Mining Industry Financial Analysis

This assignment requires students to analyze the financial performance of the Australian mining industry. Using a range of sources including company annual reports, industry reports, and news articles, students will assess key financial indicators, identify trends, and discuss the factors influencing the sector's health. The analysis should draw upon financial reporting concepts, accounting principles, and economic perspectives.

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Principles of Financial Markets

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Executive Summary
This report provides the information related to top down analysis and bottom up analysis of two
companies operating in mining industry of Australia i.e. Rio Tinto and BHP Billiton. The top
down analysis includes economic, fundamental, industry and company analysis. It is found out
that the GDP of the country comprises of 8.5% of the total GDP by the mining industry in the
year 2013. The companies make investment in research and development activities to bring
innovation in business practices. The findings of bottom up approach indicate that the financial
performance and position of Rio Tinto is better than BHP Billiton.

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Contents
Introduction.................................................................................................................................................4
Top-down Analysis.....................................................................................................................................5
Fundamental Analysis.............................................................................................................................5
Economic Analysis...................................................................................................................................5
Industry Analysis.....................................................................................................................................6
Company Analysis...................................................................................................................................7
Bottom-up Analysis.....................................................................................................................................8
Rio Tinto.................................................................................................................................................8
BHP Billiton..........................................................................................................................................11
Summary and Recommendations..............................................................................................................12
References.................................................................................................................................................14

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Introduction
The top down analysis and bottom up analysis is carried out for two companies operating in
mining industry of Australia namely Rio-Tinto and BHP Billiton. The top down analysis helps in
understanding the impact of changes in the economic factors on the current economic growth of
Australia that also affects the industry performance. Besides this, the bottom up analysis helps in
understanding the financial situation of the companies selected for the analysis (Robinson, et al.,
2015). Mining industry is considered as the primary industry which contributes significantly
towards the economy of Australia. The mining industry deals in the exploration, processing and
extraction of the resources such as gold, lead, iron ore, bauxite, copper and zinc. Rio Tinto is a
company that deals in mining and metals and was established in the year 1962 (Rio Tinto, 2016).
It mainly deals in mining, exploration and processing of mineral resources such as aluminum,
iron ore, energy and minerals and copper and diamonds. The different segments of the company
are located in 10 countries including Australia. The main aim of the business is to deliver
superior value to its shareholders. The company emphasizes on integrity, excellence, safety,
respect and teamwork (Rio Tinto, 2016).
BHP Billiton was established in the year 1885 with its headquarters in Australia. The company
deals in exploration and mining of different minerals and oil and gas products such as
metallurgical coal, iron ore, uranium, and copper. The company has dual listed company
structure with two parent companies namely BHP Billiton Plc and BHP Billiton Ltd and operates
as a single economic entity. Besides this, the company has provided employment to
approximately 65000 employees (BHP Billiton, 2016).

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Top-down Analysis
Fundamental Analysis
Fundamental analysis is the most common method used by the experts to estimate the intrinsic
value of the firm. it analyses the basic financial information of the company such as sales,
profits, dividend payout, interest assets, dividend coverage, market share and evaluation of
promoter record which in turn facilitates in valuing equity shares on value based methods in
three phases namely company analysis, economic analysis and industry analysis (Bouchard and
Chassagneux, 2016).
Economic Analysis
Economic analysis is an approach that results in the determination of the optimum use of limited
resources by making comparisons of the available alternatives to achieve specific objective under
given assumptions and constraints. It takes into consideration the opportunity cost of resources
employed in order to measure the private and social costs in monetary terms related to a project
or economy. The mining sector has contributed 8.5% to the total GDP of Australia by providing
employment to approximately 2% of the workforce in the year 2013 (The Conversation, 2015).
Downstream processing is considered as mining output instead it is considered as production or
manufacturing. Besides this, the mining sector pays approximately $12.7 billion as taxes that
include $170 million as carbon tax in the year 2013. The major source of income for mining
industry in Australia composed of 50% of Australia’s total export earnings (The Conversation,
2015).
Majority of the export earnings of the mining industry is dominated by iron ore and coal. In the
year 2013-2014, the exports from iron ore is $74.67 billion. There are approximately 1300
mining firms in Australia out of which, the production is dominated by large firms such as Rio
Tinto and BHP Billiton. Besides this, the mining industry has contributed approximately 10% to

