Analysis of Australian Mining Industry

This assignment requires a thorough analysis of the Australian mining industry, focusing on companies like BHP Billiton and Rio Tinto. It involves evaluating their financial health through key ratios, comparing their performance over time, and exploring the broader economic context within Australia. Students need to consider factors like GDP growth, interest rates, and government policies that influence the mining sector.

HA1022 Principals of Financial Markets
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Executive Summary
In this report top down and bottom up analysis has been conducted of mining industry of
Australia. In order to conduct the top down analysis all the macro factors have been considered
while, for bottom up analysis two mining companies in Australia have been evaluated for their
performance purpose. After that, common conclusion has been drawn for industry as whole.
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Contents
Introduction......................................................................................................................................4
Top-Down Analysis.........................................................................................................................4
Australian Economic Environment Analysis...............................................................................5
Bottom-Up Analysis of the chosen Companies in the same industry (BHP Billiton and Rio Tinto)
.......................................................................................................................................................10
Profitability analysis..................................................................................................................16
Liquidity Analysis......................................................................................................................17
Capital Structure Analysis.........................................................................................................18
Market performance...................................................................................................................19
Conclusion and Recommendation.................................................................................................19
References......................................................................................................................................20
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Introduction
The fundamental analysis of stocks is highly important for investors in order to determine
their intrinsic value for making investment decisions. This report has been undertaken for
carrying fundamental analysis of an industry in Australia through selecting two ASX listed
companies operating in the same industrial sector. The fundamental analysis of the industry is
aimed to identify its total worth through examining the micro and macro-economic factors
impacting its growth and development. The fundamental analysis is carried out through carrying
top-down and bottom-up analysis that identifies the factors influencing the directional changes in
the stock value of a company. In this context, the present report has carried out fundamental
analysis of the mining industry in Australia through analyzing the economic factors impacting
the stock valuation of two major companies operating within the industry, that are, Rio Tinto and
BHP Billiton.
Top-Down Analysis
The investors for making their investment decisions need to analyze the micro-economic
factors impacting the industry rather than only emphasizing only on the companies
performances. The top-down analysis, in this context, help the investors need to examine the
micro-economic trends of the market that influences the performance of industry. The analysis
begins with examining the overall macro-economic factors and then predicting the returns
generated from the industry. The economical analysis is followed by the selection of particular
industry and then choosing the individual companies for investment purposes. Analysis begins
with examining the overall economic factors and then predicting the returns generated from the
industry. The economical analysis is followed by the selection of particular industry and then
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choosing the individual companies for investment purpose. The macro-economic variables
analyzed during top-down investment strategy are GDP, inflation rate, interest rate and then
electing the most efficient assets for allocation (Krantz, 2016). Thus, top-down approach initiates
with analyzing broad economy and then selecting the best industry fitted within the macro-
economic analysis and them selecting the individual companies for investing (OECD, 2004).
Australian Economic Environment Analysis
Australia is presently in a state of strong economic growth due to presence of an efficient
legal system supported by industrial growth. The country is recognized as one of the wealthiest
Asia-Pacific country that has recovered completely from the economic recession supported by
the strong development in its mining and agriculture sector. The large-scale economic growth
realized by the country is due to development of strong macro-economic policies, structural
reforms and the mining boom (Scutt, 2016). The economic growth of the country is expected to
record an increase of about 3% till the end of the year 2018. The economy of Australia is
currently having a strong Gross Domestic Product (GDP) of AUD $ 1.69 trillion as of the year
2017. The GDP indicates the monetary value of all the finished products and services produced
by its economy annually. It quantitatively assesses the overall economic activity of the country
within a specified time-period. The strong GDP rate has resulted from the increase of its export
activities and strong improvement in its labor market. The country is recognized as the largest
national economy on the basis of nominal GDP with strong economic growth realized from the
large presence of natural resources. The natural resources of the country are valued at US$19.9
trillion with mining sector contributing to about 8.4% of the overall GDP (Australian GDP
Growth Rate, 2017).
