4 months ago
Monday, 13 August 2018
Thursday, 9 August 2018
Financial Performance Analysis of a Mining Company (Simple Example) - Mineral Economics
1. Analyze the financial performance of the Lihir Gold Limited for 2006. Given the Balance Sheet and Income Statement, calculating the following ratios and interpret the results.
i. Analyze the Liquidity/Solvency
This measures the firm’s ability to meet short term obligations i.e. debt payment.
a) Net Working Capital
Net Working Capital = Current Assets – Current Liability
= U$ 132,700, 000 –US$ 207,300, 000
= – US$ 74,600, 000
Net Working Capital shows that Lihir is not capable of meeting its short term obligation. The current assets could not meet the current Liability.
b) Current Ratio
Current Ratio= Current Assets/ Current Liability = U$132 700 000/ U$207 300 000= 0.64
Mining’s CF is highly predictable so current ratio of over 1 or 2 is acceptable. Thus Lihir has no short term debt paying ability because current ratio is less than 1.
c) Quick Ratio
Quick Ratio = Current Asset – Inventory/ Current Liability
= U$ 132,700, 000 –U$75300 000/U$ 207300 000
= 0.277
Quick ratio> 1 is desired, so Lihir has no immediate ability to meet current debts.
ii. Analyzing Activity
Activity ratios are used to measure the speed at which various accounts are converted into sales or cash.
a) Inventory Turnover – shows how soon the inventory will be converted to cash.
Inventory Turnover = Cost of goods sold / Inventory = U$ 268100 000 / U$ 75300 000= 3.56
Exploration expenses = US$ 6000 000 is an expense
Therefore; Inventory Turnover = Cost of goods sold / Inventory
= US$ 262100000 / US$75300 000 = 3.48
Inventory turnover is useful only when compared with that of other firms with same industry. For Mining and Petroleum inventory turnover is between 5- 10. However, Lihir has less than that (i.e.3.48) so inventory turnover is very poor. And the number of days required to convert inventory into cash is 360days/3.48 = 103.45 days.
b)Average Collection – average amount time required to collect accounts receivables
Average Collection Period = Accounts receivables /Average Sales/day
= U$4600 000 /U$ 310400 000/360 = 5.3 days
The average collection period of 5.3 is indicative of good managed credit collection or credit department.
c) Average payment period – average amount of time needed to pay accounts payable.
Average Payment period = Accounts payable/ Av. Purchases/day*% of goods sold
US$ (268.1M – 6M (Exploration expense)) = US$ 262.1 M Cost of goods sold;
Average Payment period = US$ 46 600 000 /US$ 262100 000/360 * 0.84 = 76.2
= 76.2 days to pay for credit purchases
If the credit purchase term is 30 days, financial analysts could give Lihir low credit rating because 76.2 days to payback credit purchases is unacceptable.
d) Fixed asset turn over – measures the efficiency with which bthe firm has been using its fixed, or earnings, assets to generate sales.
Fixed assets Turnover = Sales /Net fixed assets
= US$ 310 400 000 / US$ 86200 000 = 3.6
This means Lihir Mine Ltd’s turnover on its fixed assets is 3.6 times a year. It indicates fixed assets are efficiently used to generate cash flow.
e) Total asset turnover – indicates the efficiency with which the firm uses all its assets to generate sales.
Total assets turnover = Sales /Total assets = US$ 310 400 000 / US$ 1 496 000 000 = 0.21
The overall efficiency of using assets to generate sales is 0.21 which is not a good reflection. It could mean assets are old and need replacement.
iii)Analyzing Debt
a) Debt ratio- measures the proportion of total assets financed by the firm’s creditors.(the higher the ratio reflects greater amount of other people’s money used in an attempt to generate profit)
Debt ratio = Total liabilities / Total Assets = US$ 684 100 000 /US$ 1 496 000 000
= 0.457 = 45.7%
This indicates Lihir has financed 45.7% of its assets with debt which is good.
b) Debt equity ratio – measures the ratios or long-term debt to stockholders equity. It generally measures the degree of financial leverage of the firm.
Debt Equity Ratio = long term debt /Stockholders equity = US$188 600 000 /US$ 811 900000 =3.23%
It means Lihir applied 23.23 % debt to procure long – term assets which is lower debt – equity ratio. This indicates that it has a stable cash flow debt that can be paid at a shorter period of time.
c) Times interest earned ratio – measures the firm’s ability to make contractual interest payments.
