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

  • Mine Waste Management Training

    Mine Waste Management Short training sponsored by Government of Japan through JICA in corporation with the Government of PNG through CEPA, MRA and DMPGM.

  • Mount Sinivit Mine

    Acid mine drainage (AMD) continues to flow from the abondoned workings (mine). It is of two types and they are Mine Drainage from underground and open-pit and the seepage water from waste dump and tailings dam.

  • Mining Warden Hearing at Ok Isai Village, Frieda River, East Sepik Province, PNG

    Landowner grievances is always a challenge for the PNG Mining Industry. However, the Regulators of the Mining Inductry facilitate Mining Warden Hearings and Development Forums to address grievances related to mining.

  • Osarizawa Underground Mine Adit

    Osarizawa Underground Mine is an abandoned mine in Akita Prefecture, Japan. Event though the mine is closed, the mine site is kept for sightseeing purposes.

  • Hidden Valley Tailings Storage Facility (TSF)

    Mine Waste refers to the waste related to mining activities such as tailings and waste rock. Management refer to how the mine derived waste is managed by the operator and or the Regulatory Body.




Showing posts with label Educational. Show all posts
Showing posts with label Educational. Show all posts

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)
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)
     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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