Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Copper BUS 419 Presentation Edward Ng, May Lu, Daphne Hou, Ken Vong, Raymond Au Copper • Oldest metal known to humans • One of the most used and reused metals • Infinite recyclable life Copper • Known resource 5.8 trillion pounds • Only 0.7 trillion pounds (12%) are mined • Also essential to human health Industry • Global production • Prices are determined at LME & COMEX • Prices might also be affected through speculative trading and currency exchange Source: http://www.unr.edu/sb204/geology/intro.htm Industry • 3rd most widely used metal • Sensitive to political situation • Producers store copper in warehouses until it is sold and shipped to buyer • Prices: Contango Industry Industry Products • Sources – Ore – Scraps • Forms – Rods – Cathodes – Concentrate Products • Wires – Substitution • Fiber Optics • Pipes/Tubes – Substitution • Steel • Plastics • Aluminum Production of Copper Source: http://www.nymex.com, http://www.copper.org, http://www.lme.co.uk Industry Suppliers • Energy (Electricity, Diesel Fuel, and Natural Gas) • Scraps • Ore • Capital Equipment (example: Machineries) Source: http://www.nymex.com Buyer • Used in highly cyclical industries Source: http://www.nymex.com, http://www.copper.org, http://www.lme.co.uk Industry % Building Electrical Gen. engineering Light engineering Transport Other 48 17 16 8 7 4 Total 100 Rivals • 77 firms internationally competing • Compete on price/low cost production • Product Quality • Customer Service Key Success Factors • Economies of Scale • Refining technologies • Location Cost Structure • Research and Development • Exploration • Transportation • Storage Cost Structure • General Operation Cost • Sales and Administrative • Interest expenses • Depreciation, Depletion and Amortization Revenue Composition • Mining revenue • Financial activities revenue (example: Hedging) Risks • Economic and Political • Cyclical and Volatile price of Copper and other substitutes • Environmental Conditions • Licenses and Permits Risks • Availability of materials and equipment • Volatility in energy prices • Foreign Exchange • Interest Rate Risks • Laws and Regulations • Weather • Lower ore grades • Equipment failure Hedging Activities • Energy Prices • Copper Prices • Exchange Rates • Interest Rates Regulations • Global Environmental Protection Laws – Clean Air Act (CAA) – Resource Conservation and Recovery Act (RCRA) – National Pollutant Discharge Elimination System (NPDES) Regulations • Financial Reporting – GAAP – FASB 133 – Bureau of Land Management (BLM) Phelps Dodge Corporation Phelps Dodge • Phelps Dodge Corp. is the world’s second-largest producer of copper • World leader in the production of molybdenum – Largest producer of molybdenumbased chemicals • Leading producers of magnet wire and carbon black Source: Phelps Dodge Corporation case study, http://www.freemarkets.com/en/literature/ CaseStudy_PhelpsDodge.pdf Corporate Profile • Phelps Dodge (PD) is a producer of: – – – – Copper Carbon black Magnet wire Continuous-cast copper rod • PD consists of 2 divisions – Phelps Dodge Mining Company (PDMC) – Phelps Dodge Industries (PDI) PDMC • Comprises 11 reportable segments – 5 located in the U.S. • Morenci, Bagdad/Sierrita, Miami/Bisbee, Chino/Cobre and Tyrone – 3 located in South America • Candelaria, Cerro Verde and El Abra – Manufacturing and Sales – Primary Molybdenum – Other minings PDMC cont… • Includes the worldwide, vertically integrated copper operations from: – – – – Mining through rod production Worldwide mineral exploration Development programs Other mining operations and investments – Marketing and sales PDI • PDI comprises 2 segments – Specialty Chemicals – Wire and Cable Direct Competitors • BHP Billiton Ltd. (Melbourne, Australia) • Codelco (Corporación Nacional del Cobre, Chile) • Rio Tinto PLC (London, England) Cost Structure • High unit cost structure for copper production – lower ore grades – higher