The mining industry is amongst the largest industry in Australia. The industry is dominated by various companies among them the Australian Mines Ltd and the Australian Pacific Coal Ltd. Besides, the mining industry is amongst the greatest contributor to national economy within Australia contributing significant percentage to the country’s GDP every year. Furthermore, the industry is considered as the chief driver of economic development within Australia employing a large number of individuals. Australian Mines Ltd is one of the gold as well as base metal mining firm. The company focuses on exploration and mining activities in Nigeria and Australia. Besides, AUZ is the ASX listed firm pursuing dominant position in supply and production of technology metals and battery to the worldwide markets. In fact, the form is developing classic cobalt-scandium-nickel within Australia aiming to meet the high demand that is created by worldwide shift to a more sustainable and cleaner energy sources. On the other hand, Australian Pacific Coal Ltd is the Australian public listed firm with around 2000 shareholders. The company was listed on ASX in the year 1999. It is one of the strongest participants in junior exploration and mining industry. With these considerations, the report present top-down analysis of the economic environment in which the two firms operates and bottom-down analysis of the two firms and then presents recommendations regarding the performance of these companies.
Top-Down analysis
The top-down analysis usually comprises of examination of the bigger picture or how general economy in a specific nation and macroeconomic facets drive the stock and markets. Basically, top-down analysis comprises of analysis of the nation’s GDP growth, currency value, inflation rate as well as fluctuations in the interest rate. With such info, this section would present analysis of Australian macroeconomic aspects and their impacts on Australian Mines Ltd and the Australian Pacific Coal Ltd. Based on RBA (2018) review, overall economic environment within Australia is said to have been relatively promising. This is based on the fact that the interest rate has been around 4.52% since the 1990 to date. Besides, by early August this year, the interest rate is said to have been at all-time low; that is, at around 1.50%. This rate has been in line with Australian market expectations since August 2016. The low interest rate is said to have significant effect on mining and exploration sector since it has brought about an upward development in the sector in terms of profit generation. Furthermore, with low interest rate, there has been increase in wage growth and relatively strong competition which in turn has been keeping the price of the precious commodities in check. In fact, with reported decrease in interest rate, Australian economy is expected to remain on track with expected growth rate of above 3% in future (Trading Economics 2018). Such growth would result in positive growth in the two companies’ financial performance.
On the other hand, inflation rate in Australia is said to have moved between 2 and 3% and has remained moderate this year at around 2.1% (Focus Economics 2018). The decrease in the country’s inflation rate is said to result in increase in the mining and exploration activities and in turn result in increase in employment amongst the unemployed individuals. The increase in exploration and mining activities would in turn result in increased or growth in profit generation amongst the concerned companies (Trading Economics 2018). Basically, with decrease in the country’s inflation rate, Australian Mines Ltd and the Australian Pacific Coal Ltd financial performance is projected to increase this year compared to the previous year. This is due to the fact that in case inflation remains at the range of 2 to 3%, that rate does not at any time influence individuals economic decisions on whether to invest in such sector (Statista 2018). Besides, maintaining inflation rate at around 2 .1% would usually enhance full employment amongst citizens as well as increased progression. Furthermore, low inflation rate would greatly enhance high ROI to the two mining and exploration firms since Boyd, Levine and Smith (2011) indicated that when inflation is relatively lower, companies would get significantly high amount since decrease in the inflation rate would increase the purchasing power of the interest earnings.
According to Daily FX (2018), the $AUD has been amongst the favored currencies across the globe. This has been linked with multi-decade product boom which brought about Aussie to all-time high compared to the USD. In essence, the $AUD is said to have increased with around 0.0012 against the USD to approximate 0.7193 by early September 2018 from around 0.7181 which was reported previously (Trading Economics 2018). This increase in Aussie dollar is expected to influence performance of the two mining firms positively.
Another macroeconomic aspect that is more likely to affect the two mining and exploration firms is GDP growth. Australian GDP advanced to 0.9% by June 2018 which is above 0.7% reported as market consensus (Focus Economics 2018). This growth is attributed to strong point in local demand and the foreign trade as the country fixed investment remained relatively flat. Advancement in Australian GDP is said to greatly influence financial performance of Australian Mines Ltd and the Australian Pacific Coal Ltd greatly. Besides, the positive growth in the country’s GDP would result in positive growth rate in Australian Mines Ltd and the Australian Pacific Coal Ltd. Net income.
