Newcrest Mining Limited Analysis - Case Study Example

Company and industry introduction Newcrest Mining Limited is one of the world’s largest gold mining companies and is the largest gold producer listed on the Australian Securities Exchange by gold reserves and market capitalization. Newcrest Mining Limited aims at being the world’s miner of choice. The company’s reporting date for the last financial year was 30th June 2013. Newcrest Mining Ltd mines are located in Australia, Papua New Guinea, Indonesia,and Cote d’Ivore in West Africa. The company’s current operations include; Cadia Valley Operations (New South Wales), Tefler (Western Australia), Gosowong (Indonesia), Lihir (PNG), Hidden Valley (PNG) and Bonikro (Cote d’ivore). Its headquarters are in Melbourne, Australia. The company’s capital structure as at 30th June 2013 comprised of 29.1% debt and 70.9% equity. The company has put in place a strong corporate governance strategy in order to achieve its vision. The company has also adopted efficient mining methods in order to have an advantage over its competitors. Two of the company’s close competitors are St Barbara Limited and OZ minerals limited. Both of these companies are also listed in the Australian Securities Exchange. These two companies also control a significant gold market share but their individual market shares are not as big as that of Newcrest Mining Limited. These competitors also have different management and mining strategies as compared to Newcrest Mining Limited. Overall financial analysis The Income Statement The net sales for the year ended 30th June 2013 was $845,000,000(Total revenue of $3,775,000,000 less total cost of sales of $2,930,000,000) .The total revenue decreased by $ 641,000,000, from $4,416,000,000 for the year ended 30th June 2012 to $3,775,000,000 for the year ended 30th June 2013. The company made a loss after income tax of $5,776,000,000 for the year ended 30th June 2013 while it made a profit after income tax of $1,175,000,000 for the year ended 30th June 2012. According to these profit figures, the company performed worse in the year ended 30th June 2013 compared to the year ended 30th June 2012. Profit is broken down to; Gross profit which is arrived at by subtracting the total cost of sales from the total sales; Profit before interest and income tax which is the gross profit less operating expenses; profit before income tax which is profit before interest and income tax less finance costs; profit after income tax which is profit before income tax less income tax expense. EBIT stands for earnings before interest and taxes. The company largest stream of revenue is gold sales and the largest expense is mine production costs as at 30th June 2013. Some of the expenses such as employee remuneration remained fairly constant all through the year. Exploration costs varied from month to month depending on the amount of mining taking place at a given time. The company also earns revenue from copper and silver sales. The company also makes profit from foreign exchange gains and finance income. Newcrest Mining Ltd has growth opportunities as it is exploring other mines within its already established regions and other regions. This can be evidenced by relatively high mine production costs on the income statement. The Balance Sheet Newcrest Mining Ltd uses the report balance sheet format. The company’s accounting equation as at 30th June 2013 was Assets = Liabilities + Owner’s equity $ 17,185,000,000 = $ 7,100,000,000 + $ 10,085,000,000 The company’s total assets as at 30th June 3013 were valued at $ 17,185,000,000 while its total assets as at 30th June 2012 were valued at $ 20,509,000,000. The decrease was majorly caused by a decrease in Gold market price. It is important to monitor these changes so as to know the value of the company. The company’s largest current asset as at 30th June 2013 was inventories with a book value of $946,000,000. The company’s largest current liability as at 30th June 2012 was trade and other payables with a book value of $620,000,000 (Newcrest Mining Ltd, 2013). Current ratio is a financial position indicator that is calculated by dividing the total current assets with the total current liabilities. Current ratio shows us how ready a business is in meeting its short-term financial obligations while depending on its current assets only. The company’s current ratio for the period ended 30th June 2013 is 1.527 (which is found by dividing $1,425M with $933M). The company’s current ratio for the period ended 30th June 2012 is 0.735 (which is found by dividing $1,464M with $1,992M). Current ratio for the company I proved in the year ended 30th June 2013 as compared to the year ended 30th June 2012. This means that the company was in a better position to meet its short-term financial obligations in the year ended 30th June 2013 as compared to the year ended 30th June 2012. Furniture, fixtures and equipment are categorized as non-current assets. The company’s property, plant and equipment had a cost of $9,087 million, accumulated depreciation and impairment of $3,543 million and a carrying value of $5,544 million. The company’s other intangible assets had a cost of $193 million, accumulated amortization of $79 million, and a carrying value of $114 million. Other Current Assets Other than inventories, the company has other current assets such as; cash and cash equivalents, trade and other receivables, current tax asset, copper forward sales contracts and