labor costs – stricter regulatory requirements • Lean-production program – Quest for Zero – Narrows cost disadvantages – Achieved $330 million of operating improvements during 2003 Hedging Philosophy • Not purchase, hold or sell derivative contracts unless an existing asset, obligation is present or the occurrence of a future activity is anticipated and will result in exposure of market risk • Not enter into any contracts for speculative purposes • Use various strategies to manage market risks • Derivative instruments are used to manage well-defined commodity price, energy, foreign exchange and interest rate risks from primary business activities Derivative Financial Instruments • • • • • • • • Metals Hedging Metal Purchase Hedging Foreign Currency Hedging Interest Rate Hedging Energy Price Protection Programs Other Protection Programs Credit Risk Stock Option Plans Metals Hedging • Fair Value Hedges – Copper fixed-price hedging • At December 31, 2001, PD had net futures and swap contracts for approximately 25 million pounds of copper • Cash Flow Hedges – Copper price protection program – Copper scrap purchase hedging Metal Purchase Hedging • South American wire and cable operations may enter into aluminum swap contracts • These swap contracts settled during the month of shipment or receipt of metal • Hedge gains or losses from the swap contracts are recognized in cost of products sold • At December 31, 2001, PD had outstanding swap contracts for approximately 13 million pounds of aluminum Metal Purchase Hedging • Metal Hedge Programs in place: – 2001: 17 Millions – 2002: 16 Millions – 2003: 26 Millions Foreign Currency Hedging • Fair Value Hedges – Foreign currency transactions increase risks – forward exchange and currency option contracts – At December 31, 2001, PD had foreign exchange contracts in place with a total face value of approximately $13 million Interest Rate Hedging • Fair Value Hedges – Fixed-to-Floating interest rate swaps • In December 2001, PD entered into several interest rate swap contracts to hedge $400 million of fixed-rate debt • PD entered into interest rate swap contracts to convert fixed-rate debt to floating-rate debt • Cash Flow Hedges – Floating-to-Fixed interest rate swaps • At December 31, 2001, PD had entered into interest rate swap contracts to hedge $364 million of floating-rate debt Interest Rate Hedging Floating-to-Fixed interest rate swaps Swap Contracts Unrealized Loss ($ Million) 200 3 200 2 2001 $12 $23 $21 Energy Price Protection Programs • Cash Flow Hedges – Diesel fuel price protection program • option and fixed-price swap contracts to price protect 82 percent of the forecasted diesel fuel consumption. – Natural gas price protection program • call option contracts to protect 80 percent of the planned natural gas consumption – Feedstock oil price protection program Energy Price Protection Programs Option Premiums ($ Million) 2003 2002 2001 Diesel fuel price protection program $1 $0.9 $1 Natural Gas Price Protection Program $3 $2.2 $3 Feedstock Oil Price Protection Program $0.8 $0.7 Other Protection Programs • Copper fixed-price rod sales program – At December 31, 2001, PD had net futures and swap contracts for approximately 47 million pounds of copper • Currency swap transactions – At December 31, 2001, PD had in place $15 million in currency swap contracts • Gold price protection program • Copper quotational period swap program • Other diesel fuel price protection programs Other Protection Programs Unrealized Gain/(Loss) 2003 ($ Million ) 2002 Copper Fixed Price Rod Sales Program $(0.5) $(1.6) $4.4 Gold Price Protection Program $(1.8) Copper Quotational Period Swap Program $1.2 2001 Summary of Price Protection Program 12/31/03 Fair Value Hedges Copper fixed-price (lbs.) 12/31/02 11 17 Foreign currency (USD) $ 19 16 Fixed-to-floating interest rate swaps (USD) $ — 375 10 14 121 274 37 24 8 4 Copper fixed-price rod sales (lbs.) 42 37 Copper quotational period swaps (lbs.) 14 — Other diesel fuel price protection (gallons) 13 — Cash Flow Hedges Metal purchase (lbs.) Floating-to-fixed interest rate swaps (USD) Diesel fuel price protection (gallons) Natural gas price protection (decatherms) $ Derivative Financial Instruments Not Qualifying for Hedge Accounting *Units are in millions Credit Risk • PD is exposed to credit loss in cases where there is a default in the obligation of the protection agreement • Only use highly rated financial institutions • Review the creditworthiness periodically • The maximum amount of credit exposure was approximately $8 million Stock Option Plans • Executives and other key employees have been granted options to purchase common shares under stock option plans adopted in 1993, 1998 and 2003 • The option price equals the fair market value of the common shares on the day of the grant • An option’s maximum term is 10 years Compensation Plan • Restricted Stock Option Plan • Directors Stock Unit Plan Restricted Stock Option Plan • The issuance of the option to executives and other key employees, without any payment by them • Subject to certain restrictions Restricted Stocks Outstanding at December 31, 2000 Granted Shares: 219,578 11,700 Terminated (26,533 ) Released (15,011 ) Outstanding at December 31, 2001 189,734 Granted 205,700 Terminated (19,800 ) Released (16,450 ) Outstanding at December 31, 2002 359,184 Granted 118,000 Terminated (6,200 ) Released (19,078 ) Outstanding at December 31, 2003 451,906 Director Stock Unit Plan • Provides to each non-employee director an annual grant of stock units to our common shares • This plan replaced the 1989 Directors Stock Option Plan Options outstanding for the combined plan Avg option Price Per Share Shares Outstanding at December 31, 2000 8,179,836 Granted 1,420,090 Exercised Expired or terminated Outstanding at December 31, 2001 Granted Exercised Expired or terminated Outstanding at December 31, 2002 Granted Exercised Expired or terminated Outstanding at December 31, 2003 $ 60.95 34.80 (12,403 ) 40.30 (468,670 ) 60.73 9,118,853 56.91 802,800 40.12 (8,080 ) 30.24 (978,972 ) 57.56 8,934,601 55.36 15,500 43.23 (1,958,523 ) 50.82 (501,536 ) 74.32 6,490,042 55.23 Fair-Value of each option grant 2003 2002 2001 Expected dividend yield 0.00 % 3.04 % 3.16 % Expected stock price volatility 43.4 % 38.8 % 40.9 % 2.9 % 3.3 % 3.4 % Risk-free interest rate Expected life of options 5 years * Using a Black-Scholes option-pricing model to estimate 3 years 3 years Exercisable options by range of exercise prices Range of exercise price Options exercisable at Dec. 31, 2003 Weighted average outstanding option price $27-40 604,338 $ 34.42 $ 40-60 2,563,606 $ 51.88 $ 60-80 2,266,756 $ 70.02 $ 80-100 129,976 $ 83.82 Total 5,564,676 Financial Analysis PD’s 2-year Financial Summary Financial Highlight • Revenue (2003): – PDMC $2,485.8 mil – PDI $1,236.2 mil • Operating income: 197.6mil • Net Income: 94.8 mil • Cash from Operation: $470.50 mil • ROA: 0.33% • ROE: 0.16% • EPS: $ 0.046 Financial Analysis • Income Statement 2003 • Balance Sheet 2003 • Cash Flow Statement 2003 Revenue History for PD Quarters 2000 2001 Mar 1,119,700 1,100,700 918,500 978,000 June 1,112,900 1,063,500 966,800 962,200 Sept 1,193,400 937,000 941,200 1,031,100 Dec 1,099,100 901,200 895,500 1,171,400 Total 4,525,100 4,002,400 3,722,000 4,142,700 All figures are in thousands of U.S. Dollars 2002 2003 PD’s stock price (2000-2004) Falconbridg e Limited Section Agenda • • • • Company Background Financial Analysis Risk Management and Hedging Strategy Stock Option Plan Corporate Profile • Founded in 1928 • Leading low-cost metal producer and metalbearing processor • Core businesses: copper and nickel Ranking twelfth in terms of mined production Third-largest producer and account 8% of world nickel supply • Market Capitalization: $6.17 Billion • 6400 employees in 13 countries • Owned by Noranda Inc. of Toronto (59%), and other investors (41%) as 2002 Subsidiaries