Financial analysis of mining projects

Abstract

Financial analysis of mining projects can be known by studying the financial statements. Financial statements are official records of the financial actions of a company, firm or other unit over a period of time which provide a general idea of a company or person's financial situation in mutually short and long term. They give a precise representation of a company’s condition and working results in a reduced form. Financial statements are used for supervision tool mainly by company executives and investor’s in assess the overall situation and working results of the company.
Analysis of financial statements helps in formative the liquidity situation, long term solvency, financial feasibility and prosperity of a firm. Financial ratio analysis show whether the firm is performing well or not in past years. Furthermore, comparison of unlike aspect of the entire firms can be done efficiently with this. It helps the traders to make a decision in which firm the threat is less or maximum benefit can be earned.
Mining industry is capital demanding. For this reason a lot of capital is needed to invest in it. Before taking decisions on investing in such company, one has to cautiously study its financial status and worth. An effort has been made in this project to analyse the financial conditions of two non- coal and one coal mining company and one coal mine of MCL (CIL) has been carried out.
OBJECTIVES
 Development of Turbo C++ of version 4.9.9.2 programs for balance sheet and income statement.
 Collecting financial data from different non-coal and coal companies.
 Analysis of financial statements of different non-coal and coal companies/mine.
 Comparing financial ratios of different companies.
Computer programs were developed in Turbo C++ for the preparation and analysis of balance sheet and income statement. The program can be upgraded/modified using other software to enhance its applicability.
The project was mainly focused on detailed studies on financial statements of different coal and non-coal companies and calculation of financial ratios. Ratio analysis of three companies i.e. Indian Rare Earths Ltd. (IREL), Hindustan Copper Ltd. (HCL), Coal India Limited (CIL) and one coal mine of MCL (CIL) was carried out.
 From ratio analysis of IREL of financial year 2006-07 to 2010-11 it was found that the company liquidity position was strong. Current ratio, quick ratio, cash ratio, gross profit margin, debt ratio, debt equity ratio, capitalization ratio were good while operating profit margin, net profit margin are not good except for the financial years 2006-07 to 2008-09. Return on assets (ROA) and return on equity (ROE) was unsatisfactory except for 2007-08. Fixed asset turnover ratio and total asset turnover ratio were less in all the financial years.
 In HCL, the working capital, quick ratio, gross profit margin, debt ratio, debt-equity ratio and capitalization ratio were good whereas current ratio is not high. Cash ratio was reported to be less during financial years 2008-10. Operating profit margin, net profit margin, ROE, return on investment (ROI), return on capital employed (ROCE), Return on long term funds were overall good. The profit margin was low in financial year 2008-09 due to sudden fall in copper price in International market.
 For CIL, the working capital, current ratio, quick ratio, cash ratio, gross profit margin, net profit margin, ROE, ROI, ROCE, debt ratio, debt-equity ratio and capitalization ratio were good but the operating profit margin, fixed asset turnover ratio and total asset turnover ratio were not. The operating expenses of CIL were too high.
 For Lakhanpur coal mine area, MCL the financial ratios were calculated for 2008-09 to 2010-11. Working capital, current ratio, quick ratio and cash ratio, debt ratio, debt-equity ratio and capitalization ratio were not satisfactory. So the mine may face shortage of cash due huge debts. Gross profit margin, operating profit margin,net profit margin, ROE, ROI, fixed asset turnover ratio and total asset turnover ratio were reasonably good.
In this project, comparison of different ratios for three companies HCL, IREL and CIL was done for financial years 2006-07 to 2010-11.
 It was concluded that CIL was having very good financial condition in all the financial years and it could be seen that it was increasing as the financial year move ahead. HCL financial condition was not good as the value of current ratio of HCL could not reach to its limit. While IREL was having current ratio 1.41 in the year 2006-07 this showed the non-availability of cash but in other years the company maintained a well financial condition by keeping its current ratio above 2.
 Cash ratio of IREL was always good while CIL was having cash ratio below 1 for two consecutive financial years i.e. from 2006-08 but after that its cash ratio was above 1 hence the company was having enough cash in hand for handling any financial situation. But in case of HCL, the cash ratio was below 0.5 for financial years i.e. from 2008-10 so the company was not having enough cash with it during that financial years. While the company managed to maintain its cash ratio above 0.5 for other financial years
 The gross profit obtained by CIL is significantly higher than IREL and HCL. It means that CIL was making huge profit as compared to other two companies. Gross profit of IREL varied between 55-59% so the company was making consistently good profit for all the years. In HCL, gross profit was too low in 2008-2009 i.e. 32.33%. The reason for this reduction of profit was the decrease of copper price in world market.
 When comparing operating profit margin, it was seen that IREL was performing well by keeping the value above 25% during the financial years 2006-07 to 2008-09. In HCL the operating profit was very less in financial year 2008-09 due to sudden decrease in copper price in international market. But CIL operating expenses were so high that it operating profit margin was always negative.
Return on assets of IREL was very high in financial year 2007-08. While for HCL, return on assets was negative in financial year 2008-09 and the net profit obtained by the company was negative i.e. there was a loss during that financial year, for which ROA became negative. While CIL had maintained a good ROA during the financial years 2006-11 that meant CIL utilized its assets properly as compared to the other companies.
 ROI of IREL was also good in 2006-09. ROI of HCL was very high in financial year 2006-07 and was very low in financial year 2008-09 due to decrease in copper price in world market. While CIL had maintained a good ROI during the financial years 2006-11 that meant CIL had utilized its investments properly.
 The debt ratio of CIL and IREL was nearly equal in all the financial years except the financial year 2006-07 in which the debt ratio of IREL was 0.53. HCL has decreased its debt ratio from 0.6 to 0.3 from financial year 2006-07 to 2009-10 but again rose to 0.353 from 0.3 in financial year 2010-11. It implies that the company borrowed some amount of money for expansion of its project.
 HCL had good fixed asset turnover ratio compared to other two companies as it was having very less fixed assets in initial years but later it decreased from 3.12 to 1.52 during 2006-07 to 2010-11. IREL maintained a good asset turnover ratio throughout. CIL turnover was very less as compared to its assets.