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the total output. Besides this, the GDP per capita income of Australia is $51320 billion in the
year 2015. The current exchange rate of Aus$ is 0.73 in the year 2015 which affects the buying
behavior of other countries customers to buy Australian products at low exchange rate. This
helps in creating competitiveness of the Australian businesses beneficial for economy of
Australia (Stanley, 2017).
Industry Analysis
In the year 2016, there is a decline in the enthusiasm of investors for Australian mining with the
growing sector for China. The companies in the mining industry is investing in the innovation
and research and development activities in the year 2017 for the purpose of pursuing
development in the sector. There are different companies such as BHP Billiton and Rio Tinto to
implement autonomous hauling systems for the purpose of increasing the efficiency by making
optimum utilization of the available resources with minimum wastage and minimizing the
occurrence of errors. There is an occurrence of the decline in the prices of iron ore since 2011
which results in a decline in the prices of the commodities which has a negative effect on the
profits of miners and prices of the shares (Latimer, 2016).
In the year 2015-16, the mining industry has provided employment to almost 163000 employees.
There is a decline in the employment rate by 8.4%. Besides this, the sales from mining industry
are $188943 million in 2015-2016. There is a decline in the growth rate in sales income by
11.4%. There is also a decline in the gross income to $60760 million with a decline of 17.5%.
There is a decline in the prices of the commodity despite of which there is an occurrence of
tremendous transitions in the production phase. Despite of the slow demand of mining, there is a
growth in the construction sector. Besides this, there is an occurrence of rapid changes taking
place in the technologies used by the mining industry such as autonomous hauling system which

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results in improving the overall performance and efficiency of the whole industry (Office of the
Chief Economist, 2016).
Company Analysis
It is required to analyze the financial performance and productivity of the companies as it help
investors to take decisions regarding the investments to be made in the companies which results
in accelerating the growth of the companies. This also helps in gaining competitive advantage
over other players in the market. The company is analyzed from the perspective of management
or operations carried out by the companies along with its financial performance. It is essential for
the companies to disclose the information related to different procedures and processes adopted
to carry out its different business operations (Weigand, 2014).
Management of Companies
The management of both the companies have adopted new technologies and improved processes
and procedures for the purpose of increasing their production capacity for the purpose of meeting
the needs of its customers. Besides this, the companies have also adopted effective and efficient
strategies for the purpose of achieving the goal of the business. There is a requirement to bring
transparency in the operations of the business in order to increase the competitiveness of the
company (Doss, et al., 2013).
Financial Analysis
This is the second step of the company analysis in which the financial statements are analyzed by
the stakeholders of the company in order to make effective decisions. The financial performance
and position of Rio Tinto is better than BHP Billiton as the company has earned profit. The
liquidity position of the company is also better of Rio Tinto as compared to BHP Billiton. From
the investment point, Rio Tinto is preferred over BHP Billiton as it is more profitable company.
In addition to this, shareholders are attracted towards the company as it helps in paying more

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dividend in comparison to BHP Billiton. This is because BHP Billiton has made loss in the year
2016. In addition to this, market value of BHP Billiton is better than the Rio Tinto which
indicates that investors are attracted towards BHP Billiton to make investment in the company
(Bell, Brooks and Prokopczuk, 2013).
Bottom-up Analysis
The bottom up approach does not focuses on the movements occurred in the security market but
emphasizes on the individual securities. It makes an assumption that the companies are
performing well in the industry. There is a need to review the performance and position of the
company as it helps the stakeholders to make effective decisions. In this approach, emphasis is
given on a single company rather than on industry and gain knowledge regarding its products
and services, research reports and financial stability. The bottom up approach facilitates in
providing accurate forecasts of the financial data as it emphasizes on the in depth analysis of the
company in terms of products and services, financial performance and position and availability
of different business opportunities (Vernimmen, et al., 2014).
Rio Tinto
Particulars 2015 2016
Current Assets 15261 15055
Current Liabilities 10046 9362
Inventory 3168 2937
Net Profit -1719 4776
Sales 34829 33781
Total Assets 91564 89263
Dividend 2.2 1.51
Earnings per share -0.47 2.55
Market Price per share 23.58 20.73
Shareholders’ Equity 37349 39290
Current Ratio= current
assets/ current liabilities
1.51911
2
1.60809
7
Quick Ratio = (Current 1.20376 1.29438

