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ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF IRAN Kazem Oraee PhD Professor, Stirling University, Stirling, UK Arash Goodarzi MSc Research Fellow, Ministry of Labor and Social Affairs, Tehran, Iran Nikzad Oraee-Mirzamani LLB, MSc, DIC Research Student, Imperial College London, London, UK 1 Iran is a developing country with a transitional economy – heavily dependent on the export of raw materials. Government's share in GDP was 80 percent in 2005 It is widely accepted that public enterprises and large state-owned market players are no longer the most efficient way of running the economy and that a wide-ranging reform is necessary across Iran’s economy. Iran’s GDP=$ 331 billion (2009) WORLD BANK report The program was launched as part of the government's 10-year plan to privatize 80 percent of state-owned assets. The government's assets were estimated at about $120 billion. Since 2005 $63 billion of the assets have been privatized. 2 Copper ore production in Iran accounts for 75% of the total production in the Middle East. Mining of copper ore and the related industries play an important role in Iran’s economy. 3 All activities related to copper (exploration, production, refinement etc) are owned and managed by state owned companies. Click on Icon National Iranian Copper Industries Co (N.I.C.I.Co) Decisions have been made to privatize all these activities. 4 Privatization: The partial or total transfer of property or responsibility from the public sector (government) to the private sector (business). The private sector is the “engine of growth” 5 Objectives of privatization - To relieve the financial and administrative burden of the government; - to improve efficiency and increase productivity; - to facilitate economic growth; - to help meet national development targets; - to reduce the size and presence of the public sector in the economy; 6 History of Privatization Thatcher elected 1979. The Great Britannia has had a good infrastructure for controlling . - BP (1979) - British Aerospace (1981) - Cable and Wireless (1983) - Jaguar (1984) - British Telecom (1984) - British Gas (1986) - British Airways (1987) - Rolls Royce (1987) Result • It is rightly accomplished by a sale of company shares to the general public. 7 According to the foundations of communism: The union soviet’s government control the means of production. The Soviet Union and Eastern Europe’s economies reached an impasse in the mid 80s by the lack of management and low productivity in industries. The government spending increased sharply as an increasing number of unprofitable enterprises required state support. 8 General Secretary Mikhail Gorbachev (1985-91) introduced openness and restructuring in an attempt to modernize communism with a program called Perestorika. The program permitted private ownership of businesses in the services, manufacturing, and foreign-trade sectors. Rapid mass privatization led to corruption by managers and controlling shareholders. The State’s assets were being stolen by enterprise managers, politicians and bureaucrats at an intolerable rate. 9 The Yeltsin era was marked by widespread corruption in the privatization program especially in huge industries like mining and oil. Privatization Russian multi billionaires rose through the anarchy of post-USSR. They became rich by cheaply acquiring stock in newly privatized Russian companies. This was while 20% of the population lived below the national poverty line. ((WORLD BANK report)) 10 Economic analysis is a systematic approach for determining the optimum use of scarce resources. It involves comparing alternative ways for achieving a specific objective under given conditions and constraints. Necessary for decision making concerning investment activities in every business. 11 Economic analysis takes into account the opportunity costs of resources employed and attempts to measure in monetary terms the private and social costs and benefits of a project to the community or economy. A popular strategy for firms is profit maximization or at times the minimization of losses. 