Hc2091: Finance For Business Research Assessment Answer

Introduction

The main purpose of the report is to focus on the background of OZ Minerals and Resolute Mining that will include the company’s competitive advantages, core activities and the market under which the companies operate. Through the financial data obtained from the financial statement of the companies the report will interpret the financial position of the companies through various ratios like solvency ratio, profitability ratio and market value ratios. Further, it will analyse the monthly share movements obtained from the ASX website for comparing those with All Ordinaries Index (Asx.com.au 2018). Further, using the constant dividend growth rate model the report will compute the latest stock price of the companies for comparing it with the current stock price of the market. Finally, based on the interpretation and analysis the report will provide recommendation regarding the performances which in turn will assist in decision making.

Description of companies 

OZ Minerals is the Australian based mining company that is concentrated on copper. The company was established during 2008 through merger of 2 Australian businesses for non-ferrous metals named as Zinifex and Oxiana. The entity has the growth strategy that is focussed on value creations for the shareholders (Ozminerals.com 2018). On the other hand, Resolute Mining is the proven producer for gold with experience of more than 25 years. It has experience in gold exploration, production, innovation and development. The company has 9 gold mines all over Africa and Australia that produces more than 8 million ounces of gold (Resolute 2018).

Core activities

OZ Minerals operates and owns copper-silver-gold mine at the Prominent Hall and at present they are developing one of the biggest copper gold resources at Carrapateena in Australia. It is focussed on creation of the pipeline for opportunities. They are committed to capital discipline, safety and their values underpin everything they do. They operates through various mines those include Prominent Hall, Carrapateena, Antas, West Musgrave, Centrogold and Pedra Branca. They have extensive experience in exploration in international sites as well as Australia. Central part of their strategy is to grow through exploration for adding value to the entity (Ozminerals.com 2018). On the other hand, Resolute Mining operates 2 mines – Ravenswood Gold Mine in Queensland, Australia and Syama Gold Mine in Mali, West Africa. It is one of the largest producers for gold listed under ASX with production of more than 300,000 ounce of gold (Resolute 2018).

Competitive advantages

OZ Minerals is one of the leading companies in Australian mineral sector. During the past years the company redefined the ways for carrying on the business under the material industry. Whereas the global copper levels are declining OZ Minerals produces higher grade of copper with low level of impurities. Further, it takes short time for transit that helps in planning the certainty for the customers (Ozminerals.com 2018).

On the other side, Resolute Mining Limited is one of the leading material companies in Australia. Further, it has acquired 15% stake in Canadian public entity through the transaction for an amount of $ 22.5 million. This investment will provide opportunities in Cote D’Ivoire, Sudan and other places of Africa.  Further, it added to the investment portfolio of the company including the Oklo Resources, Mako Gold and Loncor Resources (Resolute 2018).

Historical consideration

OZ minerals had been awarded with the development of Carrapateena underground mine that is valued at $ 660 million. Review of the contract for underground mining is aligned with beginning of Carrapateena mine’s development that will be started after receiving primary approval including Mining lease from State and Federal Governments. Under this contract work scope for the company includes – (i) sire development and set up to top of ore infrastructure and body excavation (ii) production ramp up and set up and (iii) bedding under steady-state operations at the capacity of nameplate site (Ozminerals.com 2018).

Resolute Mining completed the strategic investment in Loncor Resources Inc and Orca Gold Mine. It also acquired additional 3% holding in Manas Resources Limited through the agreement of share swap. It resulted into issuance of new shares amounting to 11.28 million (Resolute 2018).  

Computation and analysis of the performance ratio

Ratio	Formula	OZ Minerals		Resolute Mining
		2017	2016	2017	2016
Short-term solvency
Current ratio	Current assets/current liabilities	5.06	5.40	4.07	2.98
Quick ratio	(Current assets-inventories) / Current liabilities	3.88	4.25	2.42	1.01
Long term solvency
Debt equity ratio	Total liabilities/ shareholder's equity	0.12	0.12	0.29	0.45
Debt ratio	Total liabilities / Total assets	0.11	0.11	0.23	0.31
Asset utilization ratio
Asset turnover ratio	Net sales/total assets	0.36	0.31	0.65	1.13
Return on assets	NPAT / Total asset	0.08	0.04	0.20	0.32
Profitability ratio
Interest coverage ratio	EBIT/interest expense	84.39	26.50	50.91	18.17
Net profit ratio	Net profit/net sales *100	22.59	13.10	30.69	36.19
Market value ratio
Earnings per share (cents)	Given	77.40	35.70	19.05	19.82

