Transcript ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF

ECONOMIOC ANALYSIS OF THE COPPER MINING
INDUSDRY OF IRAN
Kazem Oraee PhD
Professor, Stirling University, Stirling, UK
Arash Goodarzi MSc
Research Fellow, Ministry of Labor and Social Affairs, Tehran, Iran
Nikzad Oraee-Mirzamani LLB, MSc, DIC
Research Student, Imperial College London, London, UK
1
Iran is a developing country with a transitional economy
– heavily dependent on the export of raw materials.
Government's share in GDP was 80 percent in 2005
It is widely accepted that public enterprises
and large state-owned market players are
no longer the most efficient way of running
the economy and that a wide-ranging
reform is necessary across Iran’s economy.
Iran’s GDP=$ 331 billion (2009)
WORLD BANK report
The program was launched as part of the government's 10-year plan to privatize 80 percent of state-owned assets.
The government's assets were estimated at about $120 billion.
Since 2005 $63 billion of the assets have been privatized.
2
Copper ore production in Iran accounts for
75% of the total production in the Middle East.
Mining of copper ore and the related industries
play an important role in Iran’s economy.
3
All activities related to copper (exploration, production, refinement
etc) are owned and managed by state owned companies.
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National Iranian Copper Industries Co (N.I.C.I.Co)
Decisions have been made to privatize all these activities.
4
Privatization:
The partial or total transfer of
property or responsibility from
the public sector (government)
to the private sector (business).
The private sector is the “engine of growth”
5
Objectives of privatization
- To relieve the financial and administrative burden of the
government;
- to improve efficiency and increase productivity;
- to facilitate economic growth;
- to help meet national development
targets;
- to reduce the size and presence of the public
sector in the economy;
6
History of Privatization
Thatcher elected 1979.
The Great Britannia has had a good infrastructure for controlling .
- BP (1979)
- British Aerospace (1981)
- Cable and Wireless (1983)
- Jaguar (1984)
- British Telecom (1984)
- British Gas (1986)
- British Airways (1987)
- Rolls Royce (1987)
Result
• It is rightly accomplished by a sale of company shares to the general public.
7
According to the foundations of communism:
The union soviet’s government control the means of production.
The Soviet Union and Eastern Europe’s economies reached an impasse in
the mid 80s by the lack of management and low productivity in industries.
The government spending increased sharply as an increasing number of
unprofitable enterprises required state support.
8
General Secretary Mikhail Gorbachev (1985-91)
introduced openness and restructuring in an
attempt to modernize communism with a
program called Perestorika.
The program permitted private ownership of businesses in
the services, manufacturing, and foreign-trade sectors.
Rapid mass privatization led to corruption by managers
and controlling shareholders.
The State’s assets were being stolen by enterprise
managers, politicians and bureaucrats at an
intolerable rate.
9
The Yeltsin era was marked by widespread
corruption in the privatization program especially
in huge industries like mining and oil.
Privatization
Russian multi billionaires rose through the anarchy of post-USSR.
They became rich by cheaply acquiring stock in newly privatized Russian companies.
This was while 20% of the
population lived below the
national poverty line.
((WORLD BANK report))
10
Economic analysis is a systematic approach for determining the
optimum use of scarce resources. It involves comparing alternative
ways for achieving a specific objective under given conditions and
constraints.
Necessary for decision making concerning
investment activities in every business.
11
Economic analysis takes into account the
opportunity costs of resources employed
and attempts to measure in monetary terms
the private and social costs and benefits of
a project to the community or economy.
A popular strategy for firms is profit maximization
or at times the minimization of losses.
12
Financial resources are limited; investors
must choose the best investment opportunity.
Potential investors need certainty in the
current capabilities of a private
company. They require financial
knowledge and trust in the management
in researching financial goals.
13
In Iran investing on mining projects in the stock exchange is
thought to be lucrative since approximately one third of the
economy is dependent on the activities in the mining sector.
Therefore for the purposes of N.I.C.I.Co (National Iranian Copper
Industries Co) raising capital through the sale of its shares in the
stock exchange is thought to be a positive step since it is a large
corporation and is bound to provide attractive investment
opportunities.
14
Everyone is on the look out for investment
opportunities, be it individuals or
institutions (or even States).
Investment opportunities will have different
rankings according to their level of
predicted profitability.
Even if the investor faces one good investment opportunity, it must be
compared to other profit-generating activities. Thus the concept of the
opportunity cost has to form an integral part of every economic analysis.
15
Generally, balance sheet, profit and loss
accounts and other financial statements
published by public companies present
raw, and in some cases meaningless
numbers without much analysis .
16
The balance sheet
Assets
Current assets
Cash balance
Short-term investments
2009
(million$)
2008
2007
(million$) (million$)
Liabilities and Shareholders’ Equity
2009
Current debts
(million$)
2008
2007
(million$) (million$)
111.20
225.46
109.07
Commercial revenue accounts
41.92
17.65
6.00
146.10
36.12
0.00
Other revenue accounts
217.28
203.40
468.65
Commercial revenue accounts and deeds
162.47
280.67
186.20
Deferred credit
3.48
4.40
46.31
Other revenue accounts
Materials and goods in hand
Orders and prepayments
Total current assets
Non-current assets
Tangible fixed assets
Non-tangible assets
Long-term investments
Other assets
Total non-current assets
75.07
61.47
97.89
Tax saving
124.60
100.44
67.42
437.95
414.08
360.52
Payable dividends
52.30
3.58
42.51
97.34
78.22
48.11
Received financial facilities
67.43
64.53
71.33
801.79
Total current debts
Non-current debts
507.01
394.00
702.22
Long-term payable accounts
2.76
2.76
2.76
1,030.13 1,096.02
1,163.91 1,118.92 1,131.96
20.72
20.67
10.78
Long-term financial facilities received
134.67
186.68
255.25
20.53
0.53
0.53
Employees’ retirement bonus saving
73.70
51.77
28.63
147.87
132.64
166.77
Total non-current debts
Total non-current liabilities
211.13
241.21
286.64
Total liabilities
718.14
635.21
988.86
Capital
578.96
578.96
578.96
Legal reserve
137.34
106.03
61.77
Other reserves
12.59
12.59
12.59
Accumulated profit
936.12
1,035.98
469.64
1,353.03 1,272.76 1,310.04
Shareholders’ equity
Total assets
Disciplinary accounts
2,383.16 2,368.78 2,111.83
379.81
404.87
690.46
Total shareholders’ equity
1,665.01 1,733.56 1,122.96
Total liabilities and shareholders’ equity
2,383.15 2,368.77 2,111.82
Disciplinary accounts party
379.81
404.87
690.46
Profit/Loss account of N.I.C.I.Co for the recent triennial fiscal years
2009
2008
2007
(million $)
(million $)
(million $)
Net
1,627.60
1,954.01
1,692.17
Cost of finished products
805.89
803.92
719.30
Gross profit
821.71
1,150.09
972.87
Sales, administrative, public expenditures costs
75.71
113.09
126.18
Other income and operational costs
16.00
5.45
22.21
Operational profit
730
1,031.55
824.48
Financial costs
26.46
29.25
40.44
Other incomes and non-operational costs
5.02
19.28
1.45
Profit emanating from normal activities before
deducting taxes
708.56
1,021.58
785.49
Profit tax of normal activities
82.34
122.75
59.02
Net profit
626.22
898.83
726.47
Dividends of each share-Net
0.11$
0.15$
0.12$
Description
18
Economic analysis
Investment
19
Sale analysis
Sale analysis is the process of
breaking a complex topic such as
sale into smaller parts to gain a
better understanding of it.
A sale analysis is an investigation of a market that is used to
forecast the next sales, according to past experiences and
prediction of future conditions.
Sale analysis is vital when perfect competition
prevails in a market, whereas it is not so
important in cases of a monopoly producer.
20
The market for the
production of copper in Iran
is a pure monopoly market.
Furthermore a company enjoying monopoly power is
not subjected to competitive pressure from the market.
Many clients have had to endure long delays before
being able to buy products from N.I.C.I.Co in Iran.