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The inflation rate of the country is estimated to be about 1.9% moving towards the 2-3%
target band decided by the RBA (Reserve Bank of Australia). This is contributed by the increase
in petrol and electricity prices in the country. However, RBA is maintaining a low interest rate in
the country that has only recorded an increase of 4.68 per cent from 1990 to the year 2017. The
current interest rate of the country is estimated to be about 1.5 per cent for supporting the
economic growth of the country. However, RBA is planning to record an increase in the interest
rate once the economy is able to attain its potential growth rate. The higher interest rates will
help in reliving the pressure from the booming housing market of the country (Roggers, 2017).
The current growth realized in the inflation and interest rate of the country can be illustrated as:
Source: https://tradingeconomics.com/australia/inflation-cpi
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The current value of $AUD is 0.79 USD with exchange rate of 0.72 USD per AUD. The
value of AUD has been steadily decline from the year 2012 to 2016. The devaluation of the
currency is supported by the Reserve Bank of Australia for promoting economical growth in the
period of economic recession by weakening the dollar (Australia - Economic forecast summary,
2017). It can be illustrated as follows:
Source: https://www.focus-economics.com/country-indicator/australia/exchange-rate
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It can be said from the analysis of the macro-economic factors of the country that
removal of foreign exchange controls and the stabilization of inflation rate have helped to large
extent in Australia for promoting its strong economic growth after the period of global recession.
The Australian economy has survived in the period of recession by eliminating of its budget
deficit with the increase in the export demand for mineral resources from China. The higher
balance of trade during the period of global recession has largely contributed in its economic
recovery from the financial crisis. The weakening of the currency rate has helped in improving
the agricultural exports and gaining educational sector growth by attracting foreign students due
to economical loans facilities. These large-scale reforms adopted by the RBA have helped in
boosting the economical growth of the country (The Economist, 2017).
The strong economic growth of the country is supported by the abundance of mineral and
non-mineral reserves. As such, the mining sector of the country enjoys large output and exports
large amount of minerals contributing to its GDP growth. The export from the mining sector of
the country has contributed about 70% of the revenue in the eyar2017. The net revenue realized
from exporting the mining products is estimated to increase on a large-scale by the end of the
year 2021-22. The mining sector of the country as such has become to be highly price-
competitive on a global scale and therefore its performance is highly impacted by the Australian
dollar value and the current fluctuations in the supply and demand (Dyster, and Meredith, 2012).
The mining boom in the country has attributed to improve the real household per capital income
to about 13% till the year 2016. Also, it has increased the GDP of the country by approximately
6 per cent in the recent years through providing higher trade balances. This in turn increases the
overall value of domestic products leading to a rise in the household income. It has also lead to a
rise of 13% in the exchange rate of the country in the year 2013 which otherwise would have
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remained to its initial levels without the occurrence of mining boom. The mining sector is largely
contributing to creating job opportunities in the country and thereby reducing the unemployment
rate that in turn will support the economic prosperity. As such, the top-down analysis of the
economic environment of Australia has indicated that investors can select the mining industry for
investment purposes. The strong financial performance of the companies operating within the
sector has indicated that the investors can realize higher capital gains through investing in the
mining industry of Australia (Tulip, 2014).
The BHP Billiton and Rio Tinto are recognized to be major players in the mining sector
of the country. The BHP Billiton is recognized as the largest mining company of Australia in
terms of revenue realization. On the other hand, Rio Tinto is recognized as a world leader in the
production of mineral ores besides having operations in Australia. It is estimated that the overall
market capitalization of the mining companies has increased by about 27% in the recent years
with small scale companies also realizing huge capital gains (McLean, 2013). The top mining
companies of Australia have recorded a 32% rise in their profitability after surviving the
downfall of global recession. The BHP Billiton has currently strongest market capitalization
among its competitors, that are, Rio Tinto and Vale. The large-scale output of iron ore is driving
the mining boom currently in Australia. It is estimated that about $1 decline in the iron ore price
can cause a decrease of about $800 million in its trade revenue. As such, the government of the
country is placing strong ensures for supporting the economic growth and development of the
mining sector. The large abundance in the mineral reserves of the country indicates profitable
growth of mining sector of the country in the future context also.