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Assets- Inventory)/
current liabilities 3 2
Net Profit Margin =
(Net Profit/ Sales)*100
-
4.93554
14.1381
2
Return on assets = Net
Profit/ Total Assets
-
0.01877
0.05350
5
Dividend Yield = Total
Dividend Payments/
Market value per share
0.09329
9
0.07284
1
Price Earnings Ratio =
Market Price per share/
Earning per share
-
50.1702
8.12941
2
For the purpose of carrying out bottom up analysis of the companies, there is a requirement to
conduct ratio analysis which helps in providing information related to different aspects of
financial performance and position so that different stakeholders can make effective decisions
related to having interest in the company in terms of getting return. In order to assess the
liquidity position of the company, two ratios such as current and quick ratio is evaluated. These
ratios provide information related to the ability of the company to meet its current liabilities by
the use of current assets. The above table indicates that there is an increase in the current ratio of
the company from 1.5 in 2015 to 1.6 in 2016. This indicates that the company has sufficient
current assets to meet its current liabilities (Wahlen, et al., 2014).
Besides this, the quick ratio provides the true measure of the liquidity position of the company as
it does not consider inventories and prepaid expenses in the current assets as it is slightly takes
time to convert them into cash and cash equivalents to meet the current liabilities. There is also
an increase in the quick ratio from 1.20 in 2015 to 1.29 in 2016. Besides this, majority of the
funds are blocked in the inventories due to which, there is a need to adopt strategies that helps in
converting the inventories into cash and cash equivalents (Brigham, 2014).

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In addition to this, the company has also made loss in the year 2015 and has able to recover the
loss and attain a tremendous increase in the net profit margin of 14.13% in the year 2016 from a
loss of 4.93%. The main reason behind it is that there is a decline in the revenues generated from
the sale of different products offered by the company. Besides this, it also takes into
consideration all the expenses incurred in carrying out different business operations of the
company. The company has made loss in the year 2015 due to which, it is unable to convert its
assets effectively to generate profits for the company. It has made tremendous profit in the year
2016 and converts its assets effectively to generate profit for the company. The return on assets
for the company has increased from -1.8% in the year 2015 to 5.35% in 2016. This indicates that
the company has improved to make efficient use of its assets to make profit for the company
(Wahlen, et al., 2015).
Besides this, the company is paying increased dividend to its shareholders every year which
results in attracting more investors to make investment in the company as the company is able to
pay high return on their investment by exploiting different business opportunities which helps in
increasing their profits. In addition to this, there is also an increase in the earnings per share of
the company to 2.55 in 2016 from -0.47 in 2015. This shows that the shareholders of the
company would earn 2.55 on each share in which they invested if whole of the profit earned by
the company is distributed among them. Along with this, there is also an increase in the price
earnings ratio from -50.17 in 2015 to 8.12 in 2016. This indicates that the investors such as
shareholders and other investors are expected to make increased investment in the company in
order to earn high returns on their investments. The company has strong financial performance
and position in the market relative to industry average (Brief, 2013).

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BHP Billiton
Particulars 2015 2016
Current Assets 16369 17714
Current Liabilities 12853 12340
Inventory 4292 3411
Net Profit 2878 -6207
Sales 44636 30912
Total Assets 124580 118953
Dividend 2.48 1.56
Earnings per share 0.71 -2.4
Market Price per share 29.75 20.96
Shareholders’ Equity 64768 54290
Current Ratio= current assets/
current liabilities 1.273554812 1.435494327
Quick Ratio = (Current Assets-
Inventory)/ current liabilities 0.93962499 1.159076175
Net Profit Margin = (Net Profit/
Sales)*100 6.447710368 -20.07958075
Return on assets = Net Profit/
Total Assets 0.023101621 -0.052180273
Dividend Yield = Total Dividend
Payments/ Market value per share 0.083361345 0.074427481
Price Earnings Ratio = Market
Price per share/ Earning per share 41.90140845 -8.733333333
The current ratio and quick ratio provides the information related to the liquidity position of the
company. It indicates that the company has sufficient current assets which can be used to pay off
its current liabilities. There is an increase in the current ratio of the company from 1.27 in 2015
to 1.43 in 2016. In addition to this, the true measure of the liquidity position of the company is
quick ratio as it does not consider inventory while calculation of the ratio i.e. it only considers
those current assets that can be quickly converted into cash and cash equivalents to meet its
current liabilities in an effective manner (Samonas, 2015).
There is also a tremendous increase in the quick ratio of the company to 1.15 in 2016 from 0.93
in 2015. This indicates that the company has good liquidity position. The company has made loss

