Valuating & Financial Prediction of Fortescue Metals Group Ltd

Valuating & Financial Prediction of Fortescue Metals root word Ltd AFX9540 BUSINESS FINANCE Executive Summary This report is written to flip a business abbreviation of Fortescue Metals Group Ltd (FMG) where there will be a discussion on the background of the union, its return on the pre-post annunciation of raising funds, the capital structure during the global pecuniary crisis in parity to its peers and the estimation on the dower evaluation in similarity to the tangible sh be value. Fortescue Metals Group (ASXFMG) is an Australian iron ore minelaying association.The company has holdings of much than 87,000 km? in the Pilbara region of Western Australia making it the largest tenement carrier in the state. It is listed as FMG on the Australian Securities Exchange (ASX). In 2008, the aggroup loaded its first iron ore shipment bound for China. Fortescue arrive at least 10 Chinese steel mill contracts lasting for close to 10 age. Baosteel was the first company to receive their iron ore. For the share valuation, the report uses the CAPM model to determine the prevailing cost of capital and as well uses the dividend send away multistage model to predict the share wrong for the company.The servings of the CAPM model (i. e. endangerment impoverished roam, company important, foodstuff return and growth prize) are mensural and predicted on historical education. The valuation data is then discriminated with the certain foodstuff price of the shares for the corresponding geezerhood and a brief analysis is then per organise on the economic and internal reasoning behind any variance encountered. dining prorogue of Contents Executive Summary2 1. 0Brief overview of the company4 2. 0Capital Structure4 2. 1Funds raised by the company4 2. 2Usage of the fund5 2. 3Announcement encounter for the trim down5 2. 4Share-return pre and post announcement5 2. commercialise return same period6 2. 6 market Perception6 2. 7 Effect of new-fash ioned financial crisis7 3. 0 Valuation of FXJ shares7 3. 1Risk free rove computing8 3. 2Market appreciate figuring8 3. 3 important computation9 3. 4CAPM computation10 3. 5 evolution rate slowness10 3. 6Share valuation11 3. 7Comparison of valuation vs. substantial data12 3. 8 Evaluation of the variation13 4. 0 Conclusion13 Appendix 1 bills rate target14 Appendix 2 Market data for genus Beta calculation14 Reference & Bibliography 16 . 0General background of the Firm Fortescue Metals Group Ltd is the New upshot in Iron Ore and has joined the worlds leading producers of iron ore. Since the company was formed in 2003, its extraordinary growth has been unparalleled. Listed in the SP/ASX 50 share index, Fortescue has firmly established itself as one of the worlds largest producers and sea-borne traders of iron ore. From construction to Production Construction of Fortescues port, discipline and mine visit commenced in February 2006 with the twist of the first sod at the Company s port site at Anderson take aim in way Hedland.Just deuce forms later in 2008, the open-access rail infrastructure was complete andoperations were underwayat the Fortescue Herb Elliott Port and at the Companys first minesite, Cloudbreak. Shipping started on 15 whitethorn 2008 and externalise Completion was achieved within calendar months. On 18 July 2008, Fortescues fifth anniversary, the Company successfully mined, railed and shipped at a rate of 24mtpa (Million ton per annum) for a one month period. In the first full year of operations, Fortescue mined, railed and shipped much than 27 jillion tonnes of iron ore to customers in China. FinanceFortescues project was founded on the raising of A$3. 