12 Financial resources are limited; investors must choose the best investment opportunity. Potential investors need certainty in the current capabilities of a private company. They require financial knowledge and trust in the management in researching financial goals. 13 In Iran investing on mining projects in the stock exchange is thought to be lucrative since approximately one third of the economy is dependent on the activities in the mining sector. Therefore for the purposes of N.I.C.I.Co (National Iranian Copper Industries Co) raising capital through the sale of its shares in the stock exchange is thought to be a positive step since it is a large corporation and is bound to provide attractive investment opportunities. 14 Everyone is on the look out for investment opportunities, be it individuals or institutions (or even States). Investment opportunities will have different rankings according to their level of predicted profitability. Even if the investor faces one good investment opportunity, it must be compared to other profit-generating activities. Thus the concept of the opportunity cost has to form an integral part of every economic analysis. 15 Generally, balance sheet, profit and loss accounts and other financial statements published by public companies present raw, and in some cases meaningless numbers without much analysis . 16 The balance sheet Assets Current assets Cash balance Short-term investments 2009 (million$) 2008 2007 (million$) (million$) Liabilities and Shareholders’ Equity 2009 Current debts (million$) 2008 2007 (million$) (million$) 111.20 225.46 109.07 Commercial revenue accounts 41.92 17.65 6.00 146.10 36.12 0.00 Other revenue accounts 217.28 203.40 468.65 Commercial revenue accounts and deeds 162.47 280.67 186.20 Deferred credit 3.48 4.40 46.31 Other revenue accounts Materials and goods in hand Orders and prepayments Total current assets Non-current assets Tangible fixed assets Non-tangible assets Long-term investments Other assets Total non-current assets 75.07 61.47 97.89 Tax saving 124.60 100.44 67.42 437.95 414.08 360.52 Payable dividends 52.30 3.58 42.51 97.34 78.22 48.11 Received financial facilities 67.43 64.53 71.33 801.79 Total current debts Non-current debts 507.01 394.00 702.22 Long-term payable accounts 2.76 2.76 2.76 1,030.13 1,096.02 1,163.91 1,118.92 1,131.96 20.72 20.67 10.78 Long-term financial facilities received 134.67 186.68 255.25 20.53 0.53 0.53 Employees’ retirement bonus saving 73.70 51.77 28.63 147.87 132.64 166.77 Total non-current debts Total non-current liabilities 211.13 241.21 286.64 Total liabilities 718.14 635.21 988.86 Capital 578.96 578.96 578.96 Legal reserve 137.34 106.03 61.77 Other reserves 12.59 12.59 12.59 Accumulated profit 936.12 1,035.98 469.64 1,353.03 1,272.76 1,310.04 Shareholders’ equity Total assets Disciplinary accounts 2,383.16 2,368.78 2,111.83 379.81 404.87 690.46 Total shareholders’ equity 1,665.01 1,733.56 1,122.96 Total liabilities and shareholders’ equity 2,383.15 2,368.77 2,111.82 Disciplinary accounts party 379.81 404.87 690.46 Profit/Loss account of N.I.C.I.Co for the recent triennial fiscal years 2009 2008 2007 (million $) (million $) (million $) Net 1,627.60 1,954.01 1,692.17 Cost of finished products 805.89 803.92 719.30 Gross profit 821.71 1,150.09 972.87 Sales, administrative, public expenditures costs 75.71 113.09 126.18 Other income and operational costs 16.00 5.45 22.21 Operational profit 730 1,031.55 824.48 Financial costs 26.46 29.25 40.44 Other incomes and non-operational costs 5.02 19.28 1.45 Profit emanating from normal activities before deducting taxes 708.56 1,021.58 785.49 Profit tax of normal activities 82.34 122.75 59.02 Net profit 626.22 898.83 726.47 Dividends of each share-Net 0.11$ 0.15$ 0.12$ Description 18 Economic analysis Investment 19 Sale analysis Sale analysis is the process of breaking a complex topic such as sale into smaller parts to gain a better understanding of it. A sale analysis is an investigation of a market that is used to forecast the next sales, according to past experiences and prediction of future conditions. Sale analysis is vital when perfect competition prevails in a market, whereas it is not so important in cases of a monopoly producer. 