1. Executive summary ………………………………….2 2.Company Background ............................................................. 2 3.Business Strategy and operating Performance under global financial crisis .................................................................. 4 4.Foreign Exchange Exposure and policies ................................ 5 5.Financial Analysis and Discussion .......................................... 6 5.1Profitability Ratios .............................................................. 7 5.2Liquidity Ratios .................................................................. 9 5.3Debt Ratios ....................................................................... 10 5.4Asset utilisation Ratios ...................................................... 11 6.Conclusion and Recommendation ......................................... 11 7.References ............................................................................. 13 8.Appendix 1: Income statement .............................................. 15
Appendix 2: Balance sheet…………………………16
Appendix3: Calculation……………………………20
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Newcrest Mining Limited financial report
1. Executive summary
The purpose of this report is to provide comprehensive financial analysis for Newcrest Mining Limited which is the most famous company in Australia because of gold reserves and production. Through the measurement of annual report of Newcrest Mining Limited, firstly it is shown that during the financial crisis, this company operated superior business strategy such as running a portfolio with long life, low cost assets by activities of explorations and acquisitions, which lead to the excellent operating performance and volatility in currency market. Then, it is illustrated that NCM is easily affected by the fluctuation in foreign exchange rate due to the transactions with foreign currencies, and the major policies for that company to mitigate foreign exchange exposures is to borrow US dollars. Moreover, the financial ratio analysis would use the accurate date of profitability, Assets utilization, debt and liquidity ratios, which are helpful to investors and shareholders to understand the current situation of company and make correct decision for future investments. It is estimated that the future of NCM is optimistic, which indicates shareholders of NCM should increase their investments in order to achieve significant profit margins based on these analysis.
2. Company background
Newcrest Mining Limited is the largest company in Australia which is famous for producing gold and ranks in one of top 10 gold mining companies in the whole world due to market capitalisation, reserves and production. (Smith, 2010) The major activities for New Mining Limited is to exploit, develop and sale mining, gold and gold-copper concentrate. This company which has substantial resources and reserves with a long reserves life provides a portfolio of low cost, low life operating mining, a strong pipeline of growth projects and highly prospective brown and greenfield
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exploration projects. Newcrest Mining Limited which is listed on Australian Stock Exchange owns 36593 ordinary shareholders while at 31th August 2009.(Newcrest Mining share,2010) In addition, it has numerous mining operations and exploration interests in Australia, Indonesia, and Papua New Guinea. Newcrest Mining Limited whose headquarters is located in Melbourne (Australia) has four operating places such as Valley (Central New South Wales), 100 percent owned by Newcrest; Telfer Gold-Copper Mine (North-western Western Australia), 100 percent owned by Newcrest; Newcrest and 30 percent by Sedimentary Holdings; and Gosowong Gold Mine (Halmahera Island Indonesia), a joint venture owned 82.5 percent by PT Nusa Halmahera Minerals (Newcrest) and 17.5 percent by PT Aneka Tambang. Moreover, the main competitors of Newcrest Mining Limited internationally include Newmont and Anglo Gold. (Newcrest Mining Limited, 2004-2006)
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3. Business strategy and operating performances affected by financial crisis and volatility in currency market
While there was a global financial crisis in 2008, the amount of gold production in 2008, which was 1,781,782 ounces, was 10% higher than the amount of gold production in 2007 at 1,617,251 ounces. In addition, the underlying profit of company in 2008 which was 493, 9$ million, was significantly higher than that in 2007 at 191$million. Furthermore, record cash flow from operations and gold reserves million ounces were up 163% to $1018.1million and up 20% to 40 million ounces respectively. (Annual report, 2008) During the financial year 2009, while the demand of gold and jewellery has been relatively flat, the gold production has decreased. The gold value had been reinforced as a store of wealth by uncertainty of global financial crisis, which leads to the positive performance of share price of New Crest Mining Limited (NCM) at that time. (Annual report, 2009) The strategy pursued by company concentrated on running a portfolio of low cost, low life gold assets though series of activities in terms of explorations and acquisitions in order to enhance the financial
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returns for shareholders. For instance, the mergers with Lihir Gold provide superior financial statement to achieve significant profit margins, low level of debt and excellent balance sheet. Secondly, it has positive effects for NCM to perform remarkably at each phase of gold mining supply chain. Additionally, continuous improvements and technical innovations across a wide range of mining formats also should be taken account into as business strategy under global financial crisis.
