Analysis of Financial Markets: Australian Mineral Industry Report

This report presents a financial analysis of the Australian mineral sector, specifically focusing on Focus Minerals and Azure Minerals. The analysis employs both top-down and bottom-up methodologies, examining macroeconomic factors such as inflation, exchange rates, GDP, and unemployment rates for the broader industry context. The report includes graphical representations of economic performance indicators and utilizes ratio analysis to assess the financial health and performance of the two selected companies. The analysis covers profitability, liquidity, and efficiency ratios to facilitate a comparative evaluation and guide investment decisions. The report concludes with a summary of findings and provides recommendations to investors based on the conducted analysis.

Running head: PRINCIPLES OF FINANCIAL MARKETS
Principles of financial markets
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Executive Summary
The report demonstrated the top up and bottom down analysis of mineral industry that leads to
fundamental analysis. Selected organization for conducting the fundamental analysis is Focus
mineral and Azure mineral that are the leading producers of mineral in Australian mineral sector.
Fundamental analysis is evaluated by conducting the top down and bottom up analysis of mineral
industry. Background of Australia mineral sector has also been demonstrated and top down
analysis is conducted by considerations of various macro-economic factors such as inflation rate,
exchange rate, gross domestic product rate and unemployment rate of Australian economy.
Report presents several graphs that depicts the presentation of performance of economy
numerically. Bottom up analysis of organizations have been conducted by the implementation of
tool of ratio analysis. Ratio analysis is considered as crucial tool for investors in making
investment decisions. Furthermore, it helps in making comparison of performance of both the
selected organizations of mineral sector. Later part of report details about the summary of report
and provides with the recommendation to investors for enabling them to make favorable
investment.

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Table of Contents
Introduction......................................................................................................................................6
Background of Australian mining industry.....................................................................................6
Mission Statement of the companies...............................................................................................7
Top down analysis...........................................................................................................................8
Bottom up analysis........................................................................................................................13
Summary and Recommendations..................................................................................................22
References......................................................................................................................................24
Appendices....................................................................................................................................27

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Introduction:
It is essential for investors to conduct the proper analysis of organization in which they
are seeking investment. Such types of analysis incorporates top down analysis and bottom up
analysis of the industry. An investor is presented with the macro environment of the industry b
conducting top down analysis. On other hand, bottom up analysis depicts the micro
environmental picture of particular organization. In the current report, fundamental analysis of
two Australian listed companies of mineral sector is selected. These two organizations include
Focus mineral limited and Azure mineral limited.
Background of Australian Mineral industry:
Mineral industry of Australia is strong despite fall in price and they are the biggest
contributor of export trade of country. One of the leading mineral resource nation is Australia
and is the largest producer of primary aluminum and largest refiner of bauxite. Australia is
experiencing strong economy that is driven by low unemployment rate and continuous economic
growth rate. As the prices of commodity is falling, mineral industry is transitioning from
investment to production phase along with continuous expansion of export volume. Nonetheless,
mineral industry ash been increasingly viewed by investors as industry having high level of risks
as small exploration organizations are adversely impacted by paucity of venture capital. 60%-
70% of mining software is supplied worldwide according to Mineral council of Australia and
center for international economics. A greater interest is created in the frontier areas due to
technological development and rapid improvement in exploration of petroleum (Carlon et al.
2015). This has enabled drilling of horizontal wells, mapping data of petroleum exploration and
development options of diverse petroleum production that are of diverse range.

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More than 50% of needs of Australia is provided by mineral sector and they are considered as
essential for economic growth of nation.
Overview and Mission statement of organizations:
Focus mineral is the leading explorer of gold having one of the largest bank balance of
explorer listed on ASX. The goal of organization is to ensure efficient use of capital and
leveraging strong financial position for increasing the wealth of shareholders. Organization is
current exploring at Coolgardie and Laverton and they are continuing to reemerge as producer.
Coolgardie and Laverton belt form the strategic portfolio of assets (focusminerals.com.au 2017).
Azure Mineral is an Australian based organization engaged in exploration and development of
minerals. Primary activities of organization is to explore for silver, copper, gold and zinc
deposits. Incorporation of company was done in year 2003 that is based in West Perth Australia.
Project based work of organization is progressed in partnership with two major mining
companies that includes Alacnran project and Promontorio project (azureminerals.com.au 2017).
They intends to undertake some other development projects that involve mining, infrastructural,
environment, hydrological along with social and environmental aspects.
Australia has a diverse and abundant energy and mineral resources, the critical factor to
the economic success and performance is the growth of resource sector, and they are a significant
contributor to export earnings. Mineral sector is the cornerstone of the economy of country with
vale of exports being made is recorded at $ 157 billion that accounts 51% of export of goods and
services. Mining sector attracted a total investment worth $ 76 billion in ear 2015-2016. Total of
$ 26 billion of wage sand salaries were paid to labor from this sector in year 2015-2016. Around
2280000 people are directly employed in the mineral sector and since year 2000, employment