7 billion capital, including A$1 billion legality, during two finance driveway shows in August 2006 and July 2007. The August 2006 raising was the largest single high-yield Asia-Pacific transaction, the largest high-yield wed project financing ever, one of the largest corporate bon ds out of Australia and one of the largest global bond issues in the sector. Since then Fortescue has grown to become an SP/ASX 50 company. Over 55,000 Australians engage become shareholders in the proudly Australian founded and managed company.A upstanding increase in Fortescues Resource Inventory to 10. 03 billion tonnes in defect 2011, including 1. 6 billiontonnes of Reserves,positioned the company as one of the worlds major mental imagery houses. This massive Resource Inventory was achieved in record time and was delineate from approximately 10 per cent ofFortescues 88,000 square kilometres of Pilbara tenements. 2. 0Capital Structure of the Firm 2. 1Funds raised by the company 1,326,316 number of Ordinary Shares were issued to generate A$6. 3 million. 2. 2Purpose of Fund 1,326,316 number of Ordinary Shares were issued as payment for a statistical distribution of A$6. million due under the A$140m, Redeemable mouthful Share issued with maturity on or before February 2017. 2. 3Announcement date of the issue The initial announcement date for this issue of the Ordinary Share was fifteenth September 2010. 2. 4Share return from two eld before the announcement date to two days after the announcement. holding Period choke= termination Price-Beginning PriceBeginning Price ? deoxycytidine monophosphate retentivity Period Return=p1-p0p0 ? ascorbic acid P1 = closing curtain Price, P0 = Beginning Price Date Open spunky ow Close pot Adj Close* 17 Sep 2010 4. 87 4. 92 4. 83 4. 84 25,307,700 4. 82 16 Sep 2010 5. 2 5. 02 4. 85 4. 86 15,360,000 4. 84 15 Sep 2010 5. 03 5. 08 4. 99 5. 03 11,614,800 5. 01 14 S p 2010 4. 99 5. 07 4. 97 5. 02 10,319,500 5. 00 13 Sep 2010 4. 91 5. 01 4. 90 4. 97 14,643,800 4. 95 Closing price adjusted for dividend and splits Before the Announcement Date Holding Period Return=p1-p0p0 ? degree centigrade So, HPR=5. 02-4. 914. 91 ? 100 = 2. 24% after(pre token(a)) the Announcement Date Holding Period Return=p1-p0p0 ? 100 So, HPR=4. 84-5. 025. 02 ? 100 = -3. 59% 2. 5Market Return same period Date Open High offset Close Volume Adj Close* 17 Sep 2010 4,657. 70 4,692. 50 4,657. 0 4,685. 10 1,523,846,600 4,685. 10 16 Sep 2010 4,703. 00 4,707. 70 4,648. 90 4,650. 00 1,813,657,000 4,650. 00 15 Sep 2010 4,670. 10 4,710. 50 4,669. 90 4,702. 70 1,644,565,600 4,702. 70 14 Sep 2010 4,661. 40 4,688. 90 4,661. 10 4,669. 10 1,422,233,600 4,669. 10 13 Sep 2010 4,613. 30 4,660. 90 4,612. 70 4,654. 20 1,433,713,600 4,654. 20 Closing price adjusted for dividend and splits Holding Period Return=Ending Price-Beginning PriceBeginning Price ? 100 Holding Period Return=p1-p0p0 ? 100 P1 = Ending Price, P0 = Beginning Price Before the Announcement DateHolding Period Return=p1-p0p0 ? 100 So, HPR=4669. 10-4613. 304613. 30 ? 100 = 1. 21% by and by the Announcement Date Holding Period Return=p1-p0p0 ? 100 So, HPR=4685. 10-47034703 ? 100 = -0. 38% 2. 