Time interest earned = earnings before interest & taxes (EBIT)/ Interest Expense
= US$ 80 700 000 / US$(1 400 000 + 6 200 000) = 10.2
Lihir time interest earned is 10.2. As a rule, a value of 3 to 5 is a good margin for safety from shrinking and liquidation. However Lihir has exceeded that margin and indicates that Lihir is able to fulfill its interest servicing.
d) Fixed payment coverage ratio – measures the firm’s ability to meet all fixed – payment obligations such as loan interest ,principal, lease payments and preferred stock dividends
Fixed payment coverage ratio
= EBIT + Lease payments / ( Interest + lease pmt + { ( prin.pmt + preferred stock div) x (1/(1-T))})
= *(US$ 80 700 000 + 0 )/ ( US$ 1 400 000 + 0 +{( 30 600 000 + 0) x (1/(1 – 0.3))}) = 1.7
Note: Principle payment is obtain from year 2005 and PNG Income tax is 30%. No lease payment and no preferred stock dividend for year 2006.
iv. Analyzing profitability
a) Gross profit margin – indicates the efficiency of management in turning over company’s goods into profit.
Gross profit Margin = (Sales - Cost of Goods sold)/Sales
= (US$ 310 400 000 – US$ 268 100 000 )/ US$ 310 400 000 = 13.6 %
Exploration expenses = US$ 6000 000 is an expense
Therefore Gross profit Margin= US$310.4M – US$(268.1 - 6)M/ US$ 310.4= 15.56 %
The gross profit margin in 2005 is -4.57% or the company has received less revenue. However it has improved in 2006 with gross profit margin of 15.56%.
b) Net profit margin – measures the profit produced by each dollar of sales.
Net Profit Margin = Net profit after taxes/ Sales = US$ 53 800 000 / US$ 310 400 000 = 17.35 %
In 2005, the company has net profit margin of 19.0 % and in 2006 with the net profit margin of 17.35%. So in 2005 there is slightly improvement in profit produce by each dollar of sales.
c) Return on assets (ROA) – measures the overall effectiveness of management in generating profits with its available assets.
Return on Assets = (Net profit (before extraordinary items) + income tax + Interest )/Average total assets
= (US$ 53 800 000 + US$ 22 100 000 + US$ 1400 000 )/((US$ 1496 000 000 + US$ 1319 400 000)/2)
= 5.5 % Return of assets
This shows that company has profit earning power using its limited available assets.
d) Return on equity
Return on equity = net profit – preference dividend /Average stockholders’ equity
= ( US$ 53800 000 - 0 ) / (US$1496 000 000 + US$ 1319 400 000)/2 = 3.8%
For every dollar of strockholders’ equity, there is 3.8% return accruing to the stock holder.
e) Earnings per share – use by stock investor to compare different companies on the basis of earning power of the firm’s each outstanding share on common stock.
Earnings per share = net profit (before extraordinary items) – preference dividend
Number of ordinary shares issued (outstanding)
= (US$ 53 000 000 – 0 )/1284 049000
=US$ 0.041
The EPS of US$0.04 represent dollar amount earned on behalf of each shareholder by the company using each shareholder’s equity.
f) Price/earnings (P/E) Ratio – is the ratio use to assess the future financial performance of the firm.
Price / earnings = market price per share of common stock earnings per share.
= Selling Price / EPS
Note: The Selling price was hardly found in the given data (may be not given in the data) so the Ratio was not calculated.
SUMMARY STATEMENT OF LIHIR GOLD MINE
A) Liquidity
Liquidity or Lihir’s ability to meet short term obligations is reasonably not stable and unsecure and there is a short term liquidation problem as observed from liquidity/solvency analysis. It is seen that it will take a long time for Lihir to pay its debt. This is shown by current ratio 0.64 and quick ratio 0.277. Mining’s CF is highly predictable so current ratio of over 1 or 2 is acceptable. Thus Lihir has no short term debt paying ability because current ratio is less than 1. Quick ratio> 1 is desired, so Lihir has no immediate ability to meet current debts.
B) Activity
Lihir’s inventory appears to be in bad shape and the firm faced problems with account receivables of 103.45 days. Average payment is unacceptable and total assets turnover is not good. However, the average collection period of 5.3 is indicative of good managed credit collection or credit department.