4. Foreign exchange exposures and policies
NCM is easily affected by the fluctuation in foreign exchange rate due to frequent transactions with foreign currency. (Eiteman et al, 2011) US dollars play essential role in the majority of company’ revenue while Australian dollars are crucial for majority of costs. As a result of it, the movements in the USD: AUD exchange rate has significant impacts on NCM’ balance sheet. Moreover, other foreign currencies in terms of Indonesian Rupiah, Papua New Guinea Kina and Fiji dollars would be slight exposures to the Group. (Annual results,2008-2009)
The major policy which is operated by NCM in order to mitigate its foreign exchange exposures is to borrow US dollars. While cash flow hedge of future US dollar represent commodity sales, the company achieve exchange gains or losses which are
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deferred in Hedge Reserves within equity through revaluating the US Dollar dominated borrowings from historical drawdown rate to spot exchange rate and these gains or losses will be released to income statement. In addition, when considering the net investment in foreign operations, exchange gains and losses on revaluation of US Dollar dominated borrowings from previous drawdown rate to spot exchange rate are deferred in the foreign currency translation reserve and will be also released to income statement. Moreover, there are several activities of company to hedging its foreign exchange exposures in terms of closing out its hedge book, extinguishing any future obligation referring to the hedge contracts and releasing gold hedging losses. (Annual report, 2010)
5. Financial ratio analysis
It is obvious that financial ratio analysis is a demonstration for investors and shareholders to access and evaluate effectively the financial statement, operating performances and future trends. While considering the financial ratio of NCM, there are four dimensions should be taken account into in terms of profitability ratios, asset utilization ratios, liquidity ratios and debt utilisation ratios. Because of the close connection between ratios, the date for past five years should be provided. (Wild and Halsey 2007).
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5.1 Profitability ratios
Profit margin
Profit margin indicates the competitive capacity of operation in terms of generating profits. Company with high level of competence usually produces stable and significant profit margins. Table 4 shows the profit margin of NCM from 2006 to 2010. There was slight decline of NCM’ profit margin at 3.4% and 5.7% respectively, from year 2007 to2008, where there is a global financial crisis. However, during2009 and 2010, the profit margin increase significantly from 9.8% to 19.8%, which means strong profitability and capacity of company and optimistic future trends for investors and shareholders.
Return on assets
Return on assets illustrates the amount of income per unit of assets, which refers to the profitability of company in utilization of assets. The company prefers to seek a large amount o f profits with possible less assets due to the high level of cost and expenditure for assets to be maintained and sourced. As can be seen from Table 4, there was small reduction of return on assets for NCM in 2007, at 1.6%. However, the general trends of return on assets increase steadily during 2008 and 2010 from 3.1% and 8.8%. It indicates high level of profitability and business efficiency which owned by NCM, and it could bring superior benefits to investors and shareholders.
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Return on equity
Return on equity evaluates the profits earned referring to equity resources invested. Return on equity which bases on two components in terms of how profitability the company employs assets and how share holders’ investments dominate the size of assets of operation, is a crucial indication for the degree of management efficiency for NCM to utilize investments of shareholders in order to generate returns. According to Table 4, during 2006 and 2008, the return on equity experienced small fluctuations, which were 8.1%, 7.7%, 4.1% respectively. Moreover, return on equity in relations to the use of debt implicates the reduction in that period due to high level of debt of company compared to equity. However, from 2008 to 2010, there was gradual increase in return on equity, peaking at 11.1% in 2010. This trend shows that it has strong capacity to utilize the investments of shareholders to generate return and optimistic movements in the future stock market.
Return on total capital employed
Return on capital employed is measurement to illustrate how well assets have been employed. A profitable company with strong competitive competence usually has high level of return on total capital employed. It can be seen from Table 4, although there was a slight drop of return on total capital employed, which possibly refers to increase of cost of operation, the general trend of return on capital employed increased stably, peaking at 24% in 2010. This trend indicates the positive effect for shareholders of NCM and optimistic improvement in share price of company.
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5.2 Liquidity ratios
Current ratio
The current ratio is used to measure liquidity of a company which is in relation to the short term assets and short term liabilities. Company which has more liquid capacity owns higher current ratio. As can be seen in Table 5, the highest current ratio of NCM is 0.65 in 2006, declining dramatically in 2007 at 0.13. The current ratio of NCM in the following year rise steadily. However, there is a risk of pursue such high liquidity because of the less interest of short term asset compared to long term assets (Block and Hirt, 1992). Company should try to solve the liquidity risk associated with high level of liquidity.
