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Case Study: 1

A minerals company is any company that is involved in the exploration,

mining, processing and refining of precious, base and critical metals such as
gold, silver, copper, cobalt, zinc, magnesium and graphite (Hronsky and
Groves, 2008). A minerals company can therefore have several investment
projects based on its core business activities. Under exploitation, such a
company will have investment projects within geological parameters
including soil sampling, geological engineering and mine tunneling (Hronsky
and Groves, 2008). These projects involve the evaluation of potential mineral
deposit sites. Mining projects involve the actual acquisition of minerals from
the ground and involve projects like drilling, construction of tunnels,
procurement of tools and equipment as well as development of mining
infrastructure (Upstill and Hall, 2006). Processing and refining projects entail
the purification and alternation of the physical and chemical states of
minerals to enhance their capacity in purity, clarity or tensile strength. These
projects involve the establishment of processing plants and acquiring the
requisite resources to facilitate purification, testing and storage of minerals
(Upstill and Hall, 2006).

As part of the CFOs office, I expect to primarily partake in the financial

planning of Antipodes Minerals Resources Co. (AMR). This will involve the
analysis of the companys financial resources and potential outlays of the
company, to determine the profitability of proposed and existing projects and
allocate resources based on the short and long term objectives of the

company (Tulimieri and Banai, 2010). I will also be involved in the evaluation
of the companys financial risk by assessing existing projects and quantifying
the level of risk exposure the company might face if the projects fail. This will
involve an assessment of the invested capital in the project as well as the
potential of such projects to fail either due to a decrease in demand;
emergence of low cost alternatives as well as the break-even period (BEP) of
the project succeeds (Tulimieri and Banai, 2010). I will be required to
evaluate the companys financial statements to determine the overall fiscal
strength of the company. Under this responsibility, I will also be expected to
play an advisory role in making recommendations that alight with the
companys goals (Tulimieri and Banai, 2010).

Considering AMR is a public company listed on the stock exchange, the

company should manage its finances in an effort to maximize shareholder

value. The company should therefore implement strategies that increase
profits while mitigating operational costs in order to maximize efficiency and
productivity (Kraus and Strmsten, 2012). The company should also make an
effort to allocate earnings to shareholders in form of dividends in order to
increase its market capitalization and general reputation. This will enable the
company to easily raise expansion or operational capital through equity
offers thereby reducing its overall debt. The company should also consider
the equity capital as liability since it gives shareholders a stake in the
company thereby any interest in assets after all liabilities have been settled
should be allocated to shareholders (Kraus and Strmsten, 2012).

The fundamental goal of AMRs financial management framework

should be to maximize profits of a company. This will require the financial
manager to align the companys short term and long term goals in order to
achieve maximum profits in any predefined period of time (Goergen,
Renneboog and Khurshed, 2006). The company should also aim to increase
the value per share in existing stocks by enhancing its financial performance
which requires minimization of costs, minimization of risk exposure and
promotion of the growth in earnings by the financial management team.
Furthermore, when managing its finances, the company should consider that
shareholders aim to increase the value of their shares. As a result, the
company should utilize capital budgeting and only focus on projects with
high internal rates of return (IRR) in order to and net present value (NPV) in
order to maximize the value of its shares and meet shareholder expectations
(Goergen, Renneboog and Khurshed, 2006).

As a mining firm, AMR will generally degrade the environment and

cause pollution in the course of its business activities. The company should
therefore be accountable to the communities around the areas it is
conducting its business activities (Luning, 2012). AMR should for example
conduct civic education in its areas of activity to edify the public on potential
dangers that can result from the mining process as well as the potential
benefits. In addition, the company should establish free clinics that treat
ailments and infections such as repertory and eye infections that may occur
as a result dispersed pathogens during the mining process (Luning, 2012).

Furthermore, AMR should provide employment to local residents in areas

with active projects, which acts to improve the local economy. The company
should also be accountable to its employees and their respective unions by
ensuring that all employees working in the field are provided with protective
gear and are provided with health insurance cover (Jenkins and Yakovleva,
2006). AMR should also ensure it meets the requirements of environmental
interest groups which will ensure effective risk management in deference to
its reputation and also ensure product differentiation of its minerals (Jenkins
and Yakovleva, 2006). While it is essential to maximize profits, the company
should be accountable to the government and regulatory bodies in terms of
business ethics, submission of taxes and disclosure of its activities (Hronsky
and Groves, 2008).
Case Study: 2
Executive Memorandum

