Financial Assessment of Kidman Resources: Building a New Machinery or Outsourcing the Supply of Ore

Undertake a financial assessment of Kidman Resources to determine whether building a new machinery or outsourcing the supply of ore is the better option. Calculate WACC, NPV, and Beta analysis to make a recommendation.

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KIDMAN RESOURCES
(Business finance)
Student’s Name

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KIDMAN RESOURCES (BUSINESS FINANCE)
Executive Summary
We have undertaken this financial assessment of Kidman of the two options
that it can undertake which consists of building a new machinery or outsourcing
the supply of ore. We have assessed both the options by first calculating the
WACC for Kidman based on its debt and Equity, we have also computed the Beta
for the Company based on the Price and Stock Index provided to us. We have
calculated the NPV for both the options to get an idea about which option entails
greater cashflows for the company. We have also done Beta analysis for the
company where we have shown how change in Beta can affect the WACC itself.
All the data has been used to find out the market value for Kidman resources.
Contents

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KIDMAN RESOURCES (BUSINESS FINANCE)
PART-A...........................................................................................................................................3
Analysis of WACC......................................................................................................................4
Calculation of NPV......................................................................................................................5
Option 1 – Building a New Refinery.......................................................................................5
Option 2 – Outsourcing the supply of ore...............................................................................5
Recommendation.........................................................................................................................6
PART B...........................................................................................................................................6
Beta Analysis...............................................................................................................................6
Reference:........................................................................................................................................8
Appendix A..............................................................................................................................9
Appendix B............................................................................................................................11

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KIDMAN RESOURCES (BUSINESS FINANCE)
PART-A
Australian Kidman Resources entered into an agreement with Tesla (Car
Manufacturer) to provide Lithium which is one of the major ingredient required in
the manufacture of rechargeable batteries. With the signing of this deal the share
price of Kidman rose by 2.8%. The current market price of Kidman’s equity share
is $1.17 each with 405,000,000 ordinary floating in the market making $473.85
million as its market value.

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KIDMAN RESOURCES (BUSINESS FINANCE)
Analysis of WACC
Weighted Average Cost of Capital (WACC) = (Total Debt/Total
Capital)*Kd*(1-Tax Rate)+(Total Equity/Total Capital)*Ke+(Total Preference
Capital/Total Capital)*Kp
= 11.1203%
Calculation of WACC (using Market Data)
S.No. Capital WACC
1 Equity Share Capital 9.57%
2 Preference Share Capital 9.96%
3 Debt 0.44%
10.0228%
*Refer Appendix A for Detailed Calculation of WAC

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KIDMAN RESOURCES (BUSINESS FINANCE)
Calculation of NPV
Option 1 – Building a New Refinery
Particulars Y0 Y1 Y2 Y3 Total
NPV Factor for 11.1203% 1 0.8999 0.8099 0.7288
Tax Liability (Refer
Appendix B) 0.644 0.532 -2.0748
Feasibility Study Cost -2
Total Cost of Machine -45
Revenue 16 16.4 16.81
Cost of New
Labour -3 -3 -3
Additional Salary of New Engineers -0.3 -0.3 -0.3
Revenue
Foregone -0.10 -0.1 -0.1
Salvage Value 9
Net Working
Capital -2 2
Net Cash Flow -49 13.244 13.532 22.3352
PV of Net Cash
Flow -49 11.9183 10.9596 16.2779
-
9.8443
Present Value of Net Cash Flows = $(9.8443) Million.
Option 2 – Outsourcing the supply of ore
Particulars Y0 Y1 Y2 Y3 Total
NPV Factor for 11.1203% 1 0.9 0.81 0.729
Revenue 16 16.4 16.81
Advance Costs -6
Costs in Installment -12 -12 -12
Processing Cost -4.5 -4.5 -4.5
Net Cash Flow -6 -0.5 -0.1 0.31
PV of Cash Flow -6 -0.45 -0.08 0.226 -6.30501
Present Value of Net Cash Flows = $(6.30501) Million.
*Refer Appendix A for Detailed Calculation of WACC

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KIDMAN RESOURCES (BUSINESS FINANCE)
Recommendation
Our recommendation for Kidman would be to go for Option 2. Both the options are
yielding negative cash flows to Kidman, but Option 2 is yielding less negative cash
flows as compared to Option 1. We also suggest Kidman to find some other option
that can result in positive cash flows to it.
PART B
Beta Analysis
Kidman has a beta of 1.5240 which implies that the price of its stock tends to
experience a change that is greater than most. Based on the value of beta we have
calculated it can be said that Kidman is a stock which is favorable for investors
who want to build a portfolio comprising of stocks that have low beta. In times of
bullish sentiment more can be reaped with high beta stocks in comparison to low
beta’s muted movements.
There are significant factors which can cause a change in Beta. The very first of
them would be Market Capitalization. Kidman has a market capitalization of USD

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KIDMAN RESOURCES (BUSINESS FINANCE)
474.9 million which qualifies it as small-cap stock which usually have a higher
beta compared to big players of the market. Also, the Operating Industry is a factor
for changes in Beta, Kidman operates in Mining and Metal Industry which
demonstrates stronger reaction to the shocks market wide. The third factor crucial
for Beta would be Asset Base. A company that has a heavy asset base generally
has high beta due to the risks associated to run the fixed assets at downturn which
can be highly expensive. Since Kidman invests in its assets a big chunk of the
capital, it tends to have a high beta due to that. (St, 2019)
The Current Beta we calculated is 1.5240. Let us assume that the raw materials
have become expensive due to some additional taxes imposed, now the metal &
mining industry would react to this, so would Kidman. The result would be the
Beta increasing. The increase be 20% i.e. 1.8288. This would change our previous
analysis as Current WACC of 11.1203% would change to 12.7666%. Hence,
putting an extra burden on Kidman to recover the increased cost of capital invested
in the business.

