Inca Minerals Limited Financial Analysis

This assignment delves into a comprehensive financial analysis of Inca Minerals Limited. It examines the company's profitability over the past four years, its debt-to-equity ratio (gearing), dividend policy, and provides investment recommendations based on both risk and return factors. The analysis is informed by the company's financial reports and industry benchmarks.

Running head: FINANCE FOR BUSINESS
Name of the student – Sagar Pokhrel
Student ID – EMV 22235
Subject – Finance for Business
Name of the institute – Holmes Institute
Company – INCA Minerals
Author note

FINANCE FOR BUSINESS 1
Table of Contents
1. Company description..........................................................................................................2
2. Ownership governance structure........................................................................................2
3. Key ratios of INCA Minerals..............................................................................................3
4. Information from the ASX website....................................................................................4
5. Recent announcement of INCA Minerals...........................................................................5
6. Stock field...........................................................................................................................6
7. WACC (weighted average cost of capital).........................................................................6
8. Optimal debt structure........................................................................................................7
9. Dividend policy...................................................................................................................8
10. Recommendation.............................................................................................................8
Reference....................................................................................................................................9

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1. Company description
INCA Minerals Limited is the metal development and exploration company
based in Western Australia with having its project portfolio that is located in Peru and
Australia. Primarily the company is engaged with the activities of exploration of
molybdenum, copper, gold, silver, porphyry and nickel deposits. The principal project
of the company is Chanape project that is located in east Peru (Limited 2018).
2. Ownership governance structure
i) Substantial shareholders
 Greater than 20% of shares – there are no shareholders in the company that is
holding the shares for more than 20% of value.
 Greater than 5% of shares – Merrill Lynch (Australia) Nominees Pty Ltd hold
218,623,397 shares that is, 9.49% of total share. Further, Zhian Zhang hold
181,200,000 shares that is 7.86% of total shares.
ii) Name of key persons
 Chairman – Ross Brown
 Board members –The board comprises of –
 Ross Brown – Managing Director
 Gareth Lloyd – Director
 Justin Walawski – Company secretary and Director
 CEO – Ross Brown
From the annual report of the company for the year ended 2017 it is recognized
that no members from board holds more than 20% or 5% of the company’s total number
of shares. Therefore, none of them will be regarded as substantial shareholder.
3. Key ratios of INCA Minerals
i. Return on assets (ROA) = (NPAT / Total Assets)
Return on Equity (ROE) = (Net profit after tax / Ordinary equity)
Debt ratio = Total liabilities / Total assets

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Ratio Formula 2017 2016 2015 2014
Return on assets NAPT / Total asset -0.246 -17.924 -0.482 -0.269
Return on equity NPAT / Ordinary equity -0.257 -27.512 -0.498 -0.278
Debt ratio Total liab / Total assets 0.042 0.348 0.031 0.032
EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE
EBIT/TA * NPAT/EBIT * TA/OE = - 13,54,318 / 55,02,423 * - 13,54,318 / -
13,54,318 * 55,02,423 / 52,70,227 = - 0.257
NPAT/OE = -13,54,318 / 52,70,227 = - 0.257
From above it can be proved that –
EBIT/TA * NPAT/EBIT * TA/OE = NPAT/OE
ii. Phenomenon of TA/OE variable
TA stands for total asset whereas OE stands for owner’s equity. This ratio
indicates relationship of total asset of the company against the part that is owned by the
shareholders that is the owner’s equity. The ratio further indicates the leverage that is
the debt used by the company. The ratio is depended on the industry, the sales and
assets of the company, present economic scenario and other different factors. The higher
ratio represents the sustainability risk for the company. The reason behind this is that
the additional debt may expose the company to interest risk, which in turn will
deteriorate the financial position of the company.
iii. Reasons behind higher ROE than the ROA
While the cost of debt is lower than the ROA, the company earns on the debt
actually which in turn increase the ROE. Profit earned from debt and additional equity
will then be higher as compared to the profits that were supposed to be earned only from
equity. Therefore, if it is assumed that the ROA is more than the interest rate, it will
results into ROE higher than the ROA.
4. Information from the ASX website
i. Monthly movement of stock for last 2 years

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INCA Minerals Limited
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
01/10/2017
0
0.005
0.01
0.015
0.02
0.025
0.03
INCA Minerals Limited
Adj Close
All Ordinary Index
01/12/2015
01/02/2016
01/04/2016
01/06/2016
01/08/2016
01/10/2016
01/12/2016
01/02/2017
01/04/2017
01/06/2017
01/08/2017
01/10/2017
0
1000
2000
3000
4000
5000
6000
7000
All Ordinary Index
Adj Close

