# Mine Waste Management

Learning and Discussion of Innovative ideas about Mining Waste Management and also Mining Related News and Activities

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## 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.

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## 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

Cu ore grade is 0.8% tonne Cu per mill tonnage produced

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
a)      Milling
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)
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)
Year 0 to Year 1 amount used is US\$300 million (1990)
(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% + 0.25% = 2.25% from Year 2 to Year 12
2.25% - 0.25% = 2.0 % from Year 13 to Year 22
6.      Income Tax
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.
i)                    Double Declining Balance Method
 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%

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