Quick ratio
Quick ratio which is measurement of short term liquidity of an operation is similar to current ratio but exclude the value of inventory or stock in current assets. While considering quick ratio, inventory is overstock or unqualified which leads to long time to be source of cash should be taken account into. The higher ratio company has, the more liquid the company is. It can be seen from the Table 5, the highest quick ratio is 0.46 in 2006 followed by sharp fall in 2007 and 2008 at 0.10, 0.18 respectively. In the
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following three years, quick ratio of NCM rises slightly.
5.3Debt ratios
Debt to equity ratio
Debt to equity ratio measures proportions of short term debts and long term debts in share holders’ equity of company. Company which is confronted with high solvency and liquidity risk has a large amount of debt within equity in capital structure of firm. According to Table 6, it is clear that there is a remarkably high debt to equity ratio in 2006 at 1014.13%. However, from 2007 to 2010 the general trend of debt to equity ratio of NCM decline dramatically, bottoming at 8.52% in 2010. This trend should be preferred by shareholders due to less capital cost and low level of solvency and liquidity risk.
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5.3 Asset utilisation ratios
Inventory turnover
Inventory turnover which measures the efficiency of company to utilize their inventory represents how many times inventory was used and replaced. The low level of inventory turnover indicates the inefficiency and inappropriate management of inventories. It can be seen from Table 7, the overall inventory turnover ratio of NCM is high and stable although there were slight fluctuations in past few years, which indicates the inventories of NCM are used effectively.
Total asset turnover
Total asset turnover is a measurement to evaluate the efficiency of company to utilize the total asset to generate the revenue. The higher total asset turnover is, the much more efficiencies company has. As can be seen from Table 7, from 2006 to 2008, total asset turnover gradually increase, peaking at 5.5 in 2008. Moreover, the trend of asset turnover decline slightly during 2008 and 2010. In spite of it, the overall asset turnover of NCM is stable and the ulitisation of company to generate the sale is effective.
6. Conclusions and recommendations for investments
In conclusion, it is found that Newcrest Mining Limited has strong capacity in terms
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of capitalisation, gold production and reserves and superior financial statement to create continuous growing and significant profits for the investors and shareholders. This company operated superior business strategy such as running a portfolio with long life, low cost assets by activities of explorations and acquisitions, which lead to the excellent operating performance and volatility in currency market. Although NCM is easily exposed to the foreign exchange exposures due to the foreign transactions, the corresponding policies are used to mitigate the foreign exchange risk such as hedging strategies. Through the analysis of NCM’ financial ratio in terms of profitability, Assets utilization, debt and liquidity ratios, it is obvious that NCM has the competitive capacity of operation in terms of generating profits for its investors and shareholders and effective utilizing the assets and inventories. Moreover, NCM which owns higher current and quick ratio has more liquid capacity. In addition, as a result of less capital cost and low level of solvency and liquidity risk, NCM is favourable for shareholders to achieve significantly continuous profits. Because of estimation of NCM’ optimistic future based on these analysis, it is recommended that the investors and shareholders in NCM should hold, buy even increase the investment for that company in medium term or long term.