C) Financial Terms
Lihir Mine’s indebtness increase over the year 2005 to 2006. It has no lease payments and the amount of debt is small and can be paid within a short period of time.
D) Profitability
Compared to year 2005, Lihir has made great improvement and its net profit was greater than previous year.
i. Analyze the Liquidity/Solvency
This measures the firm’s ability to meet short term obligations i.e. debt payment.
a) Net Working Capital
Net Working Capital = Current Assets – Current Liability
= U$ 132,700, 000 –US$ 207,300, 000
= – US$ 74,600, 000
Net Working Capital shows that Lihir is not capable of meeting its short term obligation. The current assets could not meet the current Liability.
b) Current Ratio
Current Ratio= Current Assets/ Current Liability = U$132 700 000/ U$207 300 000= 0.64
Mining’s CF is highly predictable so current ratio of over 1 or 2 is acceptable. Thus Lihir has no short term debt paying ability because current ratio is less than 1.
c) Quick Ratio
Quick Ratio = Current Asset – Inventory/ Current Liability
= U$ 132,700, 000 –U$75300 000/U$ 207300 000
= 0.277
Quick ratio> 1 is desired, so Lihir has no immediate ability to meet current debts.
ii. Analyzing Activity
Activity ratios are used to measure the speed at which various accounts are converted into sales or cash.
a) Inventory Turnover – shows how soon the inventory will be converted to cash.
Inventory Turnover = Cost of goods sold / Inventory = U$ 268100 000 / U$ 75300 000= 3.56
Exploration expenses = US$ 6000 000 is an expense
Therefore; Inventory Turnover = Cost of goods sold / Inventory
= US$ 262100000 / US$75300 000 = 3.48
Inventory turnover is useful only when compared with that of other firms with same industry. For Mining and Petroleum inventory turnover is between 5- 10. However, Lihir has less than that (i.e.3.48) so inventory turnover is very poor. And the number of days required to convert inventory into cash is 360days/3.48 = 103.45 days.
b)Average Collection – average amount time required to collect accounts receivables
Average Collection Period = Accounts receivables /Average Sales/day
= U$4600 000 /U$ 310400 000/360 = 5.3 days
The average collection period of 5.3 is indicative of good managed credit collection or credit department.
c) Average payment period – average amount of time needed to pay accounts payable.
Average Payment period = Accounts payable/ Av. Purchases/day*% of goods sold
US$ (268.1M – 6M (Exploration expense)) = US$ 262.1 M Cost of goods sold;
Average Payment period = US$ 46 600 000 /US$ 262100 000/360 * 0.84 = 76.2
= 76.2 days to pay for credit purchases
If the credit purchase term is 30 days, financial analysts could give Lihir low credit rating because 76.2 days to payback credit purchases is unacceptable.
d) Fixed asset turn over – measures the efficiency with which bthe firm has been using its fixed, or earnings, assets to generate sales.
Fixed assets Turnover = Sales /Net fixed assets
= US$ 310 400 000 / US$ 86200 000 = 3.6
This means Lihir Mine Ltd’s turnover on its fixed assets is 3.6 times a year. It indicates fixed assets are efficiently used to generate cash flow.
e) Total asset turnover – indicates the efficiency with which the firm uses all its assets to generate sales.
Total assets turnover = Sales /Total assets = US$ 310 400 000 / US$ 1 496 000 000 = 0.21
The overall efficiency of using assets to generate sales is 0.21 which is not a good reflection. It could mean assets are old and need replacement.
iii)Analyzing Debt
a) Debt ratio- measures the proportion of total assets financed by the firm’s creditors.(the higher the ratio reflects greater amount of other people’s money used in an attempt to generate profit)
Debt ratio = Total liabilities / Total Assets = US$ 684 100 000 /US$ 1 496 000 000
= 0.457 = 45.7%
This indicates Lihir has financed 45.7% of its assets with debt which is good.
b) Debt equity ratio – measures the ratios or long-term debt to stockholders equity. It generally measures the degree of financial leverage of the firm.
Debt Equity Ratio = long term debt /Stockholders equity = US$188 600 000 /US$ 811 900000 =3.23%
It means Lihir applied 23.23 % debt to procure long – term assets which is lower debt – equity ratio. This indicates that it has a stable cash flow debt that can be paid at a shorter period of time.
c) Times interest earned ratio – measures the firm’s ability to make contractual interest payments.
