2. Rio Tinto Annual Report Financial Analysis [10 marks]
Consider the sources below and answer the following questions.
Source 1:
Rio Tinto Annual Report 2012 (see report uploaded on the portal)
Source 2:
Rio Tinto puts Papua New Guinea copper mine under review
By James Wilson, Mining Correspondent
August 18, 2014 1:27 pm
©AFP
Sam Walsh, chief executive of Rio Tinto
Rio Tinto is set to cut down further its portfolio of marginal projects after announcing a review of its options for the Panguna copper mine, shut for a quarter of a century after being embroiled in secessionist conflict in Papua New Guinea.
Panguna, on the Pacific island of Bougainville, was one of the richest copper mines in the world before it shut in 1989 amid a violent uprising on the island. Production was suspended in 1989 and all personnel withdrawn the following year. Since then the mine has barely been touched.
Rio’s chances of successfully reopening the mine fell this month when the autonomous government that now controls Bougainville stripped the mine’s operating company of its mining and exploration licences. An act by the autonomous region’s parliament in effect gives Bougainville Copper Limited, the mine’s operator, only an exploration licence and a right of first refusal over its renewed operation.
Rio, which controls Panguna through a 53.8 per cent stake in BCL, said on Monday the legislation made it an “appropriate time to review all options” for its holding. BCL had been in talks with the autonomous government, as well as with the government of Papua New Guinea and landowners on Bougainville, over a possible return to Panguna.
Reopening Panguna would be costly, according to Rio. Its annual report says a $5.2bn investment would be needed to reopen the mine with new infrastructure, according to a study completed by BCL last year. Rio’s renewed presence on the island could also be controversial, after the civil war that erupted in 1989 lasted a decade and cost 20,000 lives, according to some estimates.
Panguna produced about 550,000 tonnes of copper concentrate in 1988, its last full year of operations. It is estimated to have remaining resources of at least 4.6m tonnes of copper and 16m ounces of gold, although the estimates rely on data gathered before the 1989 shutdown.
As it is, the mine is largely irrelevant to Rio’s strategy for its copper division, which is based on output from four large mines – in Mongolia, Chile, the US and Indonesia – as well as two projects that are inching towards board approval.
…A sale by Rio of its interest in Panguna would follow its decision this year to withdraw from Pebble, a copper project in Alaska that many observers think will be very difficult to develop amid environmental concerns.
Source: http://www.ft.com/intl/cms/s/0/ba51ce30-26c0-11e4-8df5 00144feabdc0.html#axzz3B6UMHZbB
Also see: https://au.finance.yahoo.com/q/ta?s=RIO.AX&t=1m&l=on&z=l&q=l&p=&a=&c=
a) Consider the 2012 Annual Report of Rio Tinto. Briefly explain how Rio Tinto’s governance structure/ company governance is organised. Do you notice any strategies in place to align manager and shareholder interests at Rio Tinto based on the Annual Report? Provide one brief example. (Use your own words) (4 marks)
b) What factors has Rio Tinto considered in its decision about whether to re-open the Panguna mine according to the article above? What type of management decision is this and what financial techniques do you think Rio Tinto may have applied to making this decision? Do you think this decision is likely to impact on Rio Tinto’s share price? (6 marks)
3. Capital Budgeting [35 marks]
Answer the following questions with the aid of excel spreadsheets. You also need to answer the below questions in your word file and refer to your excel spreadsheets as supporting documents.
a) Rio Tinto is deciding between two iron ore mining projects. Use an excel spreadsheet to find the free cash flows for the following two projects A and B described below from years 0-7. (12 marks)
All amounts are in $USD. Rio Tinto is deciding between two iron ore mining projects. Project A has an initial outlay of $375 million and Project B has an initial outlay of $575 million. Around $500,000 has already been spent on researching project B. Project A will sell 10,000,000 tonnes of iron ore starting at the end of year 1 until the end of year 4 and 8,000,000 tonnes of iron ore starting at the end of year 5 until the end of year 7. It will also incur additional working capital expenses at the end of years 1 to 3 of $400,000,000 (these will not be recovered). Project B will sell 6,000,000 tonnes of copper starting at the end of year 1 until the end of year 7. At the end of year 7 Project B will incur a working capital expense of $232,440,000 (this will not be recovered). Assume the price for which Project A and B will be able to sell iron ore is $92/tonne over the seven years. The operating costs of both projects will be 40% of the revenues from years 1-7. Both mines have depreciation costs of $2,000,000 a year. The tax rate is 30%. All cash flows are annual and are received at the end of the year.
b) Calculate the NPV for Project A and B and advise which project should be undertaken with: