Reference no: EM132555691

FIN327 Natural Resource Equity Analysis - Kaplan University

Learning outcome 1: Explain the geological processes that lead to the formation of mineral and hydrocarbon deposits.

Learning outcome 2: Assess the basic techniques of extraction and mineral processing of natural resources and the impact of various methods on the cost structure of an operation.

Learning outcome 3: Explainthe structure of the commodities market and the various supply and demand factors that impact upon the pricing of resource sector commodities.

Learning outcome 4: Evaluate the feasibility of a resource and energy project.

Learning outcome 5: Construct an earnings model to forecast future company earnings.

Learning outcome 6: Apply valuation techniques to listed companies in the resources and energy sector.

Part A - Essay questions

Question 1 Discuss the benefits and costs to society associated with increased production of renewable energy. In your answer cover the economic, environmental and social implications of renewable energy production and use.

Question 2 (a) Discuss the key priorities of Australia's energy policy.
(b) Describe the means by which energy policy instruments can be evaluated.
(c) Critically evaluate two (2) instruments that Australia uses to implement its energy policy.

Part B- Case study

This case study is based on OceanaGold (Oceana) and focuses on its Didipio Copper-Gold Project (the Project) located in the Philippines.
Oceana is an established Australian Securities Exchange (ASX) listed mineral producing company, with a market capitalisation of $2.5 billion. It is primarily involved in the development and production of copper, gold and silver. This development is achieved through the following projectsand producing mines (Note: The following financial figures are in $US and production figures are for CY2018):
• Macraes Goldfields and Reefton Open Pit: New Zealand's largest gold producing operation located approximately 100 km north of Dunedin in the South Island. It consists of the Macraes Open Pit and Frasers Underground mine. The mines have been in operation since 1990 and are currently producing around 190,000-200,000 oz p.a., with an all-in sustaining cost (AISC) of $950-$1,000 / oz sold. Based on current reserves, the remaining mine life is estimated at around 4-5 years. The Reefton mine is approximately 7 km south of the town of Reefton and has reached the end of its mine life. It includes a processing plant with a nameplate capacity of 1mtpa. In 2016, it produced a remaining circa 5,000 oz of gold and was placed on care and maintenance.
• Waihi Gold Mine: The Waihi Gold Mine in the north island of New Zealand was acquired from Newmont Mining Ltd in 2015 for $77 million. It is producing75,000-85,000 ozat an AISC of
$750-$790per oz sold. Several studies are underway to optimise existing operations and undertake testing of new underground targets and several significant high-grade zones have been drilled below the existing open pit.
• Haile Gold Mine: was a Greenfields project in South Carolina USA,secured by acquiringRomarco Minerals in October 2015 for $856 million. The open pit mine had a budgetedtotal capital construction cost of $380 million. First mining occurred in late 2016 and commercial gold production started in October2017 and ramped up to nameplate capacity in January 2018. It is now producing 140,000-155,000 oz at an AISC of $725-$775 / oz sold. The company is also now carrying out studies to further expand production following promising exploration results.
• Didipio:Oceana acquired the Didipio project in late 2006 through the merger with Climax Mining. The gold and copper project is located on Luzon Island in the Northern Philippines. It currently has measured and indicated resourceof 1.4million oz (Moz)Gold, 2.9 Moz Silver and 0.17 Mt Copper with an expected mine life extending to 2032.The company commenced construction of an open pit in 2012 and the first copper concentrate was produced in December 2012. The mine is being converted to underground operations below the base of the existing pit. Didipio is producing 95,000-105,000 oz gold and 15,000-16,000 t of copper, and is considered a very low cost operation with a current all-insustaining cost (AISC) estimated around $260-$310/oz sold (net of by-product credits).Oceana has had poor relations with the local indigenous community and there were violent protests before the mine opened. In February 2017, the Philippine's Mines Minister decided that Didipio should close due to complaints about pollution and blasting;despite the mine having previously received awards for environmental management,community engagement and workplace practice. Oceanahas continued operations while it appealedthe finding and the minister has now been replaced.

Question 3

Before commencing with your valuation, you refer to Oceana's website and presentations (provided in theresource materials) to gain a better understanding of all its projects. After reading,you identify several matters, which you want to understand better before you commence your valuation.
(a) The ore at the Reefton project in New Zealand is considered refractory.
Briefly explain the term ‘refractory' and its impact on operating costs. How does Oceana modify its mineral processing to account for the refractory ore type?
(b) Oceanahas from time-to-time reviewed moving from a mining contractor to an owner-operator model for mining. Provide three (3) advantages and three (3) disadvantages of an owner-operator approach?
(c) You notice a lot of variation in the life-of-mine (LOM) cash cost estimates between reports and attribute it to definitional variations. Most commonly references are made to Brook Hunt's C1 and C2 cash costs, or the World Gold Councils ‘all-insustaining costs' (AISC).
(i) Explain the Brook Hunt C1 and C2 cash costs definitions.
(ii) The World Gold Council introduced AISC as a more transparent method of reporting costs. You should explain its appropriateness.
Identify two (2) non-cash items included in the adjusted operating costs. Provide commentary on whether you consider their inclusion is appropriate.
(d) In most cash cost definitions, ‘by-product credits' are included.
(i) What is meant by the term by-product credits and how does it affect the cash cost estimate? In the case of Didipio, explain how changes in the copper price impacts its AISC cost?
(ii) A lot of the operating costs are expressed on a pure US$/oz basis rather than a US$/t basis. As a mining analyst, why do you think it is misleading to express costs exclusively on a $US/oz basis?

