Risks Of The Mining Project By Zeus Plc - Essay Example

Risks Of The Mining Project By Zeus Plc Executive Summary Being a large global mining organization Zeus Plc. is eyeing for a new business venture in the Giant Tapir River of Malaysia. Tapir River is located in Malaysia and the largest deposits of chrome and cobalt. It offers an immense mining opportunity to the company, but, on the other hand, comprises of operational risks that might affect the overall success of the organization. Mining projects are subjected to various risks, which can be financial, labor force related or even political in nature. This project by Zeus Plc. is not an exception: it has considerable risks associated with it. These include financial risks, political risks, environmental risks and taxation rules. This paper explores and highlights the risks associated with setting up a mining operation in Malaysia and establishes ways of mitigating them. One of the mitigation measures examined by this paper is the employment of technology to reduce the risks. To employ effectively modern technology to mitigate the risks, Zeus Plc. will have to raise US $1.5 billion funding for this project. The organization is planning for financing this project with the help of shares. The whole financing requirement for this project will come from Malaysia. This paper seeks ways in which Zeus Plc. can effectively engage and manage the risks it would face on its mining project on the Giant Tapir River of Malaysia. Contents Contents 2 1. Introduction 3 2. Main Body 4 2.1 Major Risk 4 2.2 Environmental Risk 4 2.3 Political Risk 5 2.4 Taxation Rules 5 3.0 The Technological Change 6 4.0 Zeus Plc. case discussion 8 5. Conclusion/ Recommendations 9 Appendices 10 Appendix 1 10 Appendix 2 11 Appendix 3 (A.M. Best Company, 2014) 12 References 14 1. Introduction Zeus Plc. is eyeing for a new project in the Giant Tapir River of Malaysia. The project will involve mining and extraction of chrome and cobalt. The Giant Tapir River location was chosen because of the large deposits of cobalt and chrome. Cobalt is an important industrial mineral that is used in different alloys, lithium cobalt batteries, pigmentation, coloring, and as a catalyst. On the other hand, chrome is used in electroplating, fixing agent in dyes and as a catalyst. An organization seeking to set up a mining operation in Malaysia has to overcome risks such as political, financial, environmental, and taxation rules. Zeus Plc. Proposes to overcome the existing risk by employing modern technology and well-trained personnel. It will raise the necessary funds within Malaysia by giving potential investors a chance to buy its shares. 2. Main Body 2.1 Major Risk The financial and economic analysis depends on a wide scale of assumptions such as price, demand and cost. The most important risk, which is associated with Zeus Plc., is the large amount of investment, which is done in the context of the new project to be started in Malaysia (Madura, 2000). In this new project, the total investment will be approximately US$1.5 billion, which is a large amount and needs to be allocated properly. In a financial context, the costs that are estimated by the company for the project might not be sufficient for its successful completion. 2.2 Environmental Risk The entire process may not only have an adverse impact on the land, but even on people living in nearby areas (Cashore, Auld and Newsom, 2004). Furthermore, mining can be described as land or environment usage, which impacts health and accident hazards, surface disturbance, and excessive consumption of those resources that are irreplaceable (Gunningham, 2002). These factors can be considered as environmental risks and possess a wide scale of indirect effects on the mining industry (Rittenberg, Johnstone and Gramling, 2011). 2.3 Political Risk Political risk is greatly tied with the mining industry and is a major concern for all those investors who are interested in such projects (Ribi, 2009). There is high risk towards achieving reliability of the system due to the development of advanced technology, escalating costs of equipment, and complexity related to modern systems of mining (Dlabay and Burrow, 2007). The capital-intensive structure of the mining industry ultimately results into long payback periods in terms of existing technology and greater risks is tied to the introduction of new technology into the system (Brunsson and Jacobsson, 2000). In terms of infrastructural risks, transportation is an important factor for any mining projects, and it is even essential to be assured that the chosen infrastructure is economically and technologically much competitive down the years. It can be stated that Malaysia offers plenty of risks both from the dimension of environmental risk as well as infrastructural risk (Fight, 2005). The major political risk, which has been identified, is the intervention of government in such projects in terms of infrastructure and technology. This in turn affects the tax rates as the government imposes high duties on foreign companies and even increases freight rates (Das, 2006). In a scale of 0 to 100, where 100 represents the lack of risks, the risks that exists in Malaysia can be rated as 45 (Zafar and Julian, 2012). 2.4 Taxation Rules Taxation rules are a major risk for any company as it sums up to the total cost spend on a particular project and revenue gained by the firm. As per these rules when the taxation rate is high, it eventually affects operations of the firm, as more money needs to be spend (Madura, 2000). The currency of Malaysia is Malaysian Ringgit, and its current rate is 1 Malaysian Ringgit equals to 0.31 US dollar. There is the risk associated with currency fluctuations as the devaluation of Malaysian currency can increase the overall expense of the company and reduce the revenue margins. It has been established that the targeted investors will be totally indifferent towards interest rates of two separate countries, which are available on deposits of the bank. Purchasing power parity is a mechanism through which relative value that exists between two different currencies can be obtained. This in turn will help to counteract financial risks, as the company would be able to analyze the areas due to which it can have declining funds (International Federation of Accountants, 2002). Fisher's effect is another theory that well describes the interest rates of a particular country. It states that the real rate of interest usually equals to the nominal rate of interest minus inflation rate, which is expected (Finnerty, 2013). 