6Market Perception From the above analysis it heap be seen that the share performance o f the company and the market was stable during the pre and post two days of the announcement. Previously before the announcement the performance of both is going the akin(predicate) path (upward movement). On the other hand post announcement dilated prejudicial result (-3. 59% against -0. 38%) for Fortescue Metals Group Ltd.There might be two causes behind this one, the share price have been over estimated for which the price had to be adjusted. Secondly, the investors did non take the fund raising issue positively as they might think it would not generate much fund for the companys growth and thus unable to generate enough riches for them. 2. 7Effect of recent financial crisis BlueScope Fortescue Metals Mount Gibson OneSteel Net Gearing 2007 0% 0% 0% 46. 65% 2008 0% 0% 25. 42% 56. 72% 2009 0% 9% 6. 29% 28. 22% 2010 14. 82% 169. 90% 3. 97% 21. 45% 2011 24. 43% 183. 43% - 38. 36%Table 1 Gearing ratio-peer analysis of Fortescue Metals Group Ltd. We can conclude that the rec ent financial crisis did not propel the diligences capital structure. As of now the mining industry is going boom. In the time of recession, most of the companies will not have enough profit to repay a debt so investors are more beguileed in investing in mining industry alternatively than near other industry. By using the gearing ratio, it can be seen that Fortescues degree of leverage is higher, the more higher thecompany is considered risky. even Fortescue Metals Ltd is in truth strong with their high growth rate compared to its competitors.For them paying pip the debt would not be a big issue as they are enjoying three benefits which are one, mining industry is going boom two, Australian dollar (AUD) get stronger and three, Fortescues operations are well move to maintain the 55mtpa rate across the 2012 financial year while knowledge to 155mtpa traverses in a mixture of brownfields and greenfields projects, scheduled to take place finished to June 2013. 3. 0Valuation o f shares The dividend brush aside multistage model is a procedure for valuing the price of a ancestry by using predicted dividends and discounting them back to present value.The idea is that if the value obtained from the dividend discount multistage model is higher than what the shares are currently trading at, then the credit line is undervalued. Formula P0 = D11+R The required return can be calculated using the CAPM (capital asset pricing model) model, which becomes the cost capital of the project. Formula CAPM E(r)= Rf+? i (Rm-Rf) 3. 1Risk free rate calculation The benchmark rice beer rate in Australia was last reported at 4. 75 percent. In Australia, interest rates decisions are taken by the Reserve Bank of Australias Board.The interest rate needs to be adjusted yearly using the in force(p) Annual Rate. EAR = (1+in)n-1 EAR 2011 2010 2009 computation (1+. 0475/365)365-1 (1+. 0396/365)365-1 (1+. 0479/365)365-1 Rf 4. 86% 4. 03% 4. 90% Table 2 Risk Free rate 3. 2Market rate ca lculation The calculation of market return will include statistics from 5 years to counteract any data abnormality from recession or seasonal worker spikes. 2005 2006 2007 2008 2009 2010 2011 Calculation 4,229. 93,546. 1-1 5,034. 04,225. 9-1 6,310. 65035. 4-1 3,947. 85,345. 8-1 3,947. 85,345. 8-1 4,324. 83,934. 4-1 4,659. 84,309. -1 Return 0. 1928 0. 1912 0. 2532 -0. 1549 -0. 2615 0. 0992 0. 0811 Average Market return based on five years performance is Rm2011 = (0. 2532-0. 1549-0. 2615+0. 0992+0. 0811)5 = 0. 0034 = 0. 34% Rm2010 = (0. 1912+. 2532-0. 1549-0. 