business in compliance with the laid down government procedures. It must therefore acquire the relevant licenses and remit appropriate mining taxes. Change of policies within the company must therefore be in accordance to these regulations and any amendment in government policies must affect the operations of the company. It must make amendments to any old procedures that are in conflict with amended government regulations. International Bodies: Mining is a business governed by international laws, AMR therefore has the responsibly to adhere to any regulations outside its country of operation that affects its activities like working within the international labor laws that prohibit recruitment of minors into its mining operations and proper procedures in the sale of mineral that pose threat to international peace such as uranium and other radioactive materials (Cotula, 2012). Competitors/Industry Players: Mining industry players have a co-responsibility to adhere to the code of conduct applicable within the industry, these include quality standards and procurement procedures relevant to mining companies. AMR must therefore keep to these industry standards as part of its responsibility to the mining industry. End Users (Consumers): End users of mining products range from corporations to individuals, AMR therefore, has the responsibility to produce quality goods in a sustainable manner and provide relevant product information to this interest group. Local community: These are the inhabitants of areas around AMR’s mining zones. To this group, AMR has a social responsibility to improve their living conditions through the provision of clean safe water, better schools and health facilities, and employment opportunities. The company must take responsibility for the compensation exercise for those displaced from the mining areas and ensure that they not only live in better environments, but are also beneficiaries of the minerals as indicated by the quality of lives index (Bomsel, 1990). Answers to part 2 Bizweek Online Services 1. Investment in Special Bank Savings Account. Future value of a 20-year annuity (1+i)n - 1 FVn = PMT i = 10000[1 + 0.06]20 – 1 0.06 = 10000 (3.2071- 1) 0.06 = 10000 (2.2071) 0.06 = 10000 x 36.785 = $367,850 Therefore, at the average person’s retirement age, the handout money shall have grown to $367,850. Alternatively, the future value of this single sum of money invested for 20 years would be: Future value of a single sum invested for 20 years FVn = PV (1 + i)n = 10000 (1 + 0.06)20 = 10000 x 1.06^20 = 10000 x 3.2071354722128447 = $32071.354722128447 If rounded off to 1 decimal place it becomes, $32,017.4 2. Investment in the Share market Future value of a 5-year annuity FVn = 10000 (1 + 0.12)5 – 1 0.12 = 10000 (0.7623/0.12) = 10000 x 6.3525 = $63,525 Therefore, the expected payoff in the long run when the money is put in a share market would be $63,525. Future value of a single sum invested for 20 years FVn = 63525 (1 + 0.12)20 = 63525 (1.12)20 = 63525 x 9.6463 = $612,781.2 Therefore, the expected payoff in the long run for a future value of a single sum invested for 20 years. 3. Calculating how much the borrower would earn per month Interest (I) = 9% i = I/12 i = 0.09 12 = 0.0075 Term of the loan (T) = 30 years Y = I x T Y = 0.09 x 30 = 2.7 X = 1/2Y X = ? x 2.7 X = 1.35 n = 12 x 30 = 360 L = $300,000 P = Li 1 - 1 (1 + i)n P = Li 1 – e –n ln (1 + i) = 300,000 x 0.0075 1 – e-360 ln 1.0075 = 2250 0.9321 P = $2413.87 This value now is the monthly installment. Therefore, the amount to earn will be 1 x 2413.87 0.4 = $6,034.67 Amount to earn per year = $6,034.67 x 12 = $72,416.04 4. For 10,000,000 bonds maturity, Rate = 8% per annum YTM = C + F- P n F + P n Bibliography Bomsel, Olivier. Mining and metallurgy investment in the Third World: the end of large projects?. Paris: Development Centre of the Organization for Economic Co-operation and Development; 1990. Cotula, Lorenzo. Human rights, natural resource, and investment law in a globalized world: shades of grey in the shadow of the law. Abingdon, Oxon: Routledge, 2012. Hope, Jeremy. Reinventing the CFO: How financial managers can transform their roles and add greater value.. Boston, Mass.: Harvard Business School, 2006. Keown, Arthur J., Petty J William, John D. Martin, and David F. Scott jr. Financial management: principles and applications. 10th ed. Upper Saddle River, N.J.: Pearson/Prentice Hall, 2005. Stenzel, Catherine, and Joe Stenzel. CFO survival guide: the roles and responsibilities of the chief financial officer. New York: Wiley, 2004. Read More