Accounting for Managers

Lewis Investment wants to invest $100 million in an Australian listed iron ore producer, and reached a newly set up consulting firm which has identified three businesses engaged in the business of Iron Ore to invest, following is comparative analysis done by accountant to choose and give recommendation on the basis of financial analysis for following Co. as below:-

  • Rio Tinto
  • BHP
  • Fortescue Metals Group

1. Business Descriptions of Lewis Investment Case Study

Rio Tinto:-

Rio Tinto is a mining and metals company operating in around 36 countries around the world. Our purpose is to produce the materials essential to human progress.

Four Products they have are: Aluminum, Copper & Diamonds, Energy & Minerals and Iron Ore. They produce iron ore for steel, aluminum for cars and smart phones, copper for wind turbines, diamonds that set the standard for “responsible”, titanium for household products and borates for crops that feed the world

Rio Tinto first launched its integrated sustainability strategy in 2018 and became a major player in this industry they have a portfolio of production of free of fossil fuel. Currently they have portfolio consisting of commodities with solid long term base and those with those critical for the transition of low carbon economy.

Rio Tinto announced ELYSIS in 2018, which is a partnership pioneering with Alcoa, supported by Apple and Canada and Quebec Govts.

BHP:-

BHP is a world leader in Resources Company. They extract and process various minerals, oil and gases. A group of more than 72,000 work force and team of contracts with their primary base in Australia and America, Company produces and sale their product worldwide. Their Market and sales team operates from Singapore and Houston Offices. Their corporate headquarters is in Melbourne, Australia.

Company has two parents company one BHP Group Ltd. And other is BHP Group Plc but a single board and management.

It operates globally as a producer of major producer for commodities including iron ore, metallurgical coal and copper. They also are in sector of oil and gas but not that major player as in iron ore. BHP is also global base and offices all around the world.

Fortescue Metals Group:-

Fortescue Group as the name suggests is a leader globally in iron ore industry, with a unique culture, innovation and development infrastructure in Pilbara, Western Australia. They mining asset in the Pilbara base.

Company was founded in 2003 since then it has discovered and have been able to develop major iron ore deposits and constructed significant mines in the world. They have become of the one of largest iron ore producers and vision to focus to be the safest, lowest in cost and most profitable mining company.

It consistently ships approx. 170 m. ton of iron ore every year, and is lowest cost provider to China. It has fully integrated infrastjure and supply chain through which it operates and spans two mine, third under development, in Australia (Pilbara).

2. Relevant and Recent Media Commentary

Rio Tinto

As per few published:-

  • Published in News release of Rio Tinto Site dated15th May 22, 2020

Rio Tinto pledges A$500,000 to Care Flight as part of new A$1.1 million commitment to East Arnhem communities

  • Published in MELBOURNE (Reuters)

Sustainability through Partnership

Working with Traditional Owners in Far North Queensland

As one of the world’s largest mining companies, we produce materials that end up in everything from cars to bridges, skyscrapers to smart phones. We also produce materials used in the technology of the low-carbon future, such as wind turbines and electric vehicles. And we remain the only major mining company to have a portfolio free of fossil fuel production.

Since 2008, we have reduced our emissions intensity by 29%, and our absolute emissions by 46%. Today, 76% of the electricity we use comes from clean, renewable energy sources.

Oct 31 (Reuters) - Australia’s Rio Tinto on Thursday forecast a 5% year-on-year rise in iron ore shipments for 2020 and also deferred $500 million of capital expenditure in 2019 to the next year.

The global miner said total capital expenditure in 2019 is expected to be at around $5.5 billion, and $7 billion in 2020. ($1 = 1.4468 Australian dollars) (Reporting by Aby Jose Koilparambil in Bengaluru; Editing by Himani Sarkar)

MELBOURNE (Reuters) - Rio Tinto (RIO.L) (RIO.AX) said on Thursday it had found several cases where Australia’s biggest mining industry body advocated for thermal coal in contravention of 2015 Paris climate goals, as it released a review of its membership in industry groups

Content produced in partnership with Bloomberg as part of the 50 Climate Leaders project.

BHP

  • CANBERRA (Reuters) - Australia’s highest court on Wednesday dismissed an appeal by BHP Group against a tax ruling, the latest loss for the global miner over the treatment of profits from commodities sold out of its Singapore marketing hub.
  • BHP said in a statement the decision offered clarity on the interpretation of a technical area of Australian tax rules, and it would pay $87 million in additional taxes for income generated over 2006-2018.

