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Description of company

Discuss about the Journals of Academy of Business Education.

Oz Minerals is a mining company that was formed after the merger of Zinifex and Oxiana limited in year 2008 and is based in Adelaide in Australia. It is one of the largest deposits of copper at Carrapateena. The strategy of organization is centered on value creation for a wide range of stakeholders. Core product of company is Copper containing silver and gold. Mining method used by Oz Minerals involves underground mining and open pit and employs processing method such as grinding, conventional crushing and flotation (ozminerals.com 2018).. Product produced by company is railed to port Adelaide, thereafter it is shipped to customers in Europe and Asia, and then it is transported to domestic customers.

From the annual report of Oz Minerals for year 2016, it can be seen that there are top twenty investors of company. Shareholder holding more than 20% of shareholding is HSBC custody nominees (Australia) Limited. It is the only shareholder having more than 20% of shares and therefore, company will be classified as non-family company (ozminerals.com 2018).

Shareholders having higher than 5% shareholdings are JP Morgan Nominees Australia limited and Citicorp Nominees Pty limited. Total numbers of shares held by these two shareholders are 47613532 and 45349773 respectively.

Neil Hamilton is the Chairman and independent non-executive director of Oz minerals. Andrew Cole is the chief executive officer and managing director of company. Other members of board include Charles Lenegan, Julie Bebby, Paul Dowd, and Rebecca McGrath who is the independent non-executive director (ozminerals.com 2018). 

           

Trend

Particulars`

2013

2014

2015

2016

2013

2014

2015

2016

Net Profit after Tax (NPAT)

A

-294.4

48.5

130.2

107.8

-100.0%

16.5%

44.2%

36.6%

Total Assets (TA)

B

2517.1

2408.7

2566.4

2630.6

100.0%

95.7%

102.0%

104.5%

Ordinary Equity (OE)

C

2327.9

2249.1

2354.3

2343.9

100.0%

96.6%

101.1%

100.7%

Total Liabilities

D

189.2

159.6

222.5

276.3

100.0%

84.4%

117.6%

146.0%

Return on Assets (ROA)

E= A/B

-11.70%

2.01%

5.07%

4.10%

-100.0%

17.22%

43.38%

35.04%

Return on Equity (ROE)

F=A/C

-12.65%

2.16%

5.53%

4.60%

-100.0%

17.05%

43.73%

36.37%

Debt Ratio

G=D/B

0.075

0.066

0.087

0.105

100.0%

88.15%

115.34%

139.74%

The variable TA indicates total assets and variable OE indicates ownership equity and these two variables are interrelated with ROA and ROE. An increase in total value of assets with value of net profit remaining same indicates that there will be reduction in return on assets as they are not utilized efficiently for generating profits. An increase in value of assets with profit remaining same will generate lower debt equity ratio and therefore, there will be higher return on equity. Therefore, the value of ROE and ROA is determined by the total value of assets and total value of equity.

From the above table, it can be seen that return on equity (ROE) is greater than return on assets (ROA) for all the four years. Both the concepts depict the efficiency of organization in using resources for generating assets. Return on equity is less than return on assets because of lower value of total ordinary equities compared to total value of assets. A healthy organization always has total value of assets more than total equity because the values of assets are more than equity when liabilities of organization have reduced (Danes et al. 2016). 

Ownership and governance structure of company

The above chart depicts the monthly share price movement of Oz Minerals over the past two years. Blue line indicates the movement of share price of company while orange line depicts the movement of all ordinaries index. Looking at the graph, it can be inferred that movement of share price of company is more volatile compared to that of index that are less fluctuating over the time period. Therefore, the monthly share price of Oz minerals is more volatile. In the initial year till end of first month of year 2016, share price was volatile and they were above ordinaries index price and in later year, monthly share price fluctuated but they were below the ordinaries index. Line indicating share price of company is not closely correlated with that of line of ordinaries index. However, in the last four months, share price of Oz Minerals were not much volatile and in the current time, they are trading below all ordinaries index.