2615+0. 0992)5 = 0. 0254 = 2. 54% Rm2009 = (0. 1928+0. 1912+0. 2532-0. 1549-0. 2615)5 = 0. 04416 = 4. 42% 3. 3Beta calculation The beta is taken from FinAnalysis. Beta (? ) is a number describing the relation of its returns with those of the financial market as a whole. The beta coefficient is a key parametric quantity in the capital asset pricing model (CAPM).It measures the part of the assets statistical variance that cannot be removed by the diversification provided by the portfolio of galore(postnominal) risky assets, because of the correlation of its returns with the returns of the other assets that are in the portfolio. Formula for Beta is i=1nRi-ER2n-1 entropy from 2009 to 2011 has been utilize and a data of 3 years is used to calculate the beta. 2009 2010 2011 ? 0. 91 0. 80 0. 88 A beta of greater than 1 indicates that the securitys price will be more evaporable than the market. Fortescue Metals Ltd has a beta of 0. 88 therefore it is less volatile than the market. 3. CAPM Calculation Hence, using Capital Asset Pricing Model (CAPM) as compulsory Return E(r)= Rf+? i (Rm-Rf) 2009 2010 2011 Calculation 4. 90% + 0. 88(4. 42%-4. 90%) 4. 03% + 0. 88(2. 54%-4. 03%) 4. 86% + 0. 88(0. 34%-4. 86%) Return 4. 48% 2. 72% 0. 88% Table 4 Cost of Capital 3. 5Growth Rate Calculation Growth rate calculation represents thecompounded annualized rate of growth of a companys revenues, earnings, dividends, etc. T he manifestation for growth rate = Return on equity X Plowback ratio = ROE ? (1-DividendEPS) This growth rate will be used for the calculation of share prices for the last three years.ROE, DIV and EPS from 2009 to 2011 are shown at a lower place 2009 2010 2011 ROE 13. 62% 51. 57% 75. 36% DIV ($) - - 7. 0 EPS ($) 21. 90 22. 12 31. 88 Table 5 Financial data g2011 = ROE(2011) (1- Div(2011)/EPS(2011)) = 75. 36%(1-7/31. 88)= 58. 81% g2010 = ROE(2010) (1- Div(2010)/EPS(2010)) = 51. 57%(1-0/22. 12)= 51. 57% g2009 = ROE(2009) (1- Div(2009)/EPS(2009)) = 13. 62%(1-0/21. 90)= 13. 62% Below is the summary of the data discussed Components 2009 2010 2011 Er 4. 48% 2. 72% 0. 88% Rf 4. 86% 4. 03% 4. 90% Rm 4. 42% 2. 54% 0. 34% ?i 0. 91 0. 80 0. 88 13. 62% 51. 57% 58. 81% Table 6 Summarisation of component 3. 6Share Valuation To calculate the value of the shares, we need to determine the method of valuation so mixed stage dividend model can be used to calculate the value of the share. Bearing in mind the business nature, we can see an average of 41. 33% growth which is abnormally high. For the purpose of calculation we will presume this high growth rate will continue for some other 40-45 years at least. As it is a new mining company and as we know that the return comes late so, the growth rate is high even after a long term.From 2053 onwards we birth that the business will grow at 7% rate, which we believe is a conservative approach, as because by then there will be many mining companies opening both domestically and internationally. China is progressing very fast and by next 15-20 years they will level up, not just China India, South Africa, South America etc are also catching-up fast, so due to the high competition the market would not watch the same and it will change consecutively as forecasted. The valuation calculation will take this assumption towards establishing the model. P2009=i=20092012D0 (1+g)i(1+Ke)i + Pi(1+Ke)iP2010=i=20102012D0 (1+g)i(1+Ke)i + Pi(1+Ke)i P2011=i=20112012D0 (1+g)i(1+Ke)i + Pi(1+Ke)i Growth Rate Net Cash Flow Cost of Capital D2009 -13,643 4. 