21
Sale (Import & Export) analysis for 2009
Production
For
Import
For
Export
Total
For
Import
Weight (ton)
For
Export
Total
%
Value (million $)
Sulfide’s ore
223,202
0
223,202
1.34
0.00
1.34
0.08
Concentration of copper
0
193,606
193,606
0.00
264.48
264.48
16.25
Cathode copper
75,519
57,766
133,285
409.42
299.42
708.84
43.55
3,953
494
4,447
108.90
18.08
126.98
7.80
329
0
329
22.83
0.00
22.83
1.40
Wire rod
73,624
1,494
75,118
429.50
12.02
441.52
27.13
Slab
644
0
644
2.76
0.00
2.76
0.17
Low grade copper
2,694
50,944
53,638
2.46
56.06
58.52
3.60
Sulfuric acid
4,988
0
4,988
0.33
0.00
0.33
0.02
977.54
650.06
1,627.60
( 60%)
( 40%) (=100%)
Concentration of
Molybdenum
Concentration of gold &
silver
Total
The sale: Import  60% & Import  40%
100
Main production: Cathode copper & Wire rod
Cost estimation
Costs as well as revenues must be calculated in economic analysis.
Costs are the monetary value of expenditures for:
- supplies
- services
- equipment
- labor
- products
- other items purchased for use by a
company or other accounting entity
23
The global recession and collapse of copper prices has forced the closure
of many high cost mines and adversely impacted on project development.
The rapid pace of change in the copper industry makes it even more important
for producers and industry observers to truly understand the drivers on cost
and profitability, as well as the implications for future copper mining.
24
The table of finished products cost for the fiscal years
For the last fiscal year
% to cost finished
million $
products
For the two fiscal year ago
% to cost finished
million $
products
Wages (Direct)
-150.64
-18.69
-133.31
-16.58
Consumption material and parts
-107.30
-13.31
-91.75
-11.41
Overhead
-367.31
-45.58
-332.63
-41.38
The costs have not been expended to
cause halt in production
6.57
0.82
18.61
2.31
Total of production costs
-618.68
76.77
-539.08
-67.06
-67.41
8.36
-27.89
-3.47
-132.65
16.46
-279.55
-34.77
The purchase of cathode copper
-9.55
1.19
0.00
0.00
Recovery of sulfide’s ore
10.68
-1.33
13.56
1.69
Production (inventory) value increase
11.72
-1.45
34.55
4.30
The purchase of oxide’s ore for
leaching operation
0.00
0.00
-5.51
-0.69
Cost of finished products
-805.89
100.00
-803.92
100.00
Description
The cost of wastage in process
production
The purchase of scrap &
concentration copper
Total cost  $800 million
25
Overheads  the largest group of costs (40% of the total costs)
It is usually used to group costs that are necessary
for the continued functioning of the business, but
which do not directly generate profits.
-
Energy
- Depreciation
- Transport
They include
- Rent
- Repairs
- Supplies
- Other such costs
26
The table of overhead cost for fiscal years: 2009-2008
Description of costs
$ million
Depreciation
Stripping
Energy
Light transportation
Cleanliness & horticulture
Equipment maintenance
Rent of truck
Engineering services
Rent of mining equipment
Depletion
Health aids to personnel
Ore haulage
Personnel nutrition
Drilling
Non cash aids to personnel
Other costs
Rent of office & guesthouse
Gathering of the wastage copper
Heap embankment
Total overhead cost
117.30
85.38
23.88
21.35
20.07
18.84
14.62
11.34
10.76
7.28
6.47
5.99
4.66
4.60
4.58
4.40
2.34
2.14
1.31
367.31
2009
% to total overhead
cost
31.94
23.25
6.50
5.81
5.46
5.13
3.98
3.09
2.93
1.98
1.76
1.63
1.27
1.25
1.25
1.20
0.64
0.58
0.36
100%
$ million
120.91
77.29
23.29
14.67
15.08
20.00
5.40
10.23
7.81
8.50
5.33
4.56
3.93
0.54
4.14
5.11
2.27
1.63
1.93
332.63
Depreciation + Stripping  55% of overhead cost
2008
% to total overhead
cost
36.35
23.24
7.00
4.41
4.53
6.01
1.62
3.08
2.35
2.56
1.60
1.37
1.18
0.16
1.25
1.54
0.68
0.49
0.58
100%
27
The prediction of price
Pricing and breakeven analysis will determine
the impact of a price change on the business.