Clients advisers

From: The client relationship manager

Date: 10 December, 2012.
Re: Dip # 2 Fund 2008 Performance Decline
The 2008 financial year saw a decline in share offers across Australia
particularly in the second half of the year. With investors opting to stay away
from the stock market, thin liquidity and low volumes resulted in an increase
volatility which acted to inhibit prospective floatation of shares as corporate
entities opted to hold their positions (Turner, Hoffman, McInnis, Poldy and

Foran, 2011). Consequently there was a substantial decline in the number of

listed companies on the Australian Securities Exchange (ASX) 284 in 2007
financial year to 236 in the 2008 financial year (Turner, Hoffman, McInnis,
Poldy and Foran, 2011). New listings recorded a market capitalization of
$11.2 billion, with an average value of $56 million although a high
percentage (more than 50%) of these firms were in the mining industry. The
decline in market performance was also reflected in the $50.6 billion in
capital raised from the market in issues by companies listed on the ASX,
which was a decline from the $58 billion raised in 2007 (Turner, Hoffman,
McInnis, Poldy and Foran, 2011). The S&P/ASX 200 index declined by 28% in
2008 suggesting that investors would not have benefitted from staying with
the Australian share market through 2008. In fact using the S&P/ASX 200
index as a benchmark, it is highly likely that investors would have
experienced losses of up to 28% which is higher than the 25% drop in the
DIP # 2 Fund.
The Australian bond market is currently regarded as one the safest
investment opportunity which offers investors a relatively low risk/reward
ratio as a result of several convergent factors (Celk, 2012). The most
important factor is that Australia has maintained a relatively stable economy
in the midst of the global financial crisis and the subsequent global recession
and can be regarded as one of the best economies when compared to other
countries. The MSCI EAFE index indicates that Australia has a considerably
low debt to GDP ratio. The current economic conditions as well as the low

debt to GDP ratio have the allowed the country to preserve the AAA rating on
its debt and bonds (Celk, 2012). The Reserve Bank of Australia has
underscored the yield on the 10 year Australia government bonds currently
stands at 3.12%. This yield is notably higher than the yield currently being
offered by economies listed on the MSCI EAFE index. Clients are therefore
advised to transfer a portion of their investment to a Bond Fund at this point
in time is it is likely to offer relatively high returns at minimum risk. The AAA
rating on Australian sovereign debt implies the country is not likely to default
on its debt obligations and therefore investors should hedge their portfolios
with Australian Bonds (Celk, 2012).
International diversification of ones portfolio in the post Global
financial crisis era is one of the most effective ways of hedging against
market, interest rate and portfolio risk. In the post Global financial crisis era,
countries are recovering at different paces, which imply that, the portfolio is
likely to experience a degree of volatility (Knill, Lee and Mauck, 2012). For
instance the global recession is more pronounced in North America and parts
of the Euro zone such as Greece, Italy and Portugal, while countries such as
New Zealand, Australia, China and S. Korea have maintained relatively stable
economies (Knill, Lee and Mauck, 2012). However, despite the volatility, the
portfolio is likely to generate high returns considering markets are presently
at the bottom or support levels which implies that investors will be able to
purchase security assets at a relatively low cost which will increase their
returns as the global economy improves.

The fundamental risk exposure of a global investment fund largely lies

in inflation risk as different inflation rates will likely affect the performance of
the fund. Inflation which is basically the increase in price of good implies that
a similar amount of returns will buy fewer goods or services. In addition,
inflation leads to the a decline in valuation of a national currency in the
international market which results in exchange rate risk since more local
currency will be required to purchase another currency in the international
market (Huij and Derwall, 2011). Another fundamental risk is government
policies which may restrict the flexibility or performance of a global
investment fund within the specific country. China for instance in an attempt
to control inflation has occasionally regulated the value of its currency in the
international market leading to a decrease in returns for international
investment funds operating in that country (Huij and Derwall, 2011).
Financial globalization is also a leading fundamental risk in that it has
increased the rate of correlation between international markets and asset
prices thereby effectively increasing risk exposure and eliminating
diversification prospects (Knill, Lee and Mauck, 2012). In particular there has
been a marked increase in correlation within the equity markets at a rate of
up to 80%, attributed to the Increasing symbiotic relationship between
different economies, which has resulted in synchronized fundamental activity
(Knill, Lee and Mauck, 2012). For instance, China is the largest importer of
Australian gold with annual imports valued at an average of $5.6 billion.
Therefore any oscillation in the fundamental aspects of China such as

increase or reduction in nominal interest rates has a concurrent effect on the

Australian economy. These correlations in economic fundamentals have
significantly increased the level of risk exposure in global investment funds
and negated the benefits of international diversification (Knill, Lee and
Mauck, 2012). This can be exemplified by the increase in correlation
between international equity indices such as the NIKKEI200, FTSE100 and
the S&P500

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