Time interest earned = earnings before interest & taxes (EBIT)/ Interest Expense
= US$ 80 700 000 / US$(1 400 000 + 6 200 000) = 10.2
Lihir time interest earned is 10.2. As a rule, a value of 3 to 5 is a good margin for safety from shrinking and liquidation. However Lihir has exceeded that margin and indicates that Lihir is able to fulfill its interest servicing.
d) Fixed payment coverage ratio – measures the firm’s ability to meet all fixed – payment obligations such as loan interest ,principal, lease payments and preferred stock dividends
Fixed payment coverage ratio
= EBIT + Lease payments / ( Interest + lease pmt + { ( prin.pmt + preferred stock div) x (1/(1-T))})
= *(US$ 80 700 000 + 0 )/ ( US$ 1 400 000 + 0 +{( 30 600 000 + 0) x (1/(1 – 0.3))}) = 1.7
Note: Principle payment is obtain from year 2005 and PNG Income tax is 30%. No lease payment and no preferred stock dividend for year 2006.
iv. Analyzing profitability
a) Gross profit margin – indicates the efficiency of management in turning over company’s goods into profit.
Gross profit Margin = (Sales - Cost of Goods sold)/Sales
= (US$ 310 400 000 – US$ 268 100 000 )/ US$ 310 400 000 = 13.6 %
Exploration expenses = US$ 6000 000 is an expense
Therefore Gross profit Margin= US$310.4M – US$(268.1 - 6)M/ US$ 310.4= 15.56 %
The gross profit margin in 2005 is -4.57% or the company has received less revenue. However it has improved in 2006 with gross profit margin of 15.56%.
b) Net profit margin – measures the profit produced by each dollar of sales.
Net Profit Margin = Net profit after taxes/ Sales = US$ 53 800 000 / US$ 310 400 000 = 17.35 %
In 2005, the company has net profit margin of 19.0 % and in 2006 with the net profit margin of 17.35%. So in 2005 there is slightly improvement in profit produce by each dollar of sales.
c) Return on assets (ROA) – measures the overall effectiveness of management in generating profits with its available assets.
Return on Assets = (Net profit (before extraordinary items) + income tax + Interest )/Average total assets
= (US$ 53 800 000 + US$ 22 100 000 + US$ 1400 000 )/((US$ 1496 000 000 + US$ 1319 400 000)/2)
= 5.5 % Return of assets
This shows that company has profit earning power using its limited available assets.
d) Return on equity
Return on equity = net profit – preference dividend /Average stockholders’ equity
= ( US$ 53800 000 - 0 ) / (US$1496 000 000 + US$ 1319 400 000)/2 = 3.8%
For every dollar of strockholders’ equity, there is 3.8% return accruing to the stock holder.
e) Earnings per share – use by stock investor to compare different companies on the basis of earning power of the firm’s each outstanding share on common stock.
Earnings per share = net profit (before extraordinary items) – preference dividend
Number of ordinary shares issued (outstanding)
= (US$ 53 000 000 – 0 )/1284 049000
=US$ 0.041
The EPS of US$0.04 represent dollar amount earned on behalf of each shareholder by the company using each shareholder’s equity.
f) Price/earnings (P/E) Ratio – is the ratio use to assess the future financial performance of the firm.
Price / earnings = market price per share of common stock earnings per share.
= Selling Price / EPS
Note: The Selling price was hardly found in the given data (may be not given in the data) so the Ratio was not calculated.
SUMMARY STATEMENT OF LIHIR GOLD MINE
A) Liquidity
Liquidity or Lihir’s ability to meet short term obligations is reasonably not stable and unsecure and there is a short term liquidation problem as observed from liquidity/solvency analysis. It is seen that it will take a long time for Lihir to pay its debt. This is shown by current ratio 0.64 and quick ratio 0.277. Mining’s CF is highly predictable so current ratio of over 1 or 2 is acceptable. Thus Lihir has no short term debt paying ability because current ratio is less than 1. Quick ratio> 1 is desired, so Lihir has no immediate ability to meet current debts.
B) Activity
Lihir’s inventory appears to be in bad shape and the firm faced problems with account receivables of 103.45 days. Average payment is unacceptable and total assets turnover is not good. However, the average collection period of 5.3 is indicative of good managed credit collection or credit department.