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7. References
Block and Hirt. (1992). Foundations of Financial Management. 6th edition. Richard Irwin & Co
Eiteman, D., Rath, S. and K. Daly, (2011). Multinational Business Finance, 2nd Edition, Pearson Australia, Frenchs Forest
Newcrest Mining Limited 2004-2006, Annual report 2004-2006, accessed 05/03/10, http://www.newcrest.com.au/reports/gri_report/org/GRI_ORG_profile.asp
Newcrest Mining Limited 2008, Annual result 2008, accessed 01/03/10, http://www.newcrest.com.au//upload/521_30x09x2008102703AM.pdf
Newcrest Mining Limited 2009, Annual report 2009, accessed 02/03/10
http://www.aspectfinancial.com.au.ezproxy.uow.edu.au/docserver/00992552.pdf?fileid=00992552&datedir=20090929&edt=MjAxMS0wMy0xMCsyMTo1MDo0OCsxMjArNTA1ODExK1VuaW9mV29sbG9uZ29uZ0ZpbnMzK3JlZGlyZWN0Ky9pbWFnZXNpZ25hbC9lcnJvcnBhZ2VzL1BERlRpbWVvdXQuaHRtbCsvaW1hZ2VzaWduYWwvZXJyb3JwYWdlcy9wZGZkZWxheWVkLmpzcA==
Newcrest Mining Limited 2010, Annual report 2010, accessed 02/03/10,
http://www.aspectfinancial.com.au.ezproxy.uow.edu.au/docserver/01101947.pdf?fileid=01101947&datedir=20100928&edt=MjAxMS0wMy0xMCsyMTo1MDo0OCsxMjArNTA1ODExK1VuaW9mV29sbG9uZ29uZ0ZpbnMzK3JlZGlyZWN0Ky9pbWFnZXNpZ25hbC9lcnJvcnBhZ2VzL1BERlRpbWVvdXQuaHRtbCsvaW1hZ2VzaWduYWwvZXJyb3JwYWdlcy9wZGZkZWxheWVkLmpzcA==
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Newcrest Mining Limited 2008-2009, Annual result 2008-2009, accessed 04/03/10,
Newcrest Mining Limited 2009, Annual result 2009, accessed 04/03/10, http://imagesignal.comsec.com.au/asxdata/20090817/pdf/00977764.pdf
Smith, Lan 2009, Global Metals& Mining Conference, accessed 03/03/10, http://media.wotnews.com.au/asxann/01063213.pdf
Wild, Subramanyan, and Halsey 2007, “Financial Statement Analysis”, 9th edn, Irwin/McGraw-Hill.
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8. Appendix1
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Appendix 2
Annual Balance Sheet as Reported
($millions) 06/01 06/02 06/03 06/04 06/05 06/06 06/07 06/08 06/09 06/10 Current Assets Cash
47.96 14.36 101.06 157.01 64.60 153.00 34.30 77.50 366.40 643.30
Receivables 68.69 89.89 61.16 96.16 144.70 240.40 298.90 163.50 189.30 223.40 Other Debtors Prepaid Expenses
Inventories 28.0 25.4 16.8 40.2 Curr. Investment0.16 0.18 0.13 0.35 s NCA Sale Other CA Total Curr. Assets
181.1 162.0 238.0 338.7 358.3 617.1 986.3 683.7 1,081.3 1,410.5 Held 0.00 0.00 0.00 0.00
0.00
0.00
0.00
0.00 0.00
0.00
1.20
0.00
386.20 6.90 13.50 39.40
103.3 178.2 163.4 219.6 272.8 267.0
25.19 9.22 7.85 13.68 9.80
20.90 0.00
46.00 83.30 56.60
5.48 11.92 14.20 13.38 17.40 0.60 0.00 39.50 9.30 30.10
5.63 10.99 36.73 17.93 17.30 24.00 103.50 130.70 146.70 150.70
Non-Current Assets
Receivables 26.42 20.04 39.85 34.57 9.10 Investments
0.00 0.00 0.00 0.00
0.00
0.00 9.40
9.10
0.30 9.10
8.90
514.80 37.60 14.80 2.80
Inventories 9.69 8.38 8.85 7.86 4.80 1.80 1.60 1.40 0.00 152.70
16
1,039.1,413.1,830.