other financial derivatives, prepayments and deferred mining. The stakeholders of the company are interested in knowing the other current assets so as to have a clear picture of the company’s operations. Receivables and non-current assets Receivables Acid-test ratio is a financial indicator that determines whether a firm has enough short-term assets to cover its immediate liabilities without selling its inventory. Acid-test ratio is different from current ratio because it does not allow the inclusion of inventory assets. Acid-test ratio = (cash + marketable securities + Accounts receivable)/ current liabilities Acid-test ratio as at 30th June 2013 = (69+178+18+156)/933= 0.451 Acid-test ratio as at 30th June 2012 = (242+251+11+212)/1992= 0.359 Note that in the two cases we have not included current tax asset because this asset cannot be utilized by the company to meet its short-term financial obligations. If all the current liabilities came due immediately, the company would not be in a position to repay them without selling its inventories. This scenario is evidenced by the fact that the acid-test ratio is less than 1, which means that the liabilities are more than the readily disposable assets. The acid-test ratio was higher at 30th June 2013 compared to 1 year earlier which might suggest an improvement in the company’s liquidity position. Such a low acid-test ratio suggests that the leverage ratio of the company is high (the company is over-leveraged), low sales, paying bills too quickly or collecting receivables too slowly. Non-current assets The company’s property, plant and equipment had accumulated depreciation and impairment of $3,543 million. The company’s other intangible assets had accumulated amortization of $79 million (Newcrest Mining Ltd, 2013). It is important to report the company’s assets in their fair values so that the users of the report can get the true picture of the financial position of the company. Liabilities & Equity Current Liabilities As at 30th June 2013, the company’s current liabilities were broken down into Trade and other payables = $ 620 Million Borrowings = $ 1 million Provisions = $ 241 million Current tax liability = Nil Other financial liabilities = $ 71 million The amount owed to trade creditors as at the yearend was $136 million. Of the $ 620 million trade and other payables, $136 million is an amount owed to trade creditors while the other $484 million is amounts owed to other payables plus accruals. The entire payables amount is unsecured and does not bear interest. The company’s payables are normally settled within 30-60 days. The company also had secured finance lease liabilities of $1 million as at 30th June 2013. The assets leased were the security for the finance lease liabilities. None of the unsecured US dollar bilateral bank debt was categorized as a current liability as at 30th June 2013. There was a provision for employee benefits of $119 million as at 30 June 2013. The amount for employee benefits includes amounts for annual leave, long service leave, salary at risk and other incentive payments. This amount owed to employees is reported in the provisions account on the balance sheet. The reported amount for provisions also includes; a mine rehabilitation and restoration amount of $15 million, a restructure amount of 46 million, and an extra $61 million for other provisions such as onerous contracts and community obligations (Newcrest Mining Ltd, 2013). Mine rehabilitation and restoration provision is the estimated present value of future expected expenditure to be incurred on restoring the company’s mine sites to their original condition at the end of the mine’s life. The provision for restructure is the costs associated with restructuring activities within the group. The other financial liabilities account includes quotational period derivatives of $68 million and other financial derivatives of $3 million. Quotational period derivatives represents the embedded derivatives relating to quotational period movements on commodity sales. The company did not have any current liability owing to the government or to its customers as at 30th June 2013. Non-current liabilities As at 30th June 2013, the company’s interest-bearing non-current liabilities amounted to $4,210 million. This amount comprised of; unsecured US dollar bilateral bank debt of $1,806 million, unsecured US dollar private placement notes of $248 million, and unsecured US dollar corporate bonds of $2,156 million. The company did not have any secured finance lease non-current liability as at the year end. The company has a total of committed unsecured bilateral bank debt facilities of $2,500 million with 10 banks. These bank debt facilities have maturities of September 2015 and September 2017. The debt facilities have similar terms and conditions although they were individually negotiated with each bank. These debt facilities have some financial covenants and are on normal terms and conditions. Interest on these debt facilities is based on LIBOR plus a lender’s margin which varies from bank to bank. In the financial year ended 30th June 2005, the company issued US$350 million of long-term senior unsecured notes into the North American private placement market. The balance of this liability as at 30th June 2013 was US$230 million which composed of; US$105 million, fixed 10 years, with a maturity date of 11th May 2015; US$100 million, fixed 12 years, maturity date 11th May 2017, US$25 million, fixed 