C) Financial Terms
Lihir Mine’s indebtness increase over the year 2005 to 2006. It has no lease payments and the amount of debt is small and can be paid within a short period of time.
D) Profitability
Compared to year 2005, Lihir has made great improvement and its net profit was greater than previous year.
Sunday, 5 August 2018
Consumer Price Index(CPI) - Mineral Economics Questions and Answers
CPI for USA from Year 1990 to 2010
Year
|
Jan
|
Feb
|
Mar
|
Apr
|
May
|
Jun
|
Jul
|
Aug
|
Sep
|
Oct
|
Nov
|
Dec
|
Annual
|
2010
|
216.687
|
216.741
|
217.631
|
218.009
|
218.178
|
217.965
|
218.011
|
218.312
|
218.439
|
218.711
|
218.803
|
219.179
|
218.055
|
2009
|
211.143
|
212.193
|
212.709
|
213.24
|
213.856
|
215.693
|
215.351
|
215.834
|
215.969
|
216.177
|
216.33
|
215.949
|
214.537
|
2008
|
211.08
|
211.693
|
213.528
|
214.823
|
216.632
|
218.815
|
219.964
|
219.086
|
218.783
|
216.573
|
212.425
|
210.228
|
215.303
|
2007
|
202.416
|
203.499
|
205.352
|
206.686
|
207.949
|
208.352
|
208.299
|
207.917
|
208.49
|
208.936
|
210.177
|
210.036
|
207.342
|
2006
|
198.3
|
198.7
|
199.8
|
201.5
|
202.5
|
202.9
|
203.5
|
203.9
|
202.9
|
201.8
|
201.5
|
201.8
|
201.6
|
2005
|
190.7
|
191.8
|
193.3
|
194.6
|
194.4
|
194.5
|
195.4
|
196.4
|
198.8
|
199.2
|
197.6
|
196.8
|
195.3
|
2004
|
185.2
|
186.2
|
187.4
|
188
|
189.1
|
189.7
|
189.4
|
189.5
|
189.9
|
190.9
|
191
|
190.3
|
188.9
|
2003
|
181.7
|
183.1
|
184.2
|
183.8
|
183.5
|
183.7
|
183.9
|
184.6
|
185.2
|
185
|
184.5
|
184.3
|
184
|
2002
|
177.1
|
177.8
|
178.8
|
179.8
|
179.8
|
179.9
|
180.1
|
180.7
|
181
|
181.3
|
181.3
|
180.9
|
179.9
|
2001
|
175.1
|
175.8
|
176.2
|
176.9
|
177.7
|
178
|
177.5
|
177.5
|
178.3
|
177.7
|
177.4
|
176.7
|
177.1
|
2000
|
168.8
|
169.8
|
171.2
|
171.3
|
171.5
|
172.4
|
172.8
|
172.8
|
173.7
|
174
|
174.1
|
174
|
172.2
|
1999
|
164.3
|
164.5
|
165
|
166.2
|
166.2
|
166.2
|
166.7
|
167.1
|
167.9
|
168.2
|
168.3
|
168.3
|
166.6
|
1998
|
161.6
|
161.9
|
162.2
|
162.5
|
162.8
|
163
|
163.2
|
163.4
|
163.6
|
164
|
164
|
163.9
|
163
|
1997
|
159.1
|
159.6
|
160
|
160.2
|
160.1
|
160.3
|
160.5
|
160.8
|
161.2
|
161.6
|
161.5
|
161.3
|
160.5
|
1996
|
154.4
|
154.9
|
155.7
|
156.3
|
156.6
|
156.7
|
157
|
157.3
|
157.8
|
158.3
|
158.6
|
158.6
|
156.9
|
1995
|
150.3
|
150.9
|
151.4
|
151.9
|
152.2
|
152.5
|
152.5
|
152.9
|
153.2
|
153.7
|
153.6
|
153.5
|
152.4
|
1994
|
146.2
|
146.7
|
147.2
|
147.4
|
147.5
|
148
|
148.4
|
149
|
149.4
|
149.5
|
149.7
|
149.7
|
148.2
|
1993
|
142.6
|
143.1
|
143.6
|
144
|
144.2
|
144.4
|
144.4
|
144.8
|
145.1
|
145.7
|
145.8
|
145.8
|
144.5
|
1992
|
138.1
|
138.6
|
139.3
|
139.5
|
139.7
|
140.2
|
140.5
|
140.9
|
141.3
|
141.8
|
142
|
141.9
|
140.3
|
1991
|
134.6
|
134.8
|
135
|
135.2
|
135.6
|
136
|
136.2
|
136.6
|
137.2
|
137.4
|
137.8
|
137.9
|
136.2
|
1990
|
127.4
|
128
|
128.7
|
128.9
|
129.2
|
129.9
|
130.4
|
131.6
|
132.7
|
133
|
133.8
|
133.8
|
130.5
|
1. PRODUCTION
Data-
30 000 000 tonnes Cu
ore/day for 350 days for 20 years
Mill recovery 87% for
every 1 tonnage mined
Cu grade is 0.8% tone
Cu per mill tonnage produce.