SYDNEY, March 11 (Reuters) - An Australian court dismissed on Wednesday an appeal by BHP Group against a ruling by the Australian Taxation Office over $87 million in payments the government said were owed by the top global miner’s marketing arm.

By Soumyajit Saha May 21 (Reuters)

Australian shares closed lower on Thursday, hurt by losses in heavyweight miners and banks, as sentiment took a hit on fears of Chinese restrictions on the country’s iron ore exports and a bleak forecast about bank loan defaults.The S&P/ASX 200 index ended 0.41% lower at to 5,550.4.

China, Australia’s largest trading partner, on Wednesday announced changes to the inspection process for its iron ore imports, a move traders and analysts speculate could spill onto another important Australian export — coal.

  • Conferences

12 May 2020, 10:06 PM as per New release by BHP Site

Mike Henry BofA Securities Virtual 2020 Global Metals, Mining and Steel Conference speech

Mike Henry, CEO, speaks at the BofA Securities Virtual 2020 Global Metals, Mining and Steel Conference

  • Fortescue Metals Group
  • Apr 6, 2020 AS PER SITE NEWS RELEASE

Fortescue Metals Group (Fortescue) and ATCO Australia (ATCO) have signed an agreement to explore the deployment of hydrogen vehicle fueling infrastructure in Western Australia. 

  • Published in BEIJING (Reuters), May 12

BEIJING, May 12 (Reuters) - The world’s top listed miner BHP Group said on Tuesday it had made its first yuan-denominated sale of iron ore to China Baoshan Iron & Steel Co Ltd (Baosteel) and would explore using block chain for such transactions in future.

The sale of a Cape Size vessel of lump and fines, worth nearly 100 million yuan ($14.1 million), shows the Chinese currency is making further inroads in iron ore trading after Baosteel, the listed arm of the world’s biggest steelmaker China Baowu Steel Group, bought iron ore from Brazil’s Vale SA in yuan in January.

  • Mining companies rush to shield indigenous communities from coronavirus

Published in Melanie Burton

MELBOURNE (Reuters) - Big mining companies that rely on indigenous workforces or operate near remote communities have acted fast to curb the spread of the coronavirus and avoid a public health crisis that could damage their reputations.

  • FINANCIALS EXPRESS , MAY 21, 2020

Australian shares end lower on China trade tensions, bank loan pain

By Soumyajit Saha

  • Among sectors, the mining index fell for a second consecutive session.
  • Global miners Rio Tinto and BHP Group lost 1% and 0.6%, respectively, while iron ore giant Fortescue Metals Group dropped over 2%.

Q 3. Ratio comparison and brief reasoning:

Other ratio which we can take to analyze the financial health of these companies other than above ratios is Solvency Ratio , This ratios helps to understand that how solvent a company is towards its debt, or how much risk is involved that company might get insolvent. So an significant ratio, and is calculated by :

SOLVENCY RATIOS

Fortescue

BHP

Rio Tinto

Debt Ratio =

Total Liabilities /Total Assets

2016

0.57

0.54

0.56

2017

0.49

0.51

0.53

2018

0.46

0.50

0.52

 Solvency ratio is the key ratio to measure a company’s ability to meet is obligation of debt and is often used by investors. The solvency indicates cash flow position of the company to meet its long term liabilities.

In above case if we compare all the three companies, Best ratio is ½ or .5 but even it is equal to 1 also along with other positive parameters then also company should be treated as safe zone for investors, and in all companies above this ratios seems almost similar i.e in range of .45 to .57 for all three years.

So, Solvency is not a big issue for any of these companies and investor can invest funds in any of these but choose among these , which is the best it becomes difficult if we solely look this ratio.

5.Analyse the Trend and Discuss the Ratios in The Context of The Report Requirements

Ratios are most informative and useful data points or information’s to do comparative analysis for similar type of companies. If we analyze the above three companies on the basis of information available it seems that from the business operational points of view

All three have global presence but Rio Tinto has bigger operation in the field of Iron ore and present in 36 countries.