20 years, with a maturity date of 11th May 2020. Interest on this debt is payable semi-annually at an average interest rate 0f 5.7%. During the year ended 30th June 2013, there was a cash inflow of $2,054 million emanating from proceeds of a US dollar bilateral debt and another cash inflow of $948 million from proceeds from US dollar corporate bonds. There was a cash outflow of $1,623 million because of a repayment of US dollar bilateral debt. There also occurred a cash outflow of $3 million because of net repayment of finance lease principal and an extra $1 million due to a repayment of treasury shares. The finance costs for the year ended 30th June 2013 amounted to $110 million. Interest on loans amounted to $120 million. Faculty fees and other costs amounted to $15 million and discount unwind on provisions amounted to $10 million. $35 million of the borrowing costs were capitalized. Share capital & balance sheet The company has issued ordinary shares comprising of shares held by the public and treasury shares. By 30th June 2013, shares held by the public were 765,607,049 in number while treasury shares were 903,922 in number. Total issued capital as at 30th June 2013 amounted to $13,592 million. All shares were fully paid. Total issued capital as at 1st July 2012 was $13,561 million. A dividend reinvestment plan increased the issued capital by $38 million. Shares repurchased and held in treasury decreased the issued capital by $7 million. These were the movements in ordinary shares for the year ended 30th June 2013. Opening number of shares 764,561,477 Shares issued under: Share plans 118,130 Executive service agreements 28,488 Dividend reinvestment plan 1,510,971 Employee share acquisition plan 64,038 Purchases by the Newcrest Employee Share Trust (676,055) Closing number of shares 765,607,049 These were the movements in treasury shares for the year ended 30th June 2013 Opening number of shares 438,523 Purchases 676,055 Issued pursuant to share plans (210,656) Closing number of shares 903,922 The treasury shares account increased the most due to the purchases by the Newcrest Employee Share Trust. The company paid dividends amounting to $268 million. Retained earnings, shares and the income statement The company did not buy back any of its shares and also no share splits were done during the year ended 30th June 2013. Total reserves as at 30th June 2013 amounted to $(583) million. This amount of reserves comprised of Equity settlements reserve of $62 million, foreign currency translation reserve of $(655) million, hedge reserve of $13 million and fair value reserve of $(3) million. The company’s retained earnings as at 30th June 2013 amounted to $(3,064) million. Retained earnings were $2,890 million. Loss after tax attributable to owners of the parent reduced the retained earnings by $5,778 million. Dividends paid reduced the retained earnings by a further $268 million. Changes in equity interests held by the parent increased the retained earnings by $92 million during the year. The company’s basic EPS and diluted EPS were both (754.5) cents per share. The basic EPS was calculated by dividing the loss after income tax attributable to owners of the parent of $(5,778) million with the weighted average number of ordinary shares (765,828,885 shares) (Newcrest Mining Ltd, 2013). Important factors behind the company’s results Newcrest Mining Limited made some major capital investments in the year ended 30th June 2013. These include; Cadia East plant expansion and Panel Cave 1, Lihir Plant expansion, Telfer contract stripping. The company also faced some operational challenges such as; Lihir plant reliability, Gosowong ground conditions and Hidden Valley conveyor. The company’s major market challenge was the fall of gold prices which negatively affected the company’s revenues and assets. The company also removed high-cost production by optimizing plants, deferring capital and utilizing stock piles. The company reduced operating costs by lowering activity, contract negotiations and labour reductions. The company also operated for free cash flow neutral or positive outcomes at every asset. Future prospects and recommendations The company’s growth opportunities include exploring new undeveloped mines such as Namosi, Wafi-Golpu and O’Callaghans (Newcrest Mining Ltd, 2014). The Cadia East underground mine is expected to increase Cadia Valley production to 700,000-800,000 ounces of gold per year. The company has an exploration program seeking to extend Gosowong’s current five-year mine life. The company is determined to discover new ore bodies and it has put in place good exploration policies. The company is also determined to establish long-term mining operations by securing large mineral districts or provinces. The company has plans to produce more when the price of gold increases in future. The company should therefore retain a number of growth prospects to be used when market conditions improve. Increasing production from the company’s lower cost assets should remain a key focus for the company. References Newcrest Mining Ltd. (2013). 2013 annual report of Newcrest Mining Ltd. Retrieved from http://www.newcrest.com.au/investors/reports/annual/2013-annual-report Newcrest Mining Ltd. (2014). 14th February 2014 Market Release. Retrieved from http://www.newcrest.com.au/investors/market-releases Newcrest Mining Ltd. (2014). NCM company strategy. Retrieved from http://www.newcrest.com.au/about-us/company-strategy Read More