20 The market for the production of copper in Iran is a pure monopoly market. Furthermore a company enjoying monopoly power is not subjected to competitive pressure from the market. Many clients have had to endure long delays before being able to buy products from N.I.C.I.Co in Iran. 21 Sale (Import & Export) analysis for 2009 Production For Import For Export Total For Import Weight (ton) For Export Total % Value (million $) Sulfide’s ore 223,202 0 223,202 1.34 0.00 1.34 0.08 Concentration of copper 0 193,606 193,606 0.00 264.48 264.48 16.25 Cathode copper 75,519 57,766 133,285 409.42 299.42 708.84 43.55 3,953 494 4,447 108.90 18.08 126.98 7.80 329 0 329 22.83 0.00 22.83 1.40 Wire rod 73,624 1,494 75,118 429.50 12.02 441.52 27.13 Slab 644 0 644 2.76 0.00 2.76 0.17 Low grade copper 2,694 50,944 53,638 2.46 56.06 58.52 3.60 Sulfuric acid 4,988 0 4,988 0.33 0.00 0.33 0.02 977.54 650.06 1,627.60 ( 60%) ( 40%) (=100%) Concentration of Molybdenum Concentration of gold & silver Total The sale: Import 60% & Import 40% 100 Main production: Cathode copper & Wire rod Cost estimation Costs as well as revenues must be calculated in economic analysis. Costs are the monetary value of expenditures for: - supplies - services - equipment - labor - products - other items purchased for use by a company or other accounting entity 23 The global recession and collapse of copper prices has forced the closure of many high cost mines and adversely impacted on project development. The rapid pace of change in the copper industry makes it even more important for producers and industry observers to truly understand the drivers on cost and profitability, as well as the implications for future copper mining. 24 The table of finished products cost for the fiscal years For the last fiscal year % to cost finished million $ products For the two fiscal year ago % to cost finished million $ products Wages (Direct) -150.64 -18.69 -133.31 -16.58 Consumption material and parts -107.30 -13.31 -91.75 -11.41 Overhead -367.31 -45.58 -332.63 -41.38 The costs have not been expended to cause halt in production 6.57 0.82 18.61 2.31 Total of production costs -618.68 76.77 -539.08 -67.06 -67.41 8.36 -27.89 -3.47 -132.65 16.46 -279.55 -34.77 The purchase of cathode copper -9.55 1.19 0.00 0.00 Recovery of sulfide’s ore 10.68 -1.33 13.56 1.69 Production (inventory) value increase 11.72 -1.45 34.55 4.30 The purchase of oxide’s ore for leaching operation 0.00 0.00 -5.51 -0.69 Cost of finished products -805.89 100.00 -803.92 100.00 Description The cost of wastage in process production The purchase of scrap & concentration copper Total cost $800 million 25 Overheads the largest group of costs (40% of the total costs) It is usually used to group costs that are necessary for the continued functioning of the business, but which do not directly generate profits. - Energy - Depreciation - Transport They include - Rent - Repairs - Supplies - Other such costs 26 The table of overhead cost for fiscal years: 2009-2008 Description of costs $ million Depreciation Stripping Energy Light transportation Cleanliness & horticulture Equipment maintenance Rent of truck Engineering services Rent of mining equipment Depletion Health aids to personnel Ore haulage Personnel nutrition Drilling Non cash aids to personnel Other costs Rent of office & guesthouse Gathering of the wastage copper Heap embankment Total overhead cost 117.30 85.38 23.88 21.35 20.07 18.84 14.62 11.34 10.76 7.28 6.47 5.99 4.66 4.60 4.58 4.40 2.34 2.14 1.31 367.31 2009 % to total overhead cost 31.94 23.25 6.50 5.81 5.46 5.13 3.98 3.09 2.93 1.98 1.76 1.63 1.27 1.25 1.25 1.20 0.64 0.58 0.36 100% $ million 120.91 77.29 23.29 14.67 15.08 20.00 5.40 10.23 7.81 8.50 5.33 4.56 3.93 0.54 4.14 5.11 2.27 1.63 1.93 332.63 Depreciation + Stripping 55% of overhead cost 2008 % to total overhead cost 36.35 23.24 7.00 4.41 4.53 6.01 1.62 3.08 2.35 2.56 1.60 1.37 1.18 0.16 1.25 1.54 0.68 0.49 0.58 100% 27 The prediction of price Pricing and breakeven analysis will determine the impact of a price change on the business. Copper is a finite resource, but, unlike oil, it is not dissipated and therefore can be recycled. Recycling is a major source of copper production in the modern world. 