Financially also all three are good and seems profitable with sound and positive revenue income, But again profitability of Rio Tinto is better comparatively better than BHP and Fortescue e.g. in 2018 , Net Profit Margin is 34% in case of Rio Tinto , whereas for BHP it is only 9% and Fortescue it is 13% . Moreover, trend is very positive for Rio Tinto i.e. increasing year by year 14%, 22% and then to 34%. , though in case of BHP also it is increasing but they also suffered losses in the past . In case of Fortsecue it is not a good sign because the number declined from 25% to 13% only which is huge dip in terms of financial figure.

Net Margin Ratio

Fortescue

BHP

Rio Tinto

2016

14%

-22%

14%

2017

25%

16%

22%

2018

13%

9%

34%

Operating ratio is also highest in case of Rio Tinto 43% compare to others, a similar trend is applicable in operating income ration also , i.e a dip of approx. 17% from 2017 to 2018 in case of Fortsecue i.e. 40% to 23%.

Operating Margin Ratio

     

2016

28%

10%

19%

2017

40%

35%

35%

2018

23%

37%

43%

All three companies have a good solvency ratio which is good sign for investor’s i.e approx.

.50 Which indicates that the company has ability to convert its assets to pay off its liability in case of winding up or any bad situation. So from that point of view all three seems to be safe for investing but again this is not the only metrics to decide where and how much to invest.

Earnings Ratio also is another significant ratio which investors generally compare before investing any company , if we compare and analyze these three companies on the basis of Earning Ratio:-

Earning Ratio

     

Asset Turnover Ratio

     

2016

0.37

0.24

0.38

2017

0.44

0.31

0.42

2018

0.39

0.39

0.45

Debtors Turnover Ratio

     

2016

3%

11%

7%

2017

1%

8%

6%

2018

1%

7%

5%

Ratio shows that how much good a company is to collect money from its debtors, and what is approximate aging. Because there might be company which is booking a good sales but if their collection is bad then in future it might not be able to pay off its liabilities and working capital situation will hamper the overall performance of the companies, Such companies generally indulge in high interest borrowings. In this case Forsecue seems to be good where as other two i.e BHP and Rio Tinto seems to be average i.e ranging between 5% to 11% of their revenue ( Ratio is calculated on the basis of revenue as sales figure is not available on Reuters site)

Liquidity Ratio is another best ratio is to working capital performance and quick liquidity of the company, if we analyze the these ratios in the context of 3 companies under subject we can easily conclude that Rio Tinto is again consistent in its performance and has been able to maintain healthy ratio of average 1.5 times for Current Ratio and approx. 1.2 for Quick ratio. Anything above it treated as good current and quick ratio.

6. Final Recommendation on Lewis Investment Case Study

To Invest $100 Million Dollar in any iron base industry, Accountant has chosen a very good bucket to choose from and compare to get the best out of three. Because all three Rio Tinto, BHP and Fortescue are best and global giants in their area. The investor can invest in any of the companies but after analyzing the different financial ratios it is quite evident that right now the BEST OPTION will be RIO TINTO. and reasons is that all ratios are very much favorable for Rio Tinto and this is not consistent but they have been able to improve their performance continuously. Which is very good sign of growing company, Rio Tinto will be able to offer good return on investment due to his financial performance. Funds will be safe due to its good solvency and liquidity ratios. It has very huge potentially not because of its financial health but also because of its giantness globally, its presence in 36 countries makes its strong player in the field.

The other option could be to bifurcate its investment between Fortescue and Rio Tinto, and they can do this to get the benefit of risk diversification because Fortescue is also growing and have potential to grow. Rio Tinto is already in its peak, And sometimes to gain more it is good to invest in growing companies where in the long term chances of getting return will be good.

BHP though a bigger company with good global presence may not be right choice at this points when other best option is available. Moreover financial performance also indicates that it is not doing good for last few years. So after analyzing all calculated ratios which can say at the point the Investor will get the good return on their investment if they invest in Rio Tinto, and will be safe also.

References for Lewis Investment Case Study

<https://www.accountingtools.com/articles/2017/5/5/gearing-ratio>

<https://www.riotinto.com/australia9559.aspx?utm_source=adwords&utm_medium=search&utm_campaign=brand_2019>

< https://www.bhp.com>

< https://www.fmgl.com.au/>

<www.reuters.com>

Remember, at the center of any academic work, lies clarity and evidence. Should you need further assistance, do look up to our Accounting and Finance Assignment Help

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