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Source: http://www.columbia.edu/cu/consultingclub/Resources/Mining_Boyi_Xie.pdf
Source: https://www.rba.gov.au/publications/bulletin/2014/dec/pdf/bu-1214-3.pdf
Bottom-Up Analysis of the chosen Companies in the same industry (BHP Billiton and Rio
Tinto)
In order to carry out the bottom up analysis, ratio analysis has been conducted on both the
selected companies for year 2015 and 2016. After completing the ratio analysis, a common
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conclusion regarding the overall performance of the industry has been under recommendation
and conclusion section.
Financial data has been taken from the annual reports of both the companies that have
been published at their own website under investor relation section. Ratio analysis has been done
to measure the profitability, capital structure, solvency and market performance of both the
companies. Details of financial data and ratio analysis have been included in below table.
Financial Data of BHP Billiton (Amount in Million Dollar)
Particulars 2015 2016
Net Profit
$
4,390.00
$
(6,207.00)
Total Assets
$
124,580.00
$
118,953.00
Net Revenue
$
44,636.00
$
30,912.00
Current Assets
$
16,369.00
$
17,714.00
Current Liabilities
$
12,853.00
$
12,340.00
Inventory
$
4,292.00
$
3,411.00
Prepaid Expenses
$
-
$
-
Quick Assets $ $
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12,077.00 14,303.00
Total Debts
$
46,959.00
$
52,323.00
Shareholder's Equity
$
64,768.00
$
54,290.00
Profit attributable for
shareholders
$
4,390.00
$
(6,207.00)
Earnings Per Share
$
0.71
$
(2.40)
Number of Equity Shares in
million 2667.00 2661.00
Payout Ratio in % 45.50% 0.00%
(Annual Report 2016 and 2015, BHP Billiton and Rio Tinto)
Financial Data of Rio Tinto (Amount in Million Dollar)
Particulars 2015 2016
Net Profit
$
(1,719.00)
$
4,776.00
Total Assets
$
91,564.00
$
89,263.00
Net Revenue
$
34,829.00
$
33,781.00
Current Assets
$
15,554.00
$
15,086.00
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Current Liabilities
$
10,046.00
$
9,362.00
Inventory
$
3,168.00
$
2,937.00
Prepaid Expenses
$
242.00
$
266.00
Quick Assets
$
12,144.00
$
11,883.00
Total Debts
$
44,169.00
$
40,611.00
Shareholder's Equity
$
37,349.00
$
39,290.00
Profit attributable for
shareholders
$
(1,719.00)
$
4,776.00
Earnings Per Share (in dollar)
$
(0.47)
$
2.55
Number of Equity Shares in
million 1825.00 1808.00
Payout Ratio in % 132.60% 0.00%
(Annual Report 2016 and 2015, BHP Billiton and Rio Tinto)
Ratio Calculations
Particulars 2015 2016
Profitability Analysis
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Return on assets Net Profit / Average Total Assets
BHP Billiton 3.52% -5.22%
Rio Tinto -1.88% 5.35%
Net Profit Margin Net Profit / Net Revenue
BHP Billiton 9.84% -20.08%
Rio Tinto -4.94% 14.14%
Liquidity Analysis
Current Ratio Current Assets /Current Liabilities
BHP Billiton 1.27 1.44
Rio Tinto 1.55 1.61
Quick Ratio Quick Assets / Current Liabilities
BHP Billiton 0.94 1.16
Rio Tinto 1.21 1.27
Capital Structure
Analysis
Debt to Equity Ratio Total Debt / Shareholder’s Equity
BHP Billiton 0.73 0.96
Rio Tinto 1.18 1.03
Equity Ratio Total Equity / Total Assets
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BHP Billiton 51.99% 45.64%
Rio Tinto 40.79% 44.02%
Market Performance
Earnings per Share
Profit attributable for shareholders / Number of
common Stock (Shares)
BHP Billiton
$
0.71
$
(2.40)
Rio Tinto
$
(0.47)
$
2.55
Dividend per Share
Total Dividend Distributed / Number of Common
Stock (Shares)
BHP Billiton
$
2.48
$
1.56
Rio Tinto
$
2.20
$
1.51
(Annual Report 2016 and 2015, BHP Billiton and Rio Tinto)
Profitability analysis
Profitability analysis refers to measurement of profit earnings capacity of the entity. It
can be measured by measuring the profit with resources implied by the management in the
business. For this purpose ratio like net profit ratio, gross profit ratio, return on equity and return
on assets are used to measure the entity profitability (Bull, 2007).