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rate has been more than doubled. Export market of Australia’s energy and resources comprised
of Japan, India, China, South Korea, EU 28 and other Asia. Country has over more than 260
mineral producing and gas operations.
One of the biggest industry contributor toward the economic growth of country is mineral
sector and resilience and tenacity of mineral sector was underlined and year 2016. However,
despite the lower price or falling prices of commodities, a recorded growth in export of resources
was delivered by Australian mineral sector. Over the recent year, there was a combination of
relentless pursuits of productivity gains and long phase of investment. Such transition was a
proof of the fact that expanded mineral sector is continuing to make a vast difference in economy
of country. Growth of mineral resources along with mineral sector guarantees long-term
dividend payment to nation. Australian citizens would live with high living standard and social
welfare net that is driven by exports income, job, hundred billion of dollar in royalties and taxes
and regional communities.
Top down analysis
Overview of Australian economy:
Top down analysis of industry is done by analyzing various macro-economic indicator
such as employment rate, gross domestic product, inflation rate, output rate. Economy of
Australia is considered as growing economy and there is a considerable growth in rate at 4.40%.

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From the above chart, it can be inferred that Australian growth rate is higher with a
considerable decline in rate of unemployment. Furthermore, there has been increase in current
account deficit with increase in inflation at the same time. Increase in rate of inflation is not
viewed as something positive as this reduces the purchasing power of people and in this regard,
government is required to take some measures for reducing the rate of inflation in economy.

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Resource boom in the mineral sector has transitioned the industry from investment to
production phase and the sector produced record commodity volume in year 2016. Concentrates
produce and volume of iron ore was significantly higher by 66.3% in year 2016 as compared to
year 2012. During the boom in mineral investment, there was reversing appreciation in
Australian dollar resulting from lower international demand and increase in volume of
commodity. The Australian dollar fell to $ 0.76 USD in year 2016 as compared to $ 1.08 USD in
year 2011. Australian terms of trade are the main reason for decline in exchange rate (Marshall
2016).
Australia terms of trade and terms of trade:
Source: Henderson et al. 2015)
Source: Henderson et al. 2015)

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Growth of GDP is attributable from the increase in net exports and household
consumption and a positive contribution aroused from the government expenditure. Growth in
gross domestic product was detracted from the business investment. Mineral sector was the
reason behind the continuous fall in business investment. Business investment in year 2014-2015
stood at $ 74.8 compared to $ 52.4 in ear 2016-2016 indicating that there was a decline of 29.9%.
Fall in mineral investment is more than rise in mining investment (Christensen et al. 2013) .
Business investment by industry from June 2006 to June 2016:
Source: Henderson et al. 2015)
Mineral industry of Australia has been witnessing a contraction in employment and there
is uneven in distribution of employment growth rate throughout country. Compared to national
average of employment growth rate of 1.4%, the employment growth rate in Western Australia
and Queensland was recorded at 1.3% and 0.3%. The possible reason for this pattern is transition
of mineral sector away from investment to production phase.

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Data for full time, part time and underemployed persons:
Source: Henderson et al. 2015)
Employment and output by industry:
Source: Henderson et al. 2015)
Compared to a relatively lower employment growth rate at 1.0% in the mining and
mineral sector, they were the strongest performer in terms of growth in rate of output at 6.2%.
With increase in overall level of employment by 1.8% and increase in construction output by

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2.8%, the taper in mining industry has not been able to adversely affect the same (Sharma and
Panigrahi 2013).
Despite the fall in price, mineral and mining sector is witnessing strong volumes because
of its transition into the production phase. The contribution of mineral sector in the gross
domestic product of Australia stood at 6.9% at $ 114.9 billion. After the construction and
service sector, mining sector is the third largest contributor to gross domestic product. The
growth rate of miming output was higher than all the industries and the output growth at 6.2% in
year 2016. Production phase in mining sector requires fewer employees compared to investment
phase and recorded export volume continued to be produced by mining sector. The volume of
key commodity export in year 2015-2016 increased by 3.0% and the major component involved
metallurgical, iron ore and thermal coal.
Value and volume of mineral commodity exports:
(Source: Henderson et al. 2015)
In case of top down analysis, analysis of particular organization is the last step. With the
growth in GDP rate of Australia, it is indicated that there is positive impact on performance of

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Azure mineral and Focus mineral. Both the organizations would be able to increase their market
capitalization if there is reduction in unemployment rate and increase in gross domestic product
of economy. Azure mineral continues to direct a fair of share of its budget toward exploration
and future performance of group is dependent upon development of project, success exploration
and continuous funding (Golden and Kohlbeck 2017). Asset base of organization would be
strengthen by strategy followed by company and they are second largest concentration of copper
deposits in the world.
Bottom up analysis
Bottom up analysis is a tool used by investors for analyzing the performance of specific
organization. Implementation of bottom up analysis of organization is done by adopting the
approach of Company, Industry and Economy. For conducting the analysis, investors seeking
investment in any specific organization involves analysis of business of organization, industry in
which they are operating and economy in which they are operating. Therefore, for conducting the
bottom up analysis, investors is required to analyze the performance of selected organization in
mineral industry that is Focus Mineral and Azure Mineral that is listed on Australian stock
exchange.
Applying the tool of ratio analysis would help investors in depicting the financial teed of
both the organization. For the evaluation of the financial performance, several ratios that are
calculated involves profitability ratio, liquidity ratio, efficiency ratio and growth ratios (Nilsson
and Stockenstrand 2015). Furthermore, application of this tool would also help in comparing the
performance of both the organization and making comparison with the industry standard.