The price of Cu is
projected to be US$1.25/lb
Production = 30 000 x
350 x 20 = 210 000 000 metric tones
of Cu ore for 20 years.
Mill trough put
Recovery = 87% x 210 000 000 = 182 700 000 Mill tonnage
100
0.8% x 182 700 000 = 1 461 600 tonnes Cu produced
100
Price of Cu is
projected to be US$ 1.25/lb
1 lb = 0.4535924 kg = 0.000453924 tonnes (Using Calculator Conversion)
US$ 1.25 = 0.000453924
tonnes
xUS$ = 1 tonne
1 tonne = US$
2755.778095
Therefore price of Cu projected is US$ 2755.778095/tonne
Gross Revenue = US$ 2755.778095 x 1 461
600 tonnes of Cu = US$ 4 027 845 264
2.
Capital Cost
Data-
Capital cost projected to be US$600 million (1990)
Working Capital is US$ 70 million (1990)
NB: expected to be incurred in year 2
Salvage value
is 20% of the capital cost.
Capital Cost – 60% debt with 12% interest
- 40% equity raising
Real escalation is 4%
Calculation
·
Inflation in 2010
= CPI Dec 2010 - 1
= US$ 219.179 - 1 = 63.81 %
CPI
Dec 1990 US$ 133.80
= 63.81%
nominal inflation in 2010
·
Nominal escalation = (1+
inf 1990 -2010)* (1 + real esc.)n -1
= (1+ 0.6381)* (1+0.04)20
– 1
= 258.9 % over the 20 years period
Therefore,
·
Capital Cost (Dec 1990)
US$ 600 M x (1+2.589) = US$ 2 153 400
000 (Dec 2010)
·
Working Capital ( Dec
1990) US$ 70M x (1 + 2.589) = US$ 251
230 000 (Dec 2010)
·
Capital
Cost financed through debt 60% with 12%
interest
60%/100 x US$ 2 153 400 000 = US$ 1
292 040 000 with 12% interest
·
Capital
cost financed through equity of 40 %
40% / 100 x US$ 2 153 400 000 = US$ 861
360 000
·
Salvage
20%/100 x US$ 2 153 400 000 = US$ 430 680 000
Annual
Interest plus principle payment
A = P x i x (1 + i) n = US$ 1 292
040 000 x 0.12(1 +0.12)10 = US$ 228
670 619.5
(1 + i)n – 1 (1 + 0.12 )10 -1
= US$ 228 670 619.5
Principle = US$
1 292 040 000 = US$ 129 204 000
10
Interest = Annual payment – principle
=
US$ 228 670 619.5 – US$ 129 204 000 = US$ 67 201 632.5
3.
Operating
Cost
i)
Mining
Operation Cost
Data
Total ore &
waste tonnage is 90 000 tonnes mined per day for 350 days for 20 years
It cost US$1.0/tonne to remove both waste and
ore.