28 As consumption in India and China increases, copper supplies are becoming scarcer. Nevertheless some reports forecast an increasing demand in the near future as the global economic growth resumes. A rise in raw material prices, especially in the metals occurred in recent months. 11 Feb 2011 = $9,920.50 per ton 29 The average price of cathode copper from 2000 to 2010 $8,780 per ton $2,540 per ton weakening global demand and a steep fall in commodity prices 30 Calculation The values of the project in the future ≠ The value of the project in the past ≠ The value of the project in the present Therefore in order to assess the profitability of a potential investment opportunity, one must compare the present value of a project with the value derived from other investments. The Net Present Value [NPV] (a useful method for economical evaluation) = The sum of discounted values of all future returns less initial investment It is a standard method for using the time value of money to appraise long-term projects. 31 Economical evaluation of N.I.C.O.Co for the next 10 years The total assets in 2008 were assumed as our cash flow for year 0 Year Cash Cash in out NCF million million million $ $ $ 2,400 -2,400 PVIF (15%) DCF (15%) PVIF (20%) 1.000 -2400 DCF DCF PVIF DCF (20%) PVIF (25%) (25%) 1.000 -2400 1.000 -2,400 1.000 -2400 (27.8%) (27.8%) 0 0 1 750 0 750 0.870 652.5 0.833 624.75 0.800 600.00 0.782 586.5 2 750 0 750 0.756 567 0.694 520.5 0.640 480.00 0.612 459 3 750 0 750 0.658 493.5 0.579 434.25 0.512 384.00 0.479 359.25 4 750 0 750 0.572 429 0.482 361.5 0.410 307.50 0.375 281.25 5 750 0 750 0.497 372.75 0.402 301.5 0.328 246.00 0.293 219.75 6 750 0 750 0.432 324 0.335 251.25 0.262 196.50 0.230 172.5 7 750 0 750 0.376 282 0.279 209.25 0.210 157.50 0.180 135 8 750 0 750 0.327 245.25 0.233 174.75 0.168 126.00 0.141 105.75 9 750 0 750 0.284 213 0.194 145.5 0.134 100.50 0.110 82.5 million $ 1,179.0 623.3 198 1.5 The sum of net profit and depreciation in 2009 were assumed as cash inflow for years 1, 2, 3, 4, 5, 6, 7, 8, and 9 The cash flow table is formed according to the balance sheet and the profit and loss account Net present value is computed for: PVIF = 15%, 20%, 25% and 27.8% The NPV is positive for 15%, 20% and 25% The discount rate that makes the algebraic sum of future returns and initial investment is equal to zero and is called the Inter Rate Ratio (IRR). IRR is 27.8% where the amount of NPV becomes nil 33 Where inflation and risk are not accounted for, Net Growth is 10% and is therefore an acceptable rate. If however inflation is taken to • Therefore a project be 20% in average (as it has been where the IRR is 27.8% will be in Iran during the past 25 years) UNECONOMICAL. PVIF = 10 + 20 = 30% 34 It is widely believed that if current governmental organizations are privatized they will need to become more efficient. At present many are not profitable. 35 Privatization in Practice 40% of the shares of N.I.C.I.Co were offered to the public on two occasions, 20% each time. In 2007 the first 20% of the company was sold for $1.1 billion. The investors were other state-owned organizations! Including: - pension funds - state banks - state broadcasting industry All shares sold in less than 7 minutes The public did not have the opportunity to invest in the company. 36 Laws must be strengthened to minimize the potential for corruption before a privatization program can be effective. Experiences in the last schemes of privatization indicate the desirability of speedy mass privatization techniques, resulting in full transfer of the interests, without special deals for insiders and without attaching lingering investment or employment obligations. 37 38