The share price of influenced by many internal as well as external factors of economy. Ongoing commercially sensitive negotiations and the intervention of government in supporting palatable alternatives comprising of their party investment are some of the factors that have influenced share price. Feature of investment vase of Oz minerals are due to strong operating margins and reduction of cost assumptions. Poor outlook of company is illustrated by fall in expectation of earning by company and a limited level of growth in revenue is likely to impact the expected earnings resulting in negative growth rate. The unsustainable decline in earnings is mainly attributable to the fact of exceeding of cost growth (Petty et al. 2015). Nonetheless, insiders may have the conviction to buy the shares by perception of prosperous time ahead of the period of investment.

Particulars

Amount

Beta of the company

A

0.65

Risk Free Rate

B

4%

Market Risk Premium

C

6%

Required Rate of Return

D=B+[Ax(C-B)]

5.30%

           

Trend

Particulars`

2013

2014

2015

2016

2013

2014

2015

2016

EBIT

A

-434

56.3

186.8

127.2

-100.00%

12.97%

43.04%

29.31%

Total Assets

B

2517.1

2408.7

2566.4

2630.6

100.00%

95.69%

101.96%

104.51%

Net Profit after Tax

C

-294.4

48.5

130.2

107.8

-100.00%

16.47%

44.23%

36.62%

Owner's Equity

D

2327.9

2249.1

2354.3

2343.9

100.00%

96.61%

101.13%

100.69%

Return on Equity

E=(A/B)x(C/A)x (B/D)

-12.65%

2.16%

5.53%

4.60%

-100.00%

17.05%

43.73%

36.37%

Beta is the factor for measuring the rate of return of stock of company and it helps in explaining systematic risk and stock volatility. Conservative investment is a type of investment where the return is nit fluctuated and they guarantee to investors a given amount of return. When looking at beta value of Oz Minerals that stands at 0.65 is indicative of the fat that excess return of stock is expected to perform .45 worse than expected return of market that is index. Low beta value depicts that investment is conservative as the market related risk is low. Performance of company is associated with mining stocks and price of minerals compared to overall stock market (Thomas et al. 2015). Therefore the company has chosen a conservative investment strategy. 

Calculation of performance ratios

Particulars

Amount

Weight age

Cost

Return Rate

Tax Rate

WACC

Total Long Term Debt

101.5

4.13%

4.8

4.73%

30.00%

0.14%

Total Equity

2354.3

95.87%

5.30%

5.08%

TOTAL

2455.8

100%

5.22%

Weighted average cost of capital is the composite cost of capital that helps in evaluation of new projects that are undertaken by company. The estimation of expected cost by company is done by using WACC for financing sources of investment. Cost of capital is the discount rate that is used by company for the purpose of calculations of their capital budgeting. It helps in evaluating the returns generated by any project and whether they are sufficient for risks compensation. Higher WACC is indication of the fact that higher risk is associated with operation of company and hence investors seek additional return in return for undertaking additional level of risks (Peirson et al. 2014). Therefore, management of organization evaluates the higher weighted cost of capital to be associated with carrying higher level of risk and hence investors seeking higher return for compensation the additional level of risks that they are undertaking

The computation if debt ratio for the past three years has been shown in the above table. It can be seen that debt ratio for 0.066 in year 2014 and .087 in year 2015 respectively. It can be seen that debt ratio has increased in year 2015. Now, looking at figure for year 2016, debt ratio stood at .105 and this is indicative of the fact that level of debt ratio has been increasing for the past three to four years as illustrated by figures. Therefore, it can be concluded that debt ratio value has not been stable. Looking at the capital structure of company, it can be seen that value of assets have been increasing throughout, however, total liabilities initially decreased and then it is increased subsequently. It appears that organization is not working on maintaining a preferred optimal capital structure.

At year ending 31st December, Oz Minerals does not have any borrowings and at the end of year, consolidated entity has undrawn borrowings. On February, 2016, organization has made an announcement of program of an on market share buyback program. This was done for an amount of $ 60 million as a part of framework of updated capital management. Strategy of Oz minerals is reinforced by this updated framework for maximizing the returns of shareholders by ensuring that there is an efficient allocation of capital. Shares that have been acquired as a part of market buyback share program are presented as deduction to capital by cancelling it and there was a share buyback of $ 29.9 million. Oz minerals completed a share buyback of $ 29.9 million of a $ 60 million share through the program (ozminerals.com 2018). There was a repurchasing of shares of total amount of $ 4.8 million at an average share price of $ 6.23. Yes, the adjustments that have been made to shares by share buyback programs have been mentioned in the director’s report as presented in the annual report of company.