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Return on Assets: This ratio is calculated to calculate the amount of profit earned on the total
assets employed by the entity. The formula to calculate the return on assets is given as net profit
divided total assets (Bull, 2007).
BHP Billiton and Rio Tinto belong to same industry i.e. mining industry. There have
been many changes to this industry in year 2015 and 2016. The changes to this industry have led
the companies to suffer loss. In year 2015, the return on assets of BHP Billiton was 3.52% and it
was decreased to -5.22% in year 2016. So it can be said that there has been major decline in
profits of this company. In case of Rio Tinto the ROA in year 2015 was -1.88% and got
increased in year 2016 to 5.35%. So it can be said there is no similarity between the profit
earnings capacity of the chosen companies (Annual Report 2016 and 2015, BHP Billiton and Rio
Tinto).
Net Profit Margin: Net profit evaluates the profit from the revenue point of view. The formula to
calculate the net profit margin is income after tax divided by the net revenue. This ratio is very
important from investor’s point of view as this ratio give idea about the increase in profit
corresponding to increase in sales. In case sales has been increased but profit was decreased, than
it can be said that there is huge increase in expenses.
The net profit of BHP Billiton was 9.84% in year 2015 and it was negative 20.08% in
year 2016. The decline in profits is due to decline in revenue amount in year 2016. In case of Rio
Tinto, the net profit ratio was negative 4.94% in year 2015 and 14.14% in year 2016 (Annual
Report 2016 and 2015, BHP Billiton and Rio Tinto).
Overall profitability performance of BHP Billiton was considered good in year 2015 and
highly poor in year 2016. In case of Rio Tinto it was totally opposite.
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Liquidity Analysis
This ratio tells the short term solvency position of the company. It means level of current
assets companies keep to pay the current liabilities for the particular period. To evaluate the
liquidity performance of both the chosen companies ratio like current ratio and quick ratio has
been calculated.
Current Ratio: Current ratio means current assets divided current liabilities. As per the formula it
tells times the current assets entity posses to pay the current liabilities. The disadvantage of this
ratio is that it also takes inventory and prepaid expenses into valuation despite of that they are
not considered as good source of cash and cash equivalent. Current ratio of BHP Billiton was
1.27 times in year 2015 and it was increased to 1.44 in year 2016. While it was 1.55 times in year
2015 and 1.61 year 2016 in case of Rio Tinto. It can be said that liquidity performance of both
companies is good but Rio Tinto posses more working capital as compare to BHP Billiton
(Dyster and Meredith, 2012).
Quick Ratio: It is calculated as quick assets divided by current liabilities. It is similar to current
ratio but it removes the disadvantage that the current ratio has, as it does not take inventory and
prepaid expenses into the calculation of quick assets. Quick ratio of BHP Billiton was 0.94 and
1.16 in year 2015 and 2016 respectively. On the other hand Rio Tinto has quick ratio of 1.21 in
year 2015 and 1.27 in year 2016. It can be concluded that Rio Tinto has better stability to the
liquidity performance as compare to BHP Billiton (Annual Report 2016 and 2015, BHP Billiton
and Rio Tinto).
