CASE STUDY: FORTESCUE METALS

GROUP

Outline• Overview: Project A vs. Project B• Market Research

• Key countries to iron ore• Market position

• Method applied• NPV Calculation• Price Projection• Scenario Analysis

• Recommendation

FactsProject A

Key Assumptions Yearly figues

Life of the project (Years) 5

Revenues See Project A Revenues Chart

Cost of Sales (% of revenue) 40%

Other Expenses See Project A Other Expenses Chart

Opportunity cost (Cancel lease) nil

Depreciation of new equipment $ 2,000,000,000.00

Time of depreciation(Years) 5

Tax rate 30%

Cost of capital 12%

Working Capital $ 400,000.00

Inititial Outlay $ 13,750,000,000.00

Salvage value of equipment nil

Price per tonne (ao Jul 2014) $96.05

Price per barrel (ao Jun 30, 2014) $105.24

Initial Outlay -$13,750,000,000

Unit Sales 155,000,000

Price per unit $ 96.05

VC -$10,115,900,000

FC -$2,000,000,000

Discount rate 12%

Project life 5

Tax Rate 30%

Project B

Key Assumptions Yearly figues

Life of the project (Years) 5

Revenues See Project B Revenues Chart

Cost of Sales (% of revenue) 55%

Other Expenses See Project B Other Expenses Chart

Opportunity cost (Cancel lease) nil

Depreciation of new equipment $ 2,000,000,000.00

Time of depreciation(Years) 5

Tax rate 30%

Cost of capital 12%

Working Capital $ 400,000.00

Inititial Outlay $ 15,750,000,000.00

Salvage value of equipment nil

Price per tonne (ao Jul 2014) $96.05

Price per barrel (ao Jun 30, 2014) $105.24

Initial Outlay -$15,750,000,000

Unit Sales 200,000,000

Price per unit $ 96.05

VC -$13,716,100,000

FC -$2,000,000,000

Discount rate 12%

Project life 5

Tax Rate 30%

Source:Ycharts.com

Iron ore prices from April 2014-April 2015(in US$ per metric ton unit)

Causes of Iron Ore& Crude Oil prices slump

oDisappointing Chinese Trade Data oTightening Of Credit To Steel Mill oFinancial Deals

oStrong U.S. DollaroA Global Oil GlutoIran Nuclear Deal Could Add to Oversupply

Source: forbes.com, nasdaq.com

Supply and demand of Iron Ore

Fortescue Financial position: Iron Ore price and company’s results

Source:hotcopper.com.au

Fortescue Financial position: Stock and iron ore price

Source:hotcopper.com.au

Method Applied: Present value of CFs

0 1 2 3 4 5

-$20,000,000,000

-$15,000,000,000

-$10,000,000,000

-$5,000,000,000

$0

$5,000,000,000

$10,000,000,000

Project AProject B

Net Present Value

NPV$0.00

$50,000,000.00

$100,000,000.00

$150,000,000.00

$200,000,000.00

$250,000,000.00

$300,000,000.00

$350,000,000.00

Project AProject B

11

Scenario Analysis

Project A

    Sales Unit Variable  

Scenario Probability Price Sales Costs NPV

Economic Recession 30% $81.64 131,750,000 -$32.66 -$5,924,818,869

Base Case 50% $96.05 155,000,000 -$38.42 $330,569,462

Economic Boom 20% $110.46 178,250,000 -$44.18 $7,600,440,226

           

 Expected NPV = sum, prob times NPV     -$92,072,884.43

 

Standard Deviation       $4,704,311,064

12

Scenario Analysis

Project B

    Sales Unit Variable  Scenario Probability Price Sales Costs NPVEconomic Recession 30% $81.64

170,000,000 -$44.90 -$5,794,567,000

Base Case 50% $96.05 200,000,000

-$52.83 $259,034,611

Economic Boom 20% $110.46 230,000,000 -$60.75 $7,294,393,415

           

  Expected NPV = sum, prob times NPV -$149,974,111.51

 Standard Deviation      $4,552,559,094

Conclusion and RecommendationExpected NPV

Standard Deviation

Project A

-92072884.43

4704311063.65

Project B

-$1,000,000,000.00

$1,000,000,000.00

$3,000,000,000.00

Axis Title

References

• http://ycharts.com/indicators/iron_ore_spot_price_any_origin• http://ycharts.com/indicators/wti_crude_oil_spot_price• Financial Review, 2015, Fortescue pays up on revived bond deal, viewed 23 May 2015,

<http://www.afr.com/markets/debt-markets/fortescue-metals-group-pays-up-on-revived-bond-deal-20150422-1mr8o7>.

• Fortescue Metals Group Ltd, 2013, 2013 Annual Report, viewed 12 May 2015, <http://www.fmgl.com.au/UserDir/FMGReports/Documents/2013%20Annual%20report187.pdf>.

• Parrino, R et al. 2014, Fundamentals of corporate finance, 2nd edn, John Wiley & Sons Australia, Ltd, Australia.

• Reuters, 2015, Rio Tinto Ltd (RIO.AX) Company Profile, viewed 12 May 2015, <http://www.reuters.com/finance/stocks/companyProfile?symbol=RIO.AX>.

• Reuters, 2015, Wesfarmers Ltd (WES.AX) Company Profile, viewed 12 May 2015, <http://www.reuters.com/finance/stocks/companyProfile?symbol=WES.AX>.

• Seng, D, Hancock, J R 2012, ‘Fundamental analysis and the prediction of earnings’, International Journal of Business and Management [online], vol. 7(3), pp. 32-46, retrieved 18May 2015 from Proquest ABI Inform Global.

End of Presentation