and Associated Divisions • • • • • Nickel Sudbury Raglan Nikkelverk A/S Falconbridge Dominicana (85.26%) Custom Feed • • • • Copper Collahuasi (44%) Kidd Mining Division Kidd Metallurgical Division Lomas Bayas Financial Highlights • • • • • • • • Revenues: Operating Income: Earnings: Cash from operation: Capital Exp and Def Cost: ROA: ROE: EPS: 2,394 Mil 137 Mil 73 Mil 341 Mil 358 Mil 4% 3% $0.34 Financial Analysis • Income Statement Revenue Source • Balance Sheet • Statement of Cash Flow • 2-year stock price and historical data Future Outlook • Remain focus on exploration, development and production of nickel and copper metals • Continue to work closely with Noranda Cost saving & operation efficiency • Achieve efficiency, production, and cost objectives set by each operation. • Projects are kept in budget and in schedule Risk Management & Hedging Strategy Risk Management Philosophy • Earnings are directly related to fluctuations in the price of its metal. • Enters into contractual (derivatives) agreement to reduce (hedge) the exposure by creating offset position. • Limited use of financial instruments for discretionary trading purpose. • Primary hedges $US/Can currency exchange rate. Risk Exposures • Commodity price risk Nickel, copper, cobalt, and zinc Market prices can be affected numerous uncontrollable factors: e.g., global demand • Currency exchange risk Principally in Can/US$ exchange rate Operating cost in Canadian site are in Can$ Norway site are in Norway Risk Exposures (Cont’… • Interest rate risk Cross-currency Principally in US and Canadian interest rate Highly related with interest payable • Production process risk Risk and hazard in production Geographical factors Subject to monetary loss and possible legal liability Risk Exposures (Cont’… • Energy price risk Represents a significant percentage of operating cost • Contingency risk Estimation of future restoration is subject to the change of law and legislation and technology innovation Hedging Strategies • Commodity price Futures and options contract for hedging Purchase call options to fix the price associated, and reserve upside potential • Currency exchange To hedge these currency exposure: Issuing debt in the foreign currency denominated as the investment Entering into foreign exchange forward and option contracts Hedging Strategies • Interest ate Swap with terms range from 6.5 to 9.5 years Fixed to float and float to fixed are used Weighted average interest rate was 5.35% • Production process Contract with insurance companies • Energy price Established the three-year 10% cost reduction plan Use the futures and options to hedge the energy prices Hedging Effects • Foreign exchange hedging strategy gained 13.3 million • Reduced energy cost by 5.0 million from the part of the three-year 10% cost reduction plan • Reduced other expenses by 3.2 million from futures/forwards and options positions in current year Sensitivities of the Change in Metal Prices Stock Option Plan Stock Option Plan • Two classes of stock option plans: Employee Stock Option Plan Granted to officers and employees Exercise price is priced at the fair value using B-S model since 2002 Before 2002, exercise = market value Deferred Share Unit Plan Effective in 2002 Approved for non-employee directors Employee Stock Option Plan • Terms and Vesting: 10 year term vesting provision of 20% on the first anniversary date and further 20% per year thereafter Accelerated vesting feature was attached to stock options granted since 2000 Deferred Share Unit Plan • DSU is equivalent to common share • Elect to be paid annual retainer fee in deferred share units (DSU) or in cash • Dividend equivalent will be credited to DSU when dividend to common share is approved • DSU is redeemable in cash or common shares after resignation Recommendation • Hedge Copper, Fuel, Interest rate and Foreign Exchange – Capital Intensive – Better match for R&D expenditures and future cash flows Questions?