PP&E
7
8
1
1,339.0 2,489.6 2,768.4 0.0
4,179.5 5,223.5 6,090.5
Accumulated Depr. Intangibles Ex. Goodwill Goodwill
0.00 0.00 0.00 0.00
0.00
0.00
0.00 1,351.90
0.0
0.0
0.0
0.0
0.0
0.0
0.0
-471.9 -553.1 -748.8 -570.4 -669.3 -722.7 0.0
-1,546.-1,773.-2,075.4
4
5
0.0 32.5 82.6
0.00 0.00 0.00
FITB 0.00 0.00 0.00 0.00 0.00 638.30 490.70 403.50 271.50
Other NCA 431.7 324.9 471.1 1,415.8 836.6 910.1 1,758.9 477.1 624.7 389.8
1,035.1,214.1,601.Total NCA 6
0
1
2,226.9 2,670.8 3,605.3 3,636.3 3,640.2 4,534.7 4,923.3
1,216.1,376.1,839.Total Assets 7
0
0
2,565.6 3,029.1 4,222.4 4,622.6 4,323.9 5,616.0 6,333.8
Current Liabilities Accounts Payable
Provisions 22.68 87.68 9.08 8.08 S/T Debt NCL Sale Other CL Total CL Held 0.00 0.00 0.00 0.00
0.00
0.00
0.00
0.00 0.00
110.5 57.6 181.2 159.7 154.7 233.5 216.4 177.7 212.6 209.1
22.50 653.00 537.90 70.90 101.80 112.00
5.80
111.71 66.71 83.70 86.23 321.50 65.40 35.00 2.60 5.00
0.00
8.05 21.97 42.60 14.12 0.00 0.00 0.00 0.00 1.10 0.50
252.9 233.9 316.6 268.1 498.7 951.9 789.3 251.2 320.5 327.4 17
Non-Current Liabilities Accounts Payable
0.00 0.00 0.00 0.00
0.00
0.00
0.00
0.00 0.00
0.00
L/T Debt
1,027.51,118.81,564.31,318.9
409.67 484.05 401.40 366.00 445.50 421.00
9 0 0 0
1,469.61,504.70
0
0.00
Provisions 101.76 93.44 99.34 157.97 212.10 447.90 491.10 575.90
Other NCL 4.18 25.00 136.64 112.13 67.40 75.90 68.90 6.90 0.50
Total NCL 1,297.61,398.33,109.82,892.5515.61 602.49 637.39 820.80 937.10 996.90 9 0 0 0
Total Liabilities
768.5 836.4 954.0 1,565.8 1,897.0 4,061.7 3,681.8 1,072.0 1,257.6 1,324.3
Shareholders Equity Share Capital Reserves Ex. SPR Share Prem Reserves Retained Profits Other Equity
Convertible 0.00 0.00 0.00 0.00
0.00
18
370.0 528.3 784.3 791.5 802.4 819.0 834.5 2,857.4 3,641.6 3,639.8
-1,327.
0.0
0.0
0.0
0.0
0.0
4
-626.7 -461.2 -357.4 -178.2
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
1,031.81,492.0
70.64 3.25 93.80 200.29 319.90 656.20 711.50 829.00
0 0
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
0.00 0.00 0.00 0.00 0.00
Equity Outside Equity
7.54 7.99 6.92 7.98
9.80
12.90 21.50 26.70 42.40 55.90
Total Equity 448.2 539.6 885.0 999.8 1,132.1 160.7 940.8 3,251.9 4,358.4 5,009.5
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Appendix 3
Ratio calculation:
1. profit margin = net income/sales 2006 2007 2008 2009 2010
2. return on investment = net income/total assets 2006 2007 2008 2009 2010
3. return on equity = net income/shareholders’ equity 2006 2007 2008 2009 2010
4. inventory turnover = sales/inventory Sales Inventory Inventory turnover (times) Net income 131 72 134 248 557 Shareholders’ equity 161 941 3252 4358 5010 Return on equity % 8.1 7.7 4.1 5.7 11.1 Net income 131 72 134 248 557 Total assets 4222.4 4622.6 4323.9 5616.0 6333.8 ROI % 3.1 1.6 3.1 4.4 8.8 Net income 131 72 134 248 557 sales 1393 2127 2363 2531 2802 Profit margin % 9.4 3.4 5.7 9.8 19.8 20
2006 2007 2008 2009 2010
1393 2127 2363 2531 2802 178.2 163.4 219.6 272.8 267.0 7.8 13 10.8 9.3 10.5 5. current ratio = current assets/current liabilities 2006 2007 2008 2009 2010
6. quick ratio = (current assets – inventory)/current liabilities 2006 2007 2008 2009 2010
7. total asset turnover = sales/total assets 2006 2007 2008 2009 2010
Sales 1393 2127 2363 2531 2802 Total assets 4222.4 4622.6 4323.9 5616.0 6333.8 Total asset turnover (times) 3.3 4.6 5.5 4.5 4.4 Current assets 617.1 986.3 683.7 1081.3 1410.5 Inventory 178.2 163.4 219.6 272.8 267.0 Current liabilities 951.9 789.3 751.2 320.5 327.4 Quick ratio 0.46 0.10 0.18 0.25 0.35 Current assets 617.1 986.3 683.7 1081.3 1410.5 Current liabilities 951.9 789.3 751.2 320.5 327.4 Current ratio 0.65 0.13 0.27 0.34 0.43 21
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