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ii. Report on the stock movement
Looking at the graph of both the companies it is found that the stock of INCA
minerals through was upward moving till the month of February 2017, it started falling
from that point and after 2 years it reached at the same point from where it started 2
years back. However, the stock of the All Ordinary Index for last 2 years was
moderately upward moving. Therefore, among the 2 stocks, the stock of INCA Minerals
is considered to be more volatile. Further, the correlation among two stocks came as
0.410. Therefore, the stocks are uncorrelated.
5. Recent announcement of INCA Minerals
 The company has started the maiden drilling program at its Riqueza Project
after issuing the commencement date for official drilling
 The substantial shareholder of the company Resource Capital Fund VI LP
(“RCF VI”) changed its shareholding from 13.65% to 10.47%.
 The company acquired Riqueza Polymetallic Zn-Ag-Pb project to focus on
mineral exploration.
 It entered into new phase of the exploration development through merger with
Condor Metals
6. Stock field
i. Calculated beta of the company is 1.4
ii. Risk free rate = Rf = 4%, Market risk premium = Rm = 6%
Therefore, required rate of return of the company’s share =
R = Rf + β ( Rm – Rf ) (Zabarankin, Pavlikov and Uryasev 2014)
R = 4% + 1.4* (6% – 4%) = 4% +2.8% = 6.28%
iii. Conservative investment
The investment strategy, which highlights the capital preservation with
minimization of risk through balanced and diversified portfolio of the low risk
associated investment are known as the conservative investment (Zhang 2014). As it

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can be seen that the beta of the company is 1.4 the stock can be regarded as conservative
investment.
7. WACC (weighted average cost of capital)
i. Computation of WACC
WACC = E/V * Re +D/V * Rd * (1-Tc), Where,
E/V = Equity percentage in the capital structure
D/V = Debt percentage in the capital structure
Re = Cost of equity
Rd = Rate of debt
Tc = corporate tax rate
However, from the annual report of the company it is identified that the
company did not have any debt for the year. Therefore, the weighted average cost of
capital = cost of equity = 6.28%
ii. Higher WACC
WACC is calculation of the company’s cost of capital under which all the
capital category is weighted proportionately. An increase in WACC denotes that the rate
of return on the equity as well as the beta will go up. It means the valuation of the
company will be reduced and risk of the company will be increased. Therefore, the
management shall search for economical source of capital (He and Krishnamurthy
2013).
8. Optimal debt structure
i. Optimal structure for capital
Debt ratio Total liabilities / Total assets Year 2017 = 0.042 Year 2016 = 0.348

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Generally, 40% or lower is regarded as optimal capital structure, as it is
expected that the value of the firm will be maximized at this ratio. However, it is found
that the debt ratio of the company for the year 2016 was 34.8% whereas it significantly
reduced to 4.2% in 2017. Therefore, in case of additional fund requirement the company
shall go for debt rather than equity (Harris and Mazibas 2013).
ii. Gearing ratio
It is the fundamental analysis of ratio of the company’s long-term debt as against
its equity. Lower gearing ratio indicates the financial stability (Halili, Saleh and Zeitun
2015). However, it is recognized that for adjusting the gearing ratio the company did not
availed any fund through debt in 2016 as well as 2017. Further, it increased its equity
from $ 29,599,029 to $ 35,742,124 over the year from 2016 to 2017. Nothing mentioned
by the directors in their report regarding these changes.
9. Dividend policy
The directors of the company do not recommend payment of dividend and it did
not declared or paid any dividends from the beginning of its financial year (Albul,
Jaffee and Tchistyi 2015). For the previous year also no dividend were paid by the
company and further, the management has not made any recommendation for the
dividend payment (Renneboog and Szilagyi 2015). This policy has been adopted as the
company could not earn any positive income over last 4 years.
10. Recommendation
It is recommended that if the return factor is considered then the client shall not
include the stock in his portfolio as the net income of the company for last 4 years are in
negative and the company does not pay any dividend to their shareholder. However, if
the risk factor is considered, it can be identified that the beta of the company is only –
0.51. Therefore, considering the risk factor the stock can be included in his portfolio.

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Reference
Albul, B., Jaffee, D.M. and Tchistyi, A., 2015. Contingent convertible bonds and capital
structure decisions.
Halili, E, Saleh, A and Zeitun, R., 2015. 'Governance and Long-Term Operating
Performance of Family and Non-Family Firms in Australia', Studies in Economics and
Finance, vol.32, no.4, pp.398-421.
Harris, R.D. and Mazibas, M., 2013. Dynamic hedge fund portfolio construction: A
semi-parametric approach. Journal of Banking & Finance, 37(1), pp.139-149.
He, Z. and Krishnamurthy, A., 2013. Intermediary asset pricing. The American
Economic Review, 103(2), pp.732-770.
Limited, I., 2018. Home - Inca Minerals Limited. [online] Inca Minerals Limited.
Available at: https://www.incaminerals.com.au/ [Accessed 28 Jan. 2018].
Renneboog, L. and Szilagyi, P.G., 2015. How relevant is dividend policy under low
shareholder protection?. Journal of International Financial Markets, Institutions and
Money.
Zabarankin, M., Pavlikov, K. and Uryasev, S., 2014. Capital asset pricing model
(CAPM) with drawdown measure. European Journal of Operational Research, 234(2),
pp.508-517.
Zhang, Z., 2014. On a risk model with randomized dividend-decision times. Journal of
Industrial & Management Optimization, 10(4), pp.1041-1058.