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in the year 2016 as compared to the year 2015 as it fails to earn increased revenue from the sales
and there is an increase in the expenses incurred by the company due to which the net profit
margin of the company in the year 2016 is -20.07% as compared to 6.44% in the year 2015. The
net profit margin ratio shows that the profit generated from the sales of the company after
meeting out all the expenses incurred in different business operations of the company. In
addition to this, due to the company has made loss in the year 2016, the return on assets is also
negative in the year 2016 to -0.05 from 0.023 in the year 2015 which indicates that the company
is unable to make efficient use of the its assets to generate sales of the company (Wahlen, et al.,
2015).
The company is able to pay dividends to its shareholders as a return on their investment in the
company which attracts more number of investors towards the company. There is also a slightly
decline in the dividend yield of the company from 0.083 in 2015 to 0.074 in the year 2016. The
company has negative earnings per share in the year 2016 to -2.4 from 0.71 in the year 2015.
This indicates that the shareholders of the company are not able to earn an income on the shares
held by them. The price earnings ratio is negative as -8.73 in the year 2016 from 41.90 in the
year 2015. This shows that investors are reluctant in making investment in the business. Thus, it
can be said that the profitability position of the company is not strong in the year 2016 as
compared to the year 2015 (Fleisher and Bensoussan, 2015).
Summary and Recommendations
It can be summarized that the financial performance and position of Rio Tinto is better than BHP
Billiton. Besides this, these are close competitors of each other. In addition to this, it can also be
summarized that the mining industry deals in the exploration, processing and extraction of the
mineral resources such as iron ore, bauxite and so on. In addition to this, it can be recommended

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that the companies should exploit different business opportunities for the purpose of expansion
of the business and increase their profits and liquidity position of the company.

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References
Bell, A.R., Brooks, C. and Prokopczuk, M. (2013) Handbook of Research Methods and
Applications in Empirical Finance. USA: Edward Elgar Publishing.
BHP Billiton. (2016) Annual Report. [Online]. Available at:
http://www.bhp.com/-/media/bhp/documents/investors/annual-reports/2016/
bhpbillitonannualreport2016.pdf?la=en [Accessed on: 1 September 2017].
Bouchard, B., Chassagneux, J.F. (2016) Fundamentals and Advanced Techniques in Derivatives
Hedging. USA: Springer.
Brief, R.P. (2013) Corporate Financial Reporting and Analysis in the Early 1900s (RLE
Accounting). UK: Routledge.
Brigham, E.F. (2014) Financial Management Theory and Practice. USA: Atlantic Publishers &
Distri.
Doss, D.A., Sumrall, W.H., McElreath, D.H. and Jones, D.W. (2013) Economic and Financial
Analysis for Criminal Justice Organizations. USA: CRC Press.
Fleisher, C.S. and Bensoussan, B.E. (2015) Business and Competitive Analysis: Effective
Application of New and Classic Methods. USA: FT Press
Latimer, C. (2016) The top ten trends for mining in 2016. [Online]. Available at:
https://www.australianmining.com.au/features/top-ten-trends-mining-2016/ [Accessed on: 1
September 2017].
Office of the Chief Economist. (2016) Australian Industry Report. [Online]. Available at:
https://www.industry.gov.au/Office-of-the-Chief-Economist/Publications/
AustralianIndustryReport/assets/Australian-Industry-Report-2016-Chapter-2.pdf [Accessed on: 1
September 2017].

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Rio Tinto. (2016) Annual Report. [Online]. Available at:
http://www.riotinto.com/documents/RT_2016_Annual_report.pdf [Accessed on: 1 September
2017].
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