Short term solvency ratio

Short term solvency ratios are used for measuring the company’s ability to meet the financial obligations due in short term period. To be more specific, these ratios determine the company’s ability to avoid the financial distress in short run. 2 major short term ratios for measuring the short term solvency are current ratio and quick ratio. Current ratio is computed through dividing the current assets by current liabilities. Currents assets are those assets which are expected to get converted into cash within one year period and current liabilities are the liabilities required to be paid within one year period (Albul, Jaffee and Tchistyi 2015). However, the appropriate value for current ratio depends on the industry type under which the company is operating. At minimum, the current ratio shall be more than 1. It can be identified from the above calculation that the current ratio of OZ minerals for both the years is more than 5. On the other hand, the current ratio for Resolute Mining has increased from 2.98 to 4.07 over the years from 2016 to 2017. While calculating the quick ratio, inventories and prepayments are not taken into consideration as it is considered that if the inventories are to be sold in hurry, finding the buyer may not be easy. It measures the company’s ability to meet the short term obligations depending solely on more liquid asset like accounts receivable and cash (Zhang 2014). It can be identified from the above calculation that the quick ratio of OZ minerals for both the years is more than 3. On the other hand, the current ratio for Resolute Mining has increased from 1.01 to 2.42 over the years from 2016 to 2017. It indicates that the liquidity position of both the companies are good, however, very high liquidity ratio indicates that the companies may not be deploying the working capital effectively.

Long term solvency ratio

Long term solvency ratios are used for measuring the company’s ability to meet the financial obligations due in long term period. The interested parties who measure this ratio are debenture holders and lenders of the company. For making sure regarding the repayment of money lend by them and interest payment, they depend on the long term solvency ratios. 2 major long term ratios for measuring the long term solvency are debt equity ratio and debt ratio. Debt equity ratio builds the relationship among long term debt and shareholder’s equity. To explain it in simpler way, it can be stated that the liabilities or loans raised by company from outsiders those will become due after 1 year from the balance sheet date are considered as debt. Conversely, shareholder’s equity is total items belonged to the entity’s shareholders. Though the appropriate ratio for debt equity depends on the industry type under which the company is operating, ratio of 2:1 will be considered appropriate (Altaf and Shah 2017). It can be identified from the above calculation that the debt to ratio of OZ minerals for both the years is 0.12. On the other hand, the debt to equity ratio for Resolute Mining has reduced from 0.45 to 0.29 over the years from 2016 to 2017. Debt ratio is used for measuring the company’s leverage extension. It is defined as ratio of total debt to the total asset and is expressed in percentage or decimal term. It is interpreted as proportion of the asset financed through debt. It can be identified from the above calculation that the debt to ratio of OZ minerals for both the years is 0.11. On the other hand, the debt to equity ratio for Resolute Mining has reduced from 0.31 to 0.23 over the years from 2016 to 2017. Hence, it can be stated that major portion of the company’s fund is raised through shareholder’s equity and small proportion is financed through borrowing. It states that the company is lower leveraged and financially stable (Van Deventer, Imai and Mesler 2013).

Asset utilization ratio

Asset utilization ratio is used for computing total revenue earned by the the entity for each dollar of asset it owns. Financial and business analysts compute this ratio for assessing the efficiency of the business regarding usage of its assets for creating revenues. It is typically computed as the ratio of the value of asset to the revenues. It can be calculated for all businesses assets for individual asset category like account receivable or inventories (He and Krishnamurthy 2013). Asset turnover ratio is the ratio of company’s revenue against its assets. It indicates the efficiency regarding deployment of assets for generating revenue. Hence, higher ratio indicates better performance. It can be identified from the above calculation that the asset turnover ratio of OZ minerals increased from 0.31 to 0.36 over the years from 2016 to 2017. On the other hand, same ratio for Resolute Mining has reduced from 1.13 to 0.65 over the years from 2016 to 2017. Return on asset is the financial ratio that indicates the profit percentage earned by the company against its overall resources. As the main purpose of the company is to create revenues to earn profits this ratio assists the investors as well as managements to assess the ability of the company to convert its investment in assets into profits (Heikal, Khaddafi and Ummah 2014). It can be identified from the above calculation that the return on assets of OZ minerals increased from 0.04 to 0.08 over the years from 2016 to 2017. On the other hand, same ratio for Resolute Mining has reduced from 0.32 to 0.20 over the years from 2016 to 2017. Hence, it can be stated that the asset utilization ratio for the companies are sufficient to determine that the both the company’s businesses are efficient regarding usage of its assets for creating revenues (Harris and Mazibas 2013).

Profitability ratio

The profitability ratios are computed for assessing the ability of the business with regard to generation of earning as against the expenses. Different profitability margins are used at various levels of cost like net profit margin, pre-tax margin and interest coverage ratio. Interest coverage ratio is used for determining the way in which the company can pay off the interest expenses on the outstanding debt (Halili, Saleh and Zeitun 2015). Higher the ratio, the company is more efficient in meeting its debt expenses. It can be identified from the above calculation that the interest coverage ratio of OZ minerals significantly increased from 26.50 times to 84.39 times over the years from 2016 to 2017. On the other hand, same ratio for Resolute Mining significantly increased from 18.17 times to 50.91 times over the years from 2016 to 2017. On the other hand, the net profit margin is the after tax ratio of the entity against net sales. It determines the profit remained after meeting all the business expenses like financing, administration and production those are deducted from revenue (Akeem et al. 2014).  It can be identified from the above calculation that the net profit margin of OZ minerals significantly increased from 13.10% to 22.59% over the years from 2016 to 2017. On the other hand, the net profit margin for Resolute Mining reduced from 36.19% to 30.69% over the years from 2016 to 2017. Hence, the profitability position of both the entities has been improved over the years.