Business cycle is another important aspect while analyzing the country’s economy. Significant number of individuals are said to have neglected business cycle while making their investment. This makes them fail to get out of the market on time. Hence, although it is a bit tricky to time the stock market, one could improve the returns through better comprehension of the business cycle (Kent 2014). There are four main phases within the business cycle which include the expansion phase, the contraction phase, the trough as well as the peak phase. In the expansion phase, the country economy growth at the rate of 2 to 3% and the stocks are in the bull market. On the other hand, in the peak, country’s economy growth at around 3% and in this phase there are a number of asset bubbles and the stocks are at irrational exuberance situation (Amaded 2018). Further, in contraction, country’s economy is growing slowly though it is positive. The trough phase is where the economy tends to contract. With such explanation, the country’s economy has been in the expansion phase and there is a possibility of asset bubbles.
Bottom-Up analysis
The Bottom-up analysis comprises of assessment of basics of the stocks in spite of market trends. In our scenario, the bottom-up analysis would focus on analysis of one company’s financial performance in comparison to the other firm within the same sector. The analysis would entail financial analysis and financial statement analysis of the two firms over the last one year.
Ratio analysis of ANZ and Commonwealth Banks
Financial ratio analysis of Australian Mines Ltd and the Australian Pacific Coal Ltd comprises of the current ratio, the net margin, ROE, ROA as well as P/E ratio.
Current ratio
Australian Mines Ltd current ratio by 2017 was 7.73. The value was relatively high compared to the industry value of 1.71 and sector value of 2.46 (Reuters.com 2018). With the high current ratio, it is evident that this firm is not having any difficulties in settling its short-term debts over the year. On the other hand, Australian Pacific Coal Ltd current ratio in 2017 was 0.09. The value was significantly low compared to Australian Mines meaning that the company was struggling to settle most of its short-term arrears.
Net profit margin
Australian Mines Ltd net margin in 2017 was negative, and relatively below the industry value of 4.37% and sector value of 8.61%. The negative value in the company’s net margin is a clear indication that the company has not been generating enough profit from its operations (Reuters.com 2018). On the other hand, Australian Pacific Coal Ltd net margin in 2017 was -1,754.78% meaning that the firm is not profitable at the moment but instead it is generating losses.
ROE
Australian Mines Ltd ROE by 2017 was -14.14% below the industry value of 16.29% and sector value of 9.38%. This value implies that Australian Mines Ltd is utilizing its shareholder’s equity inefficient. Further, Australian Pacific Coal Ltd ROE on the other hand was -16.5% in 2017 compared to -25.8% on previous year (Reuters.com 2018). Despite the increase in the company’s ROE over the year, the value was relatively lower compared to Australian Mines Ltd implying that Australian Pacific Coal Ltd has not be using its shareholder’s equity more efficient in generating income.
ROA
Australian Mines Ltd ROA by June 2017 was -13.28% below the industry value of 3.50% and sector value of 5.65% (Reuters.com 2018). This value is discouraging since a negative ROA implies that the firm is inefficient in managing its total assets. Australian Pacific Coal Ltd ROA in 2017 was -25.56% Such ratio is not a good thing to the firm since it means that the company is unable to utilize its assets in a more efficient manner to generate income like it counterpart.
P/E ratio
Australian Mines Ltd P/E ratio by June 2017 was 0.00. The value was below the market value of 15.70 and below the sector value of 13.20 (Reuters.com 2018). Such value is not a good sign to potential and existing investors since it means that the firm is not generating any earnings. Australian Pacific Coal Ltd P/E ratio by June 2017 was 0.00 meaning that the firm was generating no earnings for its stakeholders.
Financial statement Analysis
Based on the Australian Pacific Coal Ltd 2017 annual report, it is evident that the company total revenue increased as from 129,828 in the year 2016 to about 593,153 in 2017. The increase is attributable to the improved economic environment in Australia which is favoring exploration and mining activities. Besides, the company total expenses are said to have surpassed its total revenue over the past two years. With higher expenses compared to total revenue, Australian Pacific Coal Ltd is said to have incurred increased net losses before the income tax. Furthermore, it is evident that over the past two years, Australian Pacific Coal Ltd net loss for the year increased as from -5,991,001 in the year 2016 to about 8,942,416 in 2017. This is a significant increase for the company and calls for necessary actions to be undertaken to improve the company profitability as well as its performance. Moreover, based on Australian Pacific Coal Ltd balance sheet statement, it is evident that the company total current assets over the last two years decreased as from 30,097,139 in the year 2016 to about 12,905,764 in the year 2017 (Australian Pacific Coal Ltd 2017). The decrease is attributable to decrease in the cash and cash equivalents over the period. Its total non-current assets on the other hand is said to have increased from 2,758,417 in 2016 to 53,271,023 in the year 2017. The increase is as a result of acquisition and purchase of PPE by the company. On overall, the company total assets increased from 32,855,556 in 2016 to approximate 66,176,787 in 2017.
Further, its total liabilities increased as from 21,740,284 in 2016 to 58,188,431 in the year 2017. The increase in the total liabilities is a sign that the company has been increasing its debt financing over the period. Total equity for this firm decreased with a significant margin as from 11,115,272 in 2016 to 7,988,356 in 2017. The decrease is a sign that the company has shifted from equity financing to heavy debt financing of its operations. From its cash flow statements, it can be derived that Australian Pacific Coal Ltd cash flow from the operations increased from -4,983,334 in 2016 to -1,729,099 in 2017. The amount of cash utilized in investment increased from 294,770 in 2016 to 35,407,133 in 2016. Finally, cash utilized in financing its activities decreased from 34,284,037 to about 20,598,265 in the year 2017 (Australian Pacific Coal Ltd 2017).
On the contrary, Australian Mines Ltd amount from the operations decreased from -1,037,087 in 2016 to about 1,682,876 in the year 2017. Besides, net finance income for the company decreased over the last two years from 13,866 to approximate 6,944 in 2017. Further, net loss before the income tax increased from -1,023,221 in 2016 to about -1,675,932 in 2017. From its balance sheet statements, it can be derived that Australian Mines Ltd total current assets increased from 1,559,609 to 4,680,028. The increase was mainly attributable to increase in the cash and cash equivalents for the company over the period. Its total non-current assets also increased from 2,913,842 to 5,595,066 as a result of increased exploration as well as evaluation assets by the company. On overall, Australian Mines Ltd total assets increased in the past two years moving from 4,473,451 in 2016 to 10,275,094 in 2017. Its current liabilities decreased from 490,340 to 138,155 whilst it non-current liabilities decreased from 10,965 in 2016 to zero. The decrease is accompanied by overall decrease in the company total liabilities from 501,305 to 138,155 in 2017. Further, Australian Mines Ltd total shareholders’ equity increased from 3,972,146 to 10,136,939 (Australian Mines Ltd 2017). The increase in total equity and decrease in total liabilities is a sign that the company has moved from debt financing to equity financing. Furthermore, based on Australian Mines Ltd cash flow statement, it is evident that cash from operations decreased from -563,955 to -1,498,217. Cash utilized in investment increased from 1,209,916 to 3,091,969. On the other hand, cash from the financing undertakings increased from 2,893,677 to 7,712,035.
Based on the above analysis, it is evident that Australian Mines Ltd has been performing relatively better compared to its counterpart. In fact, the company seems to be doing better in terms of income generation from its operations and financing activities unlike Australian Pacific Coal Ltd which has been incurring increased net loss over the period.
Summary and Recommendations
In conclusion, Australian economy is relatively attractive to any business and in particular to the mining and exploration activities which is determined by increased GDP growth, reduced inflation and interest rate as well as advancement in the $AUD. In this case, it can be stated that with attractive economy within Australia, the mining and exploration sector the two companies financial performance is affected greatly. On the other hand, from the bottom-up analysis, it is evident that despite the favorable economic progress in Australia, Australian Pacific Coal Ltd and Australian Mines Ltd are still experiencing some financial down turns through decreased net income, unfavorable financial ratios and so forth. Furthermore, based on the above analysis, it is evident that Australian Mines Ltd was performing better compared to Australian Pacific Coal Ltd.
From the above analysis it would be quite challenging for potential investors to invest in the two companies. In fact, by investing in the two firms, there is high possibility that the investors would end up losing their money instead since with the current rate, the companies are projected to continue experiencing decreasing trend in their income till the end of the year.
References
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