3.0 The Technological Change All the risks which have been identified in the mining operations of Zeus Plc. needs to be eliminated through proper allocation of funds. The technological change is a major factor of concern for the company, as it requires a large sum of money. It can be stated that the company needs to develop a contingency plan, in which it can describe all the technical uncertainties, which can occur in the nearby future (Kliem and Ludin, 2007). This will encompass the failure of existing technology, development of advanced technology that increases overall productivity, etc. On the contrary, transportation being a major component requires an emergency funding system so that the organization is not dependent on any form governmental intervention (KPMG, 2011). These extra funds will be encompassed in total capital allocation, which would prevent the organization from drawing in funds from any external source. According to Nevitt and Fabozzi (2000), formalized risk framework financing can reduce the risks like financial risks, environmental risks and personnel-related risks. The organization has to arrange the funds within 0-3 months. It will help them to budget their recourses properly before the project starts. Investors are very critical of their investments (Kunreuther, 2002). The management of the organization has to be ready with attractive finance related presentations, which can help them to reach out to more investors (Gupta, Lamech, Mazhar, Wright, 2002). It has to increase its efficiency of the operation to reduce the operating costs related to the project so that it becomes more appealing to its investors: keeping production costs low. Managing the safety of the employees related to the project is also significantly important. This factor also requires significant funding. The mining works are related to high risks (Dionne and Garand, 2002, pp. 23-25). So, it requires a significant amount of finance related to the individual insurances of the employees. Financing all the safety equipment will reduce the risk related to the employee safety (BRTF, 2004). The organization has to manage a robust compliance framework related to the environmental regulations in order for its project to be certified. This sector also requires structured financing which will reduce the carbon footprints. Finance of the business should come from the sale of shares. It will help the organization to limit the risk related to the project (Nevitt and Fabozzi, 2000). In the case of loans, the organization has to pay regular interests. The organization may pay dividends to investors but certainly, it is not mandatory to pay dividends (Merna, and Njiru, 2002). It will help the company to lower its risks if the project fails. 4.0 Zeus Plc. case discussion The management of the Zeus Plc. has significant knowledge and expertise related to the region and project (Zastre, 2013). So, there is enough potential for financing this project. The size of the deposits is highly important as far as financing a mining project is concerned (Wilson, 2013). A large size of deposits is highly required to get the US $ 1.5 billion. It shows that as far as the deposits are concerned the region has the perfect resources for going ahead with the project. So, the project is full of potentialities and therefore financing this project is a proper decision. Financing this project will add enough values. The project requires lots of modern technological equipment and a considerable number of personnel. According to the Global Mining Survey, it is a complex and difficult time for the mining industry. However, the survey also stated that the growth could return to the industry by the renewed enthusiasm of its investors across the world. The organization has very little uncertainty as far as the asset ownership is concerned (Gatti, 2013). It can easily encourage the investors to finance for this project. The organization maintains sustainable environmental stewardship and close relations with concerned governing bodies. It means the company is going by the book and not violating any government or environment-related regulations. So, there is no doubt that the project is worthy of getting required funds. The organization has able to manage its asset portfolio properly in the context of the current business situation. So, financing in this project has high potentiality (Edwards and Bowen, 2013). This factor is making the project significantly potential for financing. It will provide integrity and transparency to the project. The organization can take the help of utility theory to come to a decision related to the financing. It is significantly important for a company to choose the right place for the financing. Here in this case Zeus Plc. has two options of financing. One is from the UK, and other is Malaysia. Here in this case the whole project will be done in the Giant Tapir River of Malaysia (Yescombe, 2013). According to the utility theory, it will be better for the organization to get finance from Malaysia only. The organization has to complete the whole project under the rules and regulations of the Malaysian Government that is why it will better to get finance from that country only (Heidegger, 2010). 5. Conclusion/ Recommendations Through this study, it is evident that there are five major risks, which are to be experienced by Zeus Plc. such as political risks, financial risks, environmental risks, technological risks, and infrastructural risks. Due to the high financial risk, the company is recommended to generate funds through shares rather than opting for any such loan as that would encompass greater risk. From the sale of its shares, the company will raise US $ 1.5 billion, which is the total amount of money required for the mining project on Giant Tapir River project. Market considerations, public policies and mineral potentials are significantly important as far as the financing this project is concerned. It is recommended that the organization balance experience and expertise when recruiting and appointing the management team. Proper financing will help the organization to complete its operation on time. The share sale will be a major boost for its finances. Furthermore, in order to avoid labor strikes and other labor related industrial action, it is recommended that the organization should offer competitive salaries to its employees. In addition, it is recommended that the employees be provided with Protective Personal Equipment (PPE). These include dust masks, hard hats, safety goggles and overalls. Appendices Appendix 1 A.M. Best gives an assessment based on economic, political, and financial system risk. From the assessment, it is evident that Malaysia as a country has moderate levels of economic and political risk and low levels of financial system risk (A.M. Best Company, 2014). Appendix 2 Malaysia has a moderate economic risk. It relies on the world to market its products. It is evident from the graph of economic growth, wherein the period of the economic crisis of 2008-2009, Malaysia's GDP fell into negative territory (A.M. Best Company, 2014). Appendix 3 (A.M. Best Company, 2014) Malaysia is a politically stable country as compared to the world average. However, it fairs poorly in other areas such as monetary policy, fiscal policy, business environment and labor flexibility. Malaysia’s GDP is $10,000 Per Capita Population. It is the second highest among the group of six countries, which were sampled (A.M. Best Company, 2014). References A.M. Best Company, 2014. AMB Country Risk Report, New Jersey: A.M. Best. BRTF. 2004. Avoiding regulatory creep. 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