The mining industry is a major contributor to the growth of the Indian economy. The sector deals with companies that explore and extract ores from the earth’s crust. These ores are further refined to convert them into usable metal forms. The metal is then converted into different forms like sheets, foils, bars, pipes etc for use in different sectors.
In India, over the years, companies have developed expertise in extracting and cleaning specific metal or alloy outputs.
• Steel Authority of India, Tata Steel – Iron Ore
• Hindustan Zinc – Zinc, Lead
• Hindalco, Nalco – Aluminium
Companies like Sesa Sterlite have expertise in extracting and developing multiple ores like Zinc, Aluminium, Copper etc.
Analysis of revenue drivers
• Revenue generation for mining companies is heavily dependent on the amount of earth they can extract and the grade of the ore.
• Grade of ore depends on the amount of metal extracted from a tonne of ore after it is refined.
• Since natural ores are national resources, the government charges royalty fees from the ore extractors. The royalty payments vary across different sectors within the mining sector.
Some of the important investment related variables for the companies in this sector are as follows:
• Amount of reserves owned by the company
• Ease of extraction of ore from the mines. The easier it is to extract ore, the lower is the cost of production, indicating higher profitability.
• Production rate at every mine. Higher production rate implies greater revenue can be clocked within a given period.
• Grade of ore being mined. A Better grade of ore leads to greater amount of metal extracted from the same quantity of ore.
• Type and prices of metal being mined. More revenue accrues to the company for metals that have high market prices in the market.
• Geographies where the company has a presence. If the company has its presence in places close to source of ore or close to the end consumers, the transportation cost of the products is reduced.
• Fall in commodity prices. Fall in prices of metal will reduce the revenue accrued
• Government instability. Political uncertainty creates risk for the uninterrupted supply of ores.
• Currency fluctuation. Usually, regions where ores are mined and where the metals are used by end consumers are different. So any adverse movement in the exchange rates is detrimental to the revenues of the company.
• Adverse taxation and royalty clauses levied by certain governments
• Low grade ore bodies owned by the companies
• Interruptions to supply due to terrorist threat, inclement weather etc.
Valuation metric to be used
• Mining sector companies are valued using the sum of parts valuation method. Every mine is built out to find out the future cash flow that it will generate and then the net present value of all the cash flows of every mine are worked out. The sum of these cash flows gives the value locked in every mine. The sum of all such values gives the Net Asset Value (NAV) of the mining assets owned by the company.
• The relative valuation multiple used for valuing companies in the mining sector is P/NAV (indicates how much the investor is ready to pay for the underlying assets as indicated by the NAV). EV / EBITDA multiple for valuing the company can also be employed.
https://www.proschoolonline.com/blog/wp-content/uploads/2018/03/proschoolonline-logo.jpg00Adminhttps://www.proschoolonline.com/blog/wp-content/uploads/2018/03/proschoolonline-logo.jpgAdmin2014-11-10 14:19:042017-11-11 10:59:23Metals and Mining