Market value ratio

Market value ratios are computed for evaluating current stock price of the publicly held entity. This ratio is used by current as well as potential investors for determining whether the share of the entity is under-priced or over-priced. Earning per share is the percentage of profit distributed to the shareholders on each outstanding share held by them (Bodie, Kane and Marcus 2014). It can be identified from the above calculation that the earning per share of OZ minerals significantly increased from 35.70 cents to 77.40 cents over the years from 2016 to 2017. On the other hand, the net profit margin for Resolute Mining slightly reduced from 19.82 cents to 19.05 cents over the years from 2016 to 2017.

Graphs and comparison for share price movements

From the above presented stock movement graph for OZ Minerals against All Ordinaries Index, it can be interpreted that though at certain points of time stock price of OZ Minerals were considerably higher as compared to the All Ordinaries Index, stock of OZ Minerals are considerably fluctuating as against the stock of All Ordinaries Index. Started at 11.13% of growth, the stock of OZ Minerals ended up with negative growth of 4.40% over the last 2 years period. On the other hand, started at negative growth of 2.20% of growth, the stock of All Ordinaries Index ended up with positive growth of 1.10% over the last 2 years period. However, there are positive correlation among the stocks of OZ Minerals and All Ordinaries Index and the correlation is 0.76. The positive correlation indicates that the stock price of OZ Minerals increase with the increase in the stock price of All Ordinaries Index and decreases with the decrease of the stock price of All Ordinaries Index (Finance.yahoo.com 2018).

Share valuation 

For the financial year ended on 31^st December 2017 is 20 cents per share. Hence, D₀ = 20 cents. Growth rate for dividend is 4% and therefore, dividend for next year that is D₁ = ((20 + (20 * 4%)) = 20.8 cents per share. As per Constant Dividend growth model, value of stock is calculated as below –

Value of stock = D₁ / (r – g) (Ajanthan 2013)

Where, D₁ = expected dividend for next year = 20.8 cents

R = rate of return = 0.09

G = growth rate for dividend = 0.04

Hence, Value of stock = 20.8 / (0.09 – 0.04) = 416 cents or $ 4.16 per share.

On the other hand, value of stock of OZ Minerals as on 31^st December 2017 as per ASX website is $ 9.14 per share (Asx.com.au 2018).

There is a difference among 2 values of shares on the given date. The main reason of difference is that the dividends are not paid by the company on 31^st December 2017 that is the date taken into consideration for computing the stock price. Further, the growth rate at 4% is only the estimation whereas the actual market condition may vary (Renneboog and Szilagyi 2015).

Conclusion 

From the above interpretation it is concluded that both the companies are performing well with regard to liquidity, profitability and solvency. However, if choice is given to select only one company for the purpose of investment, OZ Minerals shall be chosen. The reason behind that is the short term as well as long term solvency position, profitability ratio and market value ratio of OZ Minerals are better as compared to that of Resolute Mining.

Based on the above interpretation it is recommended that the investor shall invest in OZ Minerals as its solvency, profitability and market value position is better as compared to that of Resolute Mining.

References

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Harris, R.D. and Mazibas, M., 2013. Dynamic hedge fund portfolio construction: A semi-parametric approach. Journal of Banking & Finance, 37(1), pp.139-149.

He, Z. and Krishnamurthy, A., 2013. Intermediary asset pricing. The American Economic Review, 103(2), pp.732-770.

Heikal, M., Khaddafi, M. and Ummah, A., 2014. Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt to equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive in Indonesia stock exchange. International Journal of Academic Research in Business and Social Sciences, 4(12), p.101.

Ozminerals.com., 2018. OZ Minerals | A modern mining company. [online] Available at: https://www.ozminerals.com/ [Accessed 29 Sep. 2018].

Renneboog, L. and Szilagyi, P.G., 2015. How relevant is dividend policy under low shareholder protection?. Journal of International Financial Markets, Institutions and Money.

Resolute. (2018). Resolute. [online] Available at: https://www.rml.com.au/ [Accessed 29 Sep. 2018].

Van Deventer, D.R., Imai, K. and Mesler, M., 2013. Advanced financial risk management: tools and techniques for integrated credit risk and interest rate risk management. John Wiley & Sons.

Zhang, Z., 2014. On a risk model with randomized dividend-decision times. Journal of Industrial & Management Optimization, 10(4), pp.1041-1058.