Total cost = US$
1.0/tonnes x 90 000 x 350
=US$ 31 500 000 (1990 value)
Therefore;
·
Mining operating Cost
(Dec 1990) US$ 31 500 000 x (1+2.589) = US$ 113 053 500 (Dec 2010)
ii)
Milling, Severance and administration
operating cost
Milling
Cost = US$1.60/tonne x 30 000 x 350 = US$ 16 800 000 (1990 value)
(Dec 1990) US$ 16 800 000 x (1 + 2.589)
= US$ 60 295 200 (Dec 2010)
b)
Severance
Severance Cost =
US$0.10/tonne x 30 000 x 350 = US$ 1 050 000 (Dec 1990)
(Dec 1990) US$1 050 000 x (1 +
2.589) = US$ 3 768 450 (Dec 2010)
c)
Administration
Administration Cost = US$
0.20/tonne x 30 000 x 350 = US$ 2 100 000 (Dec 1990)
(Dec
1990) US$ 2 100 000 x (1+2.589) = US$ 7
536 900 (Dec 2010)
d)
1 tonne Cu
smelter-charged is imposed on every 0.87 tonne mill production =
1tonne/ 0.87tonne x US$1.60 x 30 000 x 350 =US$
19 310 344.83 (Dec 1990)
(Dec
1990) US$ 19 310 344.83 x (1+2.589) = US$
69 304 827.59 (Dec 2010)
Total Operating Cost = US$
253 958 877.6
4.
Development Cost (Capital Cost)
(Dec 1990)US$ 300M x (1+2.589) = US$ 1 076 700 000 (2010 value)
Year
1 to Year 2 amount used is US$300 million (1990 value)
(Dec
1990)US$ 300M x (1+2.589) = US$ 1 076
700 000 (2010 value)
5.
Royalty
2.25%
- 0.25% = 2.0 % from Year 13 to Year
22
PNG Income Tax rate is 30% of the corporate income.
7.
Depreciation
Year
2 – 14 Apply Double Declining Balance Method (1/2 convention)
Year
15 – 22 Switch to Straight line depreciation.
Year
|
Method
|
Rate x Adjusted Basis
|
Depreciated Amount (US$)
|
1
|
|||
2
|
1.5 DB
|
1.5/13 x 2,153,400,000 x 1/2
|
124,234,615.4
|
3
|
1.5 DB
|
1.5/13 x 2,029,165,385
|
234,134,467.5
|
4
|
1.5 DB
|
1.5/13 x1,795,030,918
|
207,118,952
|
5
|
1.5 DB
|
1.5/13 x1,587,911,966
|
183,220,611.5
|
6
|
1.5 DB
|
1.5/13 x1,404,691,355
|
162,079,771.7
|
7
|
1.5 DB
|
1.5/13 x 1,242,611,583
|
143,378,259.6
|
8
|
1.5 DB
|
1.5/13 x 1,099,233,323
|
126,834,614.2
|
9
|
1.5 DB
|
1.5/13 x 972,398,708.8
|
112,199,851
|
10
|
1.5 DB
|
1.5/13 x 860,198,857.8
|
99,253,714.36
|
11
|
1.5 DB
|
1.5/13 x 760,945,143.4
|
29,267,120.9
|
12
|
1.5 DB
|
1.5/13 x 731,678,022.5
|
84,424,387.21
|
13
|
1.5 DB
|
1.5/13 x 647,253,635.3
|
74,683,111.76
|
14
|
1.5 DB
|
1.5/13 x 572,570,523.5
|
66,0665,829.64
|
ii)
Straight Line Depreciation
Annual Depreciation = US$ 41 064 561.09
= US$ 5 133 070.137/year
8 years
8.
Discount
Rate
Step
1
E(Ri) = Rf + ßi
[E (Rm – Rf )]
=
5% + 1% * [ 6% – 5% ]
=
6% is expected rate of return on the stock investment
Step 2
WACC = E(Ri) * D + D * (1
– t )* i
(D + E) (D + E)
WACC = 6%
* 60
+ 60
* (1 – 0.3)* 12
(40 + 60) (40 + 60)
=
8.64%
Therefore the discount rate is 8.64%
Summary
of the Calculation
·
Gross Revenue US$ 4
027 845 264
·
Royalty - 2% +
0.25% = 2.25% from Year 2 to Year 12
-
2.25% - 0.25% = 2.0 % from Year 13 to Year 22
·
Capital CostUS$ 2 153 400 000
i) US$ 1 076 700 000 (Year 0-1)
ii) US$ 1 076 700 000 (Year 1-2)
·
Operating Cost US$ US$
253 958 877.6
·
Working Capital - US$ 251 230 000
·
Salvage Value - US$ 430 680 000
·
Depreciation
·
Interest Expense
·
Tax
30%
·
Discount Rate 8.64%