48% D2010 1,877,963 2. 72% D2011 41. 33% 4,206,365 0. 88% D2012 50% 4,906,922 0. 92% D2013 55% 6,767,080. 65 0. 99% D2014 60% 10,435,594. 64 0. 99% D2015 60% 16,587,385. 22 0. 96% D2016 60% 26,477,415. 36 0. 98% D2017 60% 42,346,454. 77 1% D2018 60% 67,743,188. 44 0. 95% D2019 60% 108,379,297. 7 0. 96% D2020 60% 173,398,415. 1 0. 98% D2021 60% 277,429,356. 2 1% D2022 60% 443,881,664. 5 0. 98% - - - - D2052 8. 19% 13,101,273,811 0. 98% D2053 7% 22,933,861. 67 0. 98% P2009 3. 89 P2010 3. 61 P2011 5. 46 Table 7 Summary calculation 3. 7Comparison of valuation vs. actual data From the valuation calculated through the process, now we will compare that with the actual data from the market. Year Valuation Data Actual Data Variance Comment 2009 3. 89 3. 64 -6. 40% Undervalued 2010 3. 61 3. 96 9. 64% Overvalued 2011 5. 46 5. 98 9. 43% Overvalued Table 8 comparison of actual and calculated data 3. Evaluation of the variation The valuation of the shares seems to be in the right track compared with the market trend. Nevertheless, post state gives a more variable scenario. Dividend was replaced by using the net operation Cash Flow per share. The operation cash decrease only represents the cash flow rate in the companys operation activities whilst the company also have investing activities and financing activities. Thus, only use of the operation cash flow in the valuation has a high percentage of uncertainty. According to the table above, the actual price is undervalued.The valuation can be endorsed to the lower than pass judgment risk premium in the market resulting from the controlled risk free rate determined by the government. Another issue can be AUD getting stronger compared to USD, resulting additional dent on the nominal cost of capital for the company. In the later part of the table, the actual price is overvalued. In order to illustrate this phenomenon, one possible reason is swelling. Inflation is an overall general shew in prices. As we know, global financial crisis happened few years back, the emergence of the financial crisis was significant on the whole market and caused inflation.Therefore, due to inflation, the market prices are higher than the actual prices. Another possible reason is some unpredicted economic/natural events happened during this period and lead to movements of the market price. On the other hand the factors can be attributed to the assumptions and predictions using the calculation components. CAPM formula and Beta calculation has its own risk and de-merits. The growth rate is potently manipulated by the industrys landscape, economic status and political issues.The information available could also affect the actual share prices in the market which will impact on decision making for share buyers/sellers. The share price valuation will be varied from one investor to another depends on the ir information. As there is an existence of asymmetric information in the market, one cannot estimate the share price exactly the same with the actual share price. Besides, the investors behaviour are different between one another, hence, the ensample of the actual share price is not only based on market returns in general, but also depends on whether the level of the risk that the investors are willing to bear. . 0Conclusion In conclusion, we need to consider about inflation and unpredicted events when we investigate the market price. In addition, we need to distinguish nominal interest rate and real interest rate when we calculate. Appendix 1 Cash rate target Effective date New cash rate Adjusted cash rate 2011 4. 