Question 4

Use the cash flow model template (provided in the Subject Room) and the reference material to assist you to answer the questions below.
Didipio is currently being operated as if the proposed ban on mining will either be repealed or that Oceana's appeal against its closure is successful. For the purposes of the assignment, you should assume that production continues at the budgeted rate and that the company is successful in its appeal.
As you know, feasibility study plans are the result of intensive study and that the day-to-day operation of a mine and processing plant is the only way to truly judge and modify expectations of future performance. Didipio operations are a case in point, in that processing of the open pit ore will finish earlier than anticipated in the feasibility study due to better mill performance. You will therefore need information available in the NI43-101, its update, the company's quarterly reports, presentations and factbooks, as well as assumptions provided herein. Remember that you should only consider information and actual figures up to May 2017; use estimated values for any dates after this time.
(a) Build a discounted cash flow (DCF) model for the period 1 Jan 2017 to 31 Dec 2030 to determine the net present value (NPV) using the Excel template model provided(each year in the model is a calendar year CY2017 to CY2030).
Use the relevant reference material to identify the appropriate input assumptions for the DCF model. It is critical that you carefully read the directions below before commencing on the DCF model.
Important note: You must recognise that much of the financial information disclosed by the company is limited and consequently you are reliant on using best estimates/industry standards or even ambiguous market releases to prepare a reasonable valuation.
(b) The senior analyst reviews your work. He is pleased with your effort, but states that a valuation range should be considered; given volatility in commodity prices, political risk and the uncertainty with several input assumptions. He asks you to construct a one-way sensitivity table for ‘commodity prices' and ‘discount rates' using Section 2.2, ‘Valuation sensitivity' in the ‘Valuation' tab of the model template.
Note:Only complete the sections shown with a yellow or grey background. Theresulting tables must include formulas.
(c) To construct the commodity price sensitivity table, the revenue line at the free cash flow line was modified directly. While this approach provides a quick solution, it is not exactly correct to measure the impact/change on NPV in this way. What was not considered using this approach?

Question 5

The following day, you attend an internal analyst meeting where your Didipio valuation is discussed. Your work has generated a lot of interest, but also a lot of questions. These are as follows:
(a) The first question raised is:
I notice that you can include or exclude interest costs in your valuation (refer to cell CFs!I122 in themodel). What did you choose for the basis of your valuation and what was the basis for your decision?
In your answer specifically include commentary on the impact on the calculation of weighted average cost of capital (WACC).
(b) The second question raised is:
I understand that globally there is an increasing trend for governments, especially in third world jurisdictions, to look at returns beyond royalties.
You realise that this has not been considered in your model.
Explain the free carry arrangement Oceana has renegotiated and agreed on with the Philippine Government?
(c) Final questions raised are:
There is a lot of uncertainty in some of the input parameters and material risks to the project. There is now also the potential for the company to lose its license to operate, as well as the risk that the appeals are not successful or that the Government does not change its mind. How do you consider the risks (collectively) in your valuation and which approach would you prefer?
Outline two (2) approaches to consider the additional uncertainty/risk in the valuation.
Explain your preferred approach and illustrate how you might apply it in the valuation.

Question 6

You attend the client presentation and as soon as questions are raised on Oceana, the senior director defers the questions to you:
(a) Based on your analysis, what do you consider the fair value of Oceana's share price?
(b) Providetwo (2) risks to the upside and two (2)to the downside in terms of the valuation.
(c) Discuss the benefit of the Haile acquisition on the company's mine portfolio. In doing so, also comment on the impact of the ramp-up of Haile on group production and potential valuation impacts.
For the purpose of answering the question:
• refer to the 2Q17 Results Presentation or Financial Results for a financial overview of the company
• assume an exchange rate of 1AUD: 0.73 USD
• the number of outstanding shares is 614.5 million
• the share price is A$4.33ps
• assume the following Project NPVs:

Question 7

Clients normally raise a few commodity specific questions when considering an investment into a project. Accordingly, prepare notes to answer the concerns that clients commonly raise below.
Important note:You may need to conduct your own independent research outside the materials supplied in the case study for Questions 3-6 to answer these questions. You should consider sources up to and including 2018.
(a) Your client may state:
Over the past six months, we have seen a fundamental shift in the demand for gold as the US and global markets moved from being unsure about the election results and the impact on financial markets to being unsure about the impact of President Trump's leadership.
(i) Explain gold exchange traded funds (ETFs) and how it contributed to gold demand in 2017. How has this changed in the fourth quarter 2017 and first half of 2018?
(ii) Getting positive investment returns from gold mining and exploration companies may mean taking into accountthose seasonal and political factors which impact the gold price and investor sentiment in addition to the gold price achieved by a company.
From your reading of the gold demand trends, provide five (5) factors and their timing that investors should be aware of when buying equities and a brief explanation as to why they might be influential.
(b) While reviewing the Didipio project, you note that the saleable product is in fact a copper gold concentrate. Accordingly, you also prepare for any questions that may arise on copper.
(i) Describe two (2) methods that are typically used for copper processing. How do they differ in terms of ore type, recovery rates and cost? What are the copper processing steps used at Didipio?
(ii) Generally speaking, companies do not receive the London Metal Exchange (LME) price for copper and instead will receive a price adjusted for charges (i.e. two types of charges) and penalties. Explain and list these costs and penalties.

Attachment:- Natural Resource Equity Analysis.rar