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KIDMAN RESOURCES (BUSINESS FINANCE)
Reference:
Corporate Finance Institute. (2019). NPV Formula - Learn How Net Present Value Really
Works, Examples. [online] Available
at: __https://corporatefinanceinstitute.com/resources/knowledge/valuation/npv-formula/ [Access
ed 26 Feb. 2019].
Finance.yahoo.com. (2019). Yahoo is now part of Oath. [online] Available
at: __https://finance.yahoo.com/news/kidman-resources-limited-asx-kdr-063817008.html?
guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=A
QAAANLZ_FChvD6xBTKmZIaCibm7A9qhWfK532SlddcFKulSZ6zoW6sobro9puOrJeTbd8du
8DVoS78nynOJSj9BjPBNovn5jnGL11Yc2KRtO-
5TFsxacJmIJuG1uqKfmto09mogOB9jl03Pw_mDLVOr9ZyRvNhr5hUfnIvXRihRfG3Z
[Accessed 26 Feb. 2019].
Harvard Business Review. (2019). Stock Prices, Beta, and Strategic Planning. [online] Available
at: __https://hbr.org/1983/05/stock-prices-beta-and-strategic-planning [Accessed 26 Feb. 2019].
Sanasecurities. (2019). Weighted Average Cost of Capital Formula = Cost of Equity + Cost of
Debt - Sanasecurities. [online] Available at: __https://www.sanasecurities.com/weighted-
average-cost-capital-wacc/ [Accessed 26 Feb. 2019].
St, S. (2019). What Kind Of Risk Should You Expect For Kidman Resources Limited
(ASX:KDR)?. [online] Simply Wall St. Available
at: __https://simplywall.st/stocks/au/materials/asx-kdr/kidman-resources-shares/news/what-kind-
of-risk-should-you-expect-for-kidman-resources-limited-asxkdr/ [Accessed 26 Feb. 2019].
Simply Wall St. (2019). Kidman Resources (ASX:KDR) - Share price, News & Analysis.
[online] Available at: __https://simplywall.st/stocks/au/materials/asx-kdr/kidman-resources-
shares [Accessed 26 Feb. 2019].
U.S. (2019). Australia's Kidman Resources to supply lithium for Tesla cars. [online] Available
at: https://www.reuters.com/article/us-kidman-resources-tesla/australias-kidman-resources-to-
supply-lithium-for-tesla-cars-idUSKCN1IH381 [Accessed 1 Mar. 2019].
Vaidya, D. (2019). Weighted Average Cost of Capital | Formula | Calculate WACC. [online]
Learn Investment Banking: Financial Modeling Training Courses Online. Available
at: __https://www.wallstreetmojo.com/weighted-average-cost-capital-wacc/ [Accessed 26 Feb.
2019].

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KIDMAN RESOURCES (BUSINESS FINANCE)
Appendix A
Detailed Calculation of WACC
Risk Free Rate (Given) 2.38%
Beta (Refer Sheet Beta) 1.5240
Return on Market (Given) 7.80%
Tax Rate (Given) 28%
Per CAPM formula
Cost of Equity = Rf+ Beta * (Rm - Rf)
= 2.38 + 1.5240 (7.8-2.38)
= 10.64 %
Particulars Amount Weights %
ESC $473.85 99.7789 11%
PSC $1.05 0.2216 5.00%
Total Debt 52 0.0987 4.50%
Total Capital $526.90
Calculation of Cost of Capital
(Debt)
Short Term Debt
Rate of
Return Value
After Tax Rate of
Return
Cost of
Debt(Kd)
Bank OD 6.00% 4 4.32% 0.33%
Unsecured Notes 2.80% 7 2.02% 0.27%
Total 11 0.60%
Long Term Debt %
Debentures 8.50% 16 6.12% 1.88%
Term Loan 7.00% 8 5.04% 0.78%
Mortgage 5.25% 17 3.78% 1.24%
3.89%
Total 41 4.50%
Total Debt (Short Term + Long
Term) 52

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KIDMAN RESOURCES (BUSINESS FINANCE)

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KIDMAN RESOURCES (BUSINESS FINANCE)
Calculation of Market Value of Share Capital
Market value of Equity Share $1.17 (Given)
No. of Equity Share 405,000,000
$473,850,000
Market value of Preference Share $0.70 (Given)
No. of Equity Share 1,500,000
$1,050,000.00
Total Share Capital $474,900,000.00

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KIDMAN RESOURCES (BUSINESS FINANCE)
Appendix B
Detailed Calculation of NPV
Information
$
(million
)
Cost of Feasibility Study 2
Construction & Installation of Machinery 25
Cost of Processing Plant 5
Other Supporting Machines 15
Total Cost of Machine 45
Rental Income earned by fleet of Haul Trucks
(Opportunity Cost) 0.10
Additional Cost for Enginners
Depreciation (SLM) 15
Salvage Value 9
Net Working Capital 2
Calculation of Profit and
Loss
Particulars Y1 Y2 Y3
Revenue 16 16.4 16.81
Less: Depreciation -15 -15 -15
Less: Cost of Labour -3 -3 -3
Less: Aditional Salary of New
Engineers -0.3 -0.3 -0.3
Less: Revenue Foregone -0.10 -0.1 -0.1
Add: Gain on Disposal 9
Profit -2.3 -1.9 7.41
Tax 0.644 0.532
-
2.0748

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KIDMAN RESOURCES (BUSINESS FINANCE)