75 5 May 2010 4. 75 2010 3. 96 7 Apr 2010 4. 50 3 Mar 2010 4. 25 2 Dec 2009 4. 00 4 Nov 2009 3. 75 7 Oct 2009 3. 50 8 Apr 2009 3. 00 4 Feb 2009 3. 25 2009 4. 79 3 Dec 2008 4. 25 5 Nov 2008 5. 25 8 Oct 2008 6. 00 3 Sep 2008 7. 00 Appendix 2 Market Da ta for beta calculation Date Open High Low Close Volume Adj Close 3/10/2011 0. 81 0. 94 0. 79 0. 89 18267300 0. 89 1/09/2011 0. 85 0. 9 0. 74 0. 82 16091200 0. 82 1/08/2011 0. 87 0. 92 0. 68 0. 85 15948300 0. 85 1/07/2011 0. 98 1. 01 0. 86 0. 88 11603100 0. 88 1/06/2011 1. 09 1. 09 0. 94 0. 98 17479100 0. 98 2/05/2011 1. 32 1. 33 1. 03 1. 08 21843500 1. 08 1/04/2011 1. 29 1. 37 1. 25 1. 32 17067200 1. 32 1/03/2011 1. 29 1. 3 1. 17 1. 29 18402900 1. 29 1/02/2011 1. 34 1. 46 1. 28 1. 3 14583200 1. 3 4/01/2011 1. 4 1. 42 1. 33 1. 35 10259000 1. 5 1/12/2010 1. 37 1. 46 1. 36 1. 4 18060000 1. 4 1/11/2010 1. 44 1. 49 1. 32 1. 37 15254000 1. 37 1/10/2010 1. 45 1. 55 1. 4 1. 45 12209300 1. 45 1/09/2010 1. 47 1. 57 1. 44 1. 47 10714700 1. 47 2/08/2010 1. 48 1. 52 1. 33 1. 44 12983000 1. 43 1/07/2010 1. 3 1. 51 1. 29 1. 48 10254300 1. 46 1/06/2010 1. 52 1. 52 1. 26 1. 32 17287600 1. 3 3/05/2010 1. 72 1. 76 1. 4 1. 51 19697600 1. 5 1/04/2010 1. 79 1. 83 1. 72 1. 73 12311100 1. 71 1/03/2010 1. 62 1. 86 1. 62 1. 8 16808300 1. 78 1/02/2010 1. 7 1. 88 1. 64 1. 65 17412500 1. 63 4/01/2010 1. 74 1. 88 1. 7 1. 73 13261300 1. 71 1/12/2009 1. 63 1. 75 1. 56 1. 74 8904800 1. 72 2/11/2009 1. 55 1. 77 1. 52 1. 63 11449600 1. 62 1/10/2009 1. 72 1. 8 1. 52 1. 61 14759100 1. 59 1/09/2009 1. 46 1. 75 1. 42 1. 72 18761900 1. 7 3/08/2009 1. 49 1. 55 1. 4 1. 47 18455600 1. 46 1/07/2009 1. 19 1. 48 1. 07 1. 48 15136300 1. 46 1/06/2009 1. 15 1. 35 1. 15 1. 22 15624600 1. 21 1/05/2009 1. 18 1. 18 0. 99 1. 14 15047200 1. 13 1/04/2009 1. 01 1. 19 1. 01 1. 18 16260500 1. 17 2/03/2009 0. 95 1. 08 0. 8 1. 01 18923300 1. 01 2/02/2009 1. 35 1. 39 0. 92 1. 08 9490000 1. 07 /01/2009 1. 64 1. 76 1. 25 1. 4 5383300 1. 39 1/12/2008 1. 4 1. 67 1. 33 1. 63 7776700 1. 62 3/11/2008 1. 94 2. 09 1. 12 1. 35 8740000 1. 34 1/10/2008 2. 75 2. 76 1. 85 1. 92 6877000 1. 9 1/09/2008 2. 82 3. 11 2. 59 2. 64 7193700 2. 62 1/08/2008 2. 65 3. 05 2. 58 2. 82 10400800 2. 79 1/07/2008 2. 9 3. 2 2. 57 2. 75 8612800 2. 72 Re ferences & Bibliography * http//www. asx. com. au/asx/ query/companyInfo. do? by=asxCode&asxCode=FMG * http//www. investsmart. com. au/shares/asx/Fortescue-Metals-Group-FMG. asp * http//www. fxj. com. au/shareholders/Fairfax_AnnualReport_2011. df * http//www. fmgl. com. au/IRM/Company/ShowPage. aspx/PDFs/2147-13354473/Appendix3 bAllotmentofShares * http//au. finance. yahoo. com/q/ao? s=FMG. 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AX&a=08&b=13&c=2010&d=08&e=17&f=2010&g=d 3 . http//au. finance. yahoo. com/q/hp? s=%5EAORD&a=08&b=13&c=2010&d=08&e=17&f=2010&g=d 4 . ttp//www. bluescopesteel. com/investors/annual-reports 5 . http//www. igo. com. au/IRM/content/investor/annualreports. htm 6 . http//www. mtgibsoniron. com. au/pages2/InvestRelations. aspx? PageID=IR_AR 7 . http//www. aspecthuntley. com. au. ezproxy. lib. monash. edu. au/af/company/annualratios? ASXCode=OST&xtm-licensee=finanalysis 8 . http//www. investopedia. com/terms/d/ddm. aspaxzz1aBqlpkfj Table 3 Market return 9 . http//www. tradingeconomics. com/australia/interest-rate 10 . http//www. aspecthuntley. com. au. ezproxy. lib. monash. edu. au/af/company/annualps