finance group assignment - presentation
TRANSCRIPT
CASE STUDY: FORTESCUE METALS
GROUP
Outline• Overview: Project A vs. Project B• Market Research
• Key countries to iron ore• Market position
• Method applied• NPV Calculation• Price Projection• Scenario Analysis
• Recommendation
FactsProject A
Key Assumptions Yearly figues
Life of the project (Years) 5
Revenues See Project A Revenues Chart
Cost of Sales (% of revenue) 40%
Other Expenses See Project A Other Expenses Chart
Opportunity cost (Cancel lease) nil
Depreciation of new equipment $ 2,000,000,000.00
Time of depreciation(Years) 5
Tax rate 30%
Cost of capital 12%
Working Capital $ 400,000.00
Inititial Outlay $ 13,750,000,000.00
Salvage value of equipment nil
Price per tonne (ao Jul 2014) $96.05
Price per barrel (ao Jun 30, 2014) $105.24
Initial Outlay -$13,750,000,000
Unit Sales 155,000,000
Price per unit $ 96.05
VC -$10,115,900,000
FC -$2,000,000,000
Discount rate 12%
Project life 5
Tax Rate 30%
Project B
Key Assumptions Yearly figues
Life of the project (Years) 5
Revenues See Project B Revenues Chart
Cost of Sales (% of revenue) 55%
Other Expenses See Project B Other Expenses Chart
Opportunity cost (Cancel lease) nil
Depreciation of new equipment $ 2,000,000,000.00
Time of depreciation(Years) 5
Tax rate 30%
Cost of capital 12%
Working Capital $ 400,000.00
Inititial Outlay $ 15,750,000,000.00
Salvage value of equipment nil
Price per tonne (ao Jul 2014) $96.05
Price per barrel (ao Jun 30, 2014) $105.24
Initial Outlay -$15,750,000,000
Unit Sales 200,000,000
Price per unit $ 96.05
VC -$13,716,100,000
FC -$2,000,000,000
Discount rate 12%
Project life 5
Tax Rate 30%
Source:Ycharts.com
Iron ore prices from April 2014-April 2015(in US$ per metric ton unit)
Causes of Iron Ore& Crude Oil prices slump
oDisappointing Chinese Trade Data oTightening Of Credit To Steel Mill oFinancial Deals
oStrong U.S. DollaroA Global Oil GlutoIran Nuclear Deal Could Add to Oversupply
Source: forbes.com, nasdaq.com
Supply and demand of Iron Ore
Fortescue Financial position: Iron Ore price and company’s results
Source:hotcopper.com.au
Fortescue Financial position: Stock and iron ore price
Source:hotcopper.com.au
Method Applied: Present value of CFs
0 1 2 3 4 5
-$20,000,000,000
-$15,000,000,000
-$10,000,000,000
-$5,000,000,000
$0
$5,000,000,000
$10,000,000,000
Project AProject B
Net Present Value
NPV$0.00
$50,000,000.00
$100,000,000.00
$150,000,000.00
$200,000,000.00
$250,000,000.00
$300,000,000.00
$350,000,000.00
Project AProject B
11
Scenario Analysis
Project A
Sales Unit Variable
Scenario Probability Price Sales Costs NPV
Economic Recession 30% $81.64 131,750,000 -$32.66 -$5,924,818,869
Base Case 50% $96.05 155,000,000 -$38.42 $330,569,462
Economic Boom 20% $110.46 178,250,000 -$44.18 $7,600,440,226
Expected NPV = sum, prob times NPV -$92,072,884.43
Standard Deviation $4,704,311,064
12
Scenario Analysis
Project B
Sales Unit Variable Scenario Probability Price Sales Costs NPVEconomic Recession 30% $81.64
170,000,000 -$44.90 -$5,794,567,000
Base Case 50% $96.05 200,000,000
-$52.83 $259,034,611
Economic Boom 20% $110.46 230,000,000 -$60.75 $7,294,393,415
Expected NPV = sum, prob times NPV -$149,974,111.51
Standard Deviation $4,552,559,094
Conclusion and RecommendationExpected NPV
Standard Deviation
Project A
-92072884.43
4704311063.65
Project B
-$1,000,000,000.00
$1,000,000,000.00
$3,000,000,000.00
Axis Title
References
• http://ycharts.com/indicators/iron_ore_spot_price_any_origin• http://ycharts.com/indicators/wti_crude_oil_spot_price• Financial Review, 2015, Fortescue pays up on revived bond deal, viewed 23 May 2015,
<http://www.afr.com/markets/debt-markets/fortescue-metals-group-pays-up-on-revived-bond-deal-20150422-1mr8o7>.
• Fortescue Metals Group Ltd, 2013, 2013 Annual Report, viewed 12 May 2015, <http://www.fmgl.com.au/UserDir/FMGReports/Documents/2013%20Annual%20report187.pdf>.
• Parrino, R et al. 2014, Fundamentals of corporate finance, 2nd edn, John Wiley & Sons Australia, Ltd, Australia.
• Reuters, 2015, Rio Tinto Ltd (RIO.AX) Company Profile, viewed 12 May 2015, <http://www.reuters.com/finance/stocks/companyProfile?symbol=RIO.AX>.
• Reuters, 2015, Wesfarmers Ltd (WES.AX) Company Profile, viewed 12 May 2015, <http://www.reuters.com/finance/stocks/companyProfile?symbol=WES.AX>.
• Seng, D, Hancock, J R 2012, ‘Fundamental analysis and the prediction of earnings’, International Journal of Business and Management [online], vol. 7(3), pp. 32-46, retrieved 18May 2015 from Proquest ABI Inform Global.
End of Presentation