Two graphs with the description of results

The dividend policy that has been implemented by the management of Oz minerals’ is in accordance with the corporation Act and rules that are listed on Australian stock exchange. Payment of dividend is done by considering the outlined principles and ensuring the fair trading of securities of Oz minerals. There has not been any recognition of the financial impact of paying dividend in the consolidated financial statement for the year ending 31st December, 2016. For the purpose of Australian taxation, final year dividend has been fully franked. Implementing the dividend policy as prescribed by principles of Australian stock exchange and corporation act has been dine for maintaining compliance so that they are not facing compliance issues (MAcc 2017). 

Dear ABC,

Queensland

Australia

Respected Sir,

            After conducting detailed analysis of financial performance of Oz minerals in terms of their debt structure, leverage, share price, I would like to present my view on forming this company as a part of your investment portfolio. Looking the ratios computed, it can be seen that ROE and ROA is increasing and has been stable in these few years. Debt ratio has increased indicating increase in total liabilities, but this is not unfavorable for investors seeking investment. This is so because organization has employed conservative strategy and hence it will not be risky for investors including it in their portfolio of stocks. In recent years, price of shares have also increased 6.39 for year ending 2016 and increasing to 8.8 for year ending 2017. This increase can be regarded as significant for investors to be included in their investment portfolio. Moreover, looking at beta and weighted average cost of capital for Oz minerals, it can be seen that investing is not risky and stock would be generating reasonable return.

Therefore, I would recommend Mr ABC to include Oz minerals to in his/her investment portfolio.

Thanking you,

ABC

Investment Company

References

Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.

Brigham, E.F. and Daves, P.R., 2014. Intermediate Financial Management. Cengage Learning.

Brooke, M.Z., 2016. Handbook of international financial management. Springer.

Danes, S.M., Garbow, J. and Jokela, B.H., 2016. Financial management and culture: the American Indian Case. Journal of Financial Counseling and Planning, 27(1), p.61.

Dennis, V. and Walcott, J., 2014. Federal financial management shared services: The move is on. The Journal of Government Financial Management, 63(3), p.18.

Editorial, R. (2018). ${Instrument_CompanyName} ${Instrument_Ric} Quote| Reuters.com. [online] U.S. Available at: https://www.reuters.com/finance/stocks/overview/OZL.AX [Accessed 13 Jan. 2018].

Finance.yahoo.com. (2018). OZL.AX : Summary for OZMINER FPO - Yahoo Finance. [online] Available at: https://finance.yahoo.com/quote/ozl.ax?ltr=1 [Accessed 13 Jan. 2018].

Irimia-Dieguez, A.I., Medina-Lopez, C. and Alfalla-Luque, R., 2015. Financial Management of large projects: A research gap. Procedia Economics and finance, 23, pp.652-657.

Ková?ík, M., Sarga, L. and Klímek, P., 2015. Usage of control charts for time series analysis in financial management. Journal of Business Economics and Management, 16(1), pp.138-158.

MAcc, T.D.R., 2017. An Empirical Analysis of Success Factors in an Introductory Financial Management Class. Journal of the Academy of Business Education, 18, pp.231-284.

Madura, J., 2014. International financial management. Nelson Education.

Ozminerals.com. (2018). Annual Reports | OZ Minerals. [online] Available at: https://www.ozminerals.com/media/reports/annual/ [Accessed 13 Jan. 2018].

Peirson, G., Brown, R., Easton, S. and Howard, P., 2014. Business finance. McGraw-Hill Education Australia.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Sofat, R. and Hiro, P., 2015. Strategic financial management. PHI Learning Pvt. Ltd..

Thomas, O.O., Adekunle, T.A., Olarewaju, A.A. and Folarin, E.A., 2015. FINANCIAL MANAGEMENT AS A TOOL FOR THE GROWTH OF SMALL BUSINESS ENTERPRISES IN LAGOS STATE: AN EMPIRICAL APPROACH. Indian Journal of Commerce and Management Studies, 6(1), p.17.

Valencia, M. and Restrepo, J., 2016. Evaluation of financial management using latent variables in stochastic frontier analysis. DYNA, 199, pp.35-40.

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