Copper is a finite
resource, but, unlike oil,
it is not dissipated and
therefore can be recycled.
Recycling is a major
source of copper
production in the
modern world.
28
As consumption in India and China increases,
copper supplies are becoming scarcer.
Nevertheless some reports forecast an increasing
demand in the near future as the global economic
growth resumes. A rise in raw material prices,
especially in the metals occurred in recent months.
11 Feb 2011 = $9,920.50 per ton
29
The average price of cathode copper from 2000 to 2010
$8,780 per ton
$2,540 per ton
weakening global demand and a steep fall in commodity prices
30
Calculation
The values of the project in the future ≠ The value of the project
in the past ≠ The value of the project in the present
Therefore in order to assess the profitability of a potential
investment opportunity, one must compare the present value of a
project with the value derived from other investments.
The Net Present Value [NPV] (a useful method for economical evaluation) =
The sum of discounted values of all future returns less initial investment
It is a standard method for using the time
value of money to appraise long-term projects.
31
Economical evaluation of N.I.C.O.Co for the next 10 years
The total assets in 2008 were assumed as our cash flow for year 0
Year
Cash Cash
in
out
NCF
million million million
$
$
$
2,400 -2,400
PVIF
(15%)
DCF
(15%)
PVIF
(20%)
1.000
-2400
DCF
DCF
PVIF
DCF
(20%)
PVIF
(25%)
(25%)
1.000
-2400
1.000
-2,400
1.000
-2400
(27.8%) (27.8%)
0
0
1
750
0
750
0.870
652.5
0.833
624.75
0.800
600.00
0.782
586.5
2
750
0
750
0.756
567
0.694
520.5
0.640
480.00
0.612
459
3
750
0
750
0.658
493.5
0.579
434.25
0.512
384.00
0.479
359.25
4
750
0
750
0.572
429
0.482
361.5
0.410
307.50
0.375
281.25
5
750
0
750
0.497
372.75
0.402
301.5
0.328
246.00
0.293
219.75
6
750
0
750
0.432
324
0.335
251.25
0.262
196.50
0.230
172.5
7
750
0
750
0.376
282
0.279
209.25
0.210
157.50
0.180
135
8
750
0
750
0.327
245.25
0.233
174.75
0.168
126.00
0.141
105.75
9
750
0
750
0.284
213
0.194
145.5
0.134
100.50
0.110
82.5
million $
1,179.0
623.3
198
1.5
The sum of net profit and depreciation in 2009 were assumed as cash inflow for years 1, 2, 3, 4, 5, 6, 7, 8, and 9
The cash flow table is formed according to the balance sheet and the profit and loss account
Net present value is computed for:
PVIF = 15%, 20%, 25% and 27.8%
The NPV is positive for 15%, 20% and 25%
The discount rate that makes the algebraic sum of
future returns and initial investment is equal to
zero and is called the Inter Rate Ratio (IRR).
IRR is 27.8% where the amount of NPV becomes nil
33
Where inflation and risk are not accounted for, Net
Growth is 10% and is therefore an acceptable rate.
If however inflation is taken to • Therefore a project
be 20% in average (as it has been where the IRR is
27.8%
will
be
in Iran during the past 25 years)
UNECONOMICAL.
PVIF = 10 + 20 = 30%
34
It is widely believed that if current governmental
organizations are privatized they will need to become
more efficient.
At present many
are not profitable.
35
Privatization in Practice
40% of the shares of N.I.C.I.Co were offered to the public on two
occasions, 20% each time.
In 2007 the first 20% of
the company was sold for
$1.1 billion.
The investors were other
state-owned organizations!
Including:
- pension funds
- state banks
- state broadcasting industry
All shares sold in less than 7 minutes
The public did not have
the opportunity to
invest in the company.
36
Laws must be strengthened to minimize
the potential for corruption before a
privatization program can be effective.
Experiences in the last schemes of privatization
indicate the desirability of speedy mass
privatization techniques, resulting in full transfer
of the interests, without special deals for insiders
and without attaching lingering investment or
employment obligations.
37
38