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Capital Structure Analysis
Capital means funds employed by the company to finance various assets of the entity.
Capital is broadly divided into equity and debt capital. Mixing the proportion of both these
capital is known as capital structure management. Debt to equity ratio and equity ratio are
calculated to evaluate the capital structure of both the companies (Drake and Fabozzi, 2012).
Debt to Equity ratio: This ratio is calculated by divided amount of long term debt by the equity
amount. Long term debt means non-current liabilities that are due after one year time period.
Equity means shareholders capital. Debt to equity ratio of BHP Billiton was 0.73times in year
2015 and it was raised to 0.96 times in year 2016. On the other hand, debt to equity ratio of Rio
Tinto was 1.18 times in year 2015 and 1.03 in year 2016. Overall capital structures of both the
companies are dependent on the debt source of finance which is considered as the charge on the
net profit of the entity (Dyster and Meredith, 2012).
Equity Ratio: This ratio is calculated as equity capital divided by total assets of the entity. This
ratio tells percentage of equity capital used to finance the total assets. On the basis of ratio
calculation it can be said that 51.99% of total assets was financed by equity capital in year 2015
and it got reduced to 45.64 % in year 2016 in case of BHP Billiton. On the other hand, about
40% of total assets were financed through equity capital in both the years.
Overall capital structure of both the companies was mostly dependent on the debt capital.
So it can be said that there is need to take prompt action to make changes in the capital structure
of the company (Drake and Fabozzi, 2012).
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Market performance
Under this analysis, analyses of companies are done considering their performance with
the market drivers.
Earnings per Share: This ratio will tell the income earned per share by the company. This ratio is
highly important from the customer point of view. On the basis of ratio analysis table and net
profit earned by the both the companies it can be said that in year 2015, market performance of
BHP Billiton was considered as better than Rio Tinto but it was totally opposite in year 2016
(Annual Report 2016 and 2015, BHP Billiton and Rio Tinto).
Dividend per Share: Both companies have distributed the dividend in year 2015 and 2016 despite
of losses occurred in both the firm.
Conclusion and Recommendation
On the basis of overall analysis it can be said that performance of BHP Billiton was
satisfactory in year 2015 but company has suffered great loss in year 2016. On the other hand
Rio Tinto has suffered huge losses in year 2015 but it got stable in year 2016. On the industry
point of view it can be said that many companies has gone into losses in year 2016 due to impact
of foreign transactions and government policies.
On the basis of overall analysis it is highly recommended to the shareholder’s to hold the
equity shares for more than 2 years to give time to industry to achieve its full performance. It is
expected that in future that chosen companies will start earning good profits (Dyster and
Meredith, 2012).
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References
Annual Report 2015. BHP Billiton. [Online]. Available at:
http://www.bhp.com/investor-centre/financial-results-and-operational-reviews [Accessed on: 21
September, 2017].
Annual Report 2015. Rio Tinto. [Online]. Available at:
http://www.riotinto.com/investors/results-and-reports-2146.aspx [Accessed on: 21 September,
2017].
Annual Report 2016. BHP Billiton. [Online]. Available at:
http://www.bhp.com/investor-centre/financial-results-and-operational-reviews [Accessed on: 21
September, 2017].
Annual Report 2016. Rio Tinto. [Online]. Available at:
http://www.riotinto.com/investors/results-and-reports-2146.aspx [Accessed on: 21 September,
2017].
Australia - Economic forecast summary. 2017. [Online]. Available at:
http://www.oecd.org/eco/outlook/australia-economic-forecast-summary.htm [Accessed on: 21
September 2017].
Australian GDP Growth Rate. 2017. [Online]. Available at:
https://tradingeconomics.com/australia/gdp-growth [Accessed on: 20 September 2017].
Bull, R. 2007. Financial Ratios: How to use financial ratios to maximize value and success for
your businesses. Elsevier.
Drake, P. P. and Fabozzi, F. J. 2012. Analysis of Financial Statements. John Wiley & Sons.
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