economioc analysis of the copper mining indusdry of iran

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ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF IRAN Research Student, Imperial College London, London, UK Kazem Oraee PhD Professor, Stirling University, Stirling, UK Arash Goodarzi MSc Research Fellow, Ministry of Labor and Social Affairs, Tehran, Iran Nikzad Oraee-Mirzamani LLB, MSc, DIC Sarcheshmeh Copper Complex 1

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ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF IRAN. Kazem Oraee PhD. Professor, Stirling University, Stirling , UK. Arash Goodarzi MSc. Research Fellow, Ministry of Labor and Social Affairs, Tehran, Iran. Nikzad Oraee-Mirzamani LLB, MSc, DIC. - PowerPoint PPT Presentation

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Page 1: ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF IRAN

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ECONOMIOC ANALYSIS OF THE COPPER MINING INDUSDRY OF IRAN

Research Student, Imperial College London, London, UK

Kazem Oraee PhD

Professor, Stirling University, Stirling, UK

Arash Goodarzi MScResearch Fellow, Ministry of Labor and Social Affairs, Tehran, Iran

Nikzad Oraee-Mirzamani LLB, MSc, DIC

Sarcheshmeh Copper Complex

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Iran is a developing country with a transitional economy – heavily dependent on the export of raw materials.

It is widely accepted that public enterprises and large state-owned market players are no longer the most efficient way of running the economy and that a wide-ranging reform is necessary across Iran’s economy.

The government's assets were estimated at about $120 billion. Since 2005 $63 billion of the assets have been privatized.

Government's share in GDP was 80 percent in 2005

Iran’s GDP=$ 331 billion (2009)WORLD BANK report

The program was launched as part of the government's 10-year plan to privatize 80 percent of state-owned assets.

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Copper ore production in Iran accounts for 75% of the total production in the Middle East.

T h e M i d d l e E a s t

Mining of copper ore and the related industries play an

important role in Iran’s economy.

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Package

Decisions have been made to privatize all these activities.

National Iranian Copper Industries Co (N.I.C.I.Co)

Clic

k on

Icon

All activities related to copper (exploration, production, refinement etc) are owned and managed by state owned companies.

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Privatization:The partial or total transfer of property or responsibility from the public sector (government) to the private sector (business).

The private sector is the “engine of growth”

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Objectives of privatization- To relieve the financial and administrative burden of the

government;

- to help meet national development targets;

- to improve efficiency and increase productivity;

- to facilitate economic growth;

- to reduce the size and presence of the public sector in the economy;

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Result • It is rightly accomplished by a sale of company shares to the general public.

History of Privatization

7

- Rolls Royce (1987)

Thatcher elected 1979.

- BP (1979)

- British Aerospace (1981)

- Cable and Wireless (1983)

- Jaguar (1984)

- British Telecom (1984)

- British Gas (1986)

- British Airways (1987)

The Great Britannia has had a good infrastructure for controlling .

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The government spending increased sharply as an increasing number of unprofitable enterprises required state support.

The union soviet’s government control the means of production.

The Soviet Union and Eastern Europe’s economies reached an impasse in the mid 80s by the lack of management and low productivity in industries.

According to the foundations of communism:

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General Secretary Mikhail Gorbachev (1985-91) introduced openness and restructuring in an attempt to modernize communism with a program called Perestorika.

Rapid mass privatization led to corruption by managers and controlling shareholders.

The program permitted private ownership of businesses in the services, manufacturing, and foreign-trade sectors.

The State’s assets were being stolen by enterprise managers, politicians and bureaucrats at an intolerable rate

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The Yeltsin era was marked by widespread corruption in the privatization program especially

in huge industries like mining and oil.

Russian multi billionaires rose through the anarchy of post-USSR.

They became rich by cheaply acquiring stock in newly privatized Russian companies.

Privatization

This was while 20% of the population lived below the

national poverty line.((WORLD BANK report))

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Economic analysis is a systematic approach for determining the optimum use of scarce resources. It involves comparing alternative ways for achieving a specific objective under given conditions and constraints.

Necessary for decision making concerning investment activities in every business.

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Economic analysis takes into account the opportunity costs of resources employed and attempts to measure in monetary terms the private and social costs and benefits of a project to the community or economy.

A popular strategy for firms is profit maximization or at times the minimization of losses.

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Financial resources are limited; investors must choose the best investment opportunity.

Potential investors need certainty in the current capabilities of a private company. They require financial knowledge and trust in the management in researching financial goals.

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In Iran investing on mining projects in the stock exchange is thought to be lucrative since approximately one third of the economy is dependent on the activities in the mining sector.

Therefore for the purposes of N.I.C.I.Co (National Iranian Copper Industries Co) raising capital through the sale of its shares in the stock exchange is thought to be a positive step since it is a large corporation and is bound to provide attractive investment opportunities.

Stock Exch

ange

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Investment opportunities will have different rankings according to their level of predicted profitability.

Everyone is on the look out for investment opportunities, be it individuals or institutions (or even States).

Even if the investor faces one good investment opportunity, it must be compared to other profit-generating activities. Thus the concept of the opportunity cost has to form an integral part of every economic analysis.

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Generally, balance sheet, profit and loss accounts and other financial statements published by public companies present raw, and in some cases meaningless numbers without much analysis.

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Assets 2009

(million$)

2008

(million$)

2007

(million$)

Liabilities and Shareholders’ Equity 2009

(million$)

2008

(million$)

2007

(million$)Current assets Current debts

Cash balance 111.20 225.46 109.07 Commercial revenue accounts 41.92 17.65 6.00

Short-term investments 146.10 36.12 0.00 Other revenue accounts 217.28 203.40 468.65Commercial revenue accounts and deeds 162.47 280.67 186.20 Deferred credit 3.48 4.40 46.31

Other revenue accounts 75.07 61.47 97.89 Tax saving 124.60 100.44 67.42

Materials and goods in hand 437.95 414.08 360.52 Payable dividends 52.30 3.58 42.51

Orders and prepayments 97.34 78.22 48.11 Received financial facilities 67.43 64.53 71.33

Total current assets 1,030.13 1,096.02 801.79 Total current debts 507.01 394.00 702.22

Non-current assets Non-current debtsTangible fixed assets 1,163.91 1,118.92 1,131.96 Long-term payable accounts 2.76 2.76 2.76

Non-tangible assets 20.72 20.67 10.78 Long-term financial facilities received 134.67 186.68 255.25

Long-term investments 20.53 0.53 0.53 Employees’ retirement bonus saving 73.70 51.77 28.63

Other assets 147.87 132.64 166.77 Total non-current debts

Total non-current assets 1,353.03 1,272.76 1,310.04 Total non-current liabilities 211.13 241.21 286.64

Total liabilities 718.14 635.21 988.86

Shareholders’ equity

Capital 578.96 578.96 578.96

Legal reserve 137.34 106.03 61.77

Other reserves 12.59 12.59 12.59

Accumulated profit 936.12 1,035.98 469.64

Total shareholders’ equity 1,665.01 1,733.56 1,122.96

Total assets 2,383.16 2,368.78 2,111.83 Total liabilities and shareholders’ equity 2,383.15 2,368.77 2,111.82

Disciplinary accounts 379.81 404.87 690.46 Disciplinary accounts party 379.81 404.87 690.46

Total asset ≈ $2.3 billion

The balance sheet

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Description2009 2008 2007

(million $) (million $) (million $)

Net 1,627.60 1,954.01 1,692.17

Cost of finished products 805.89 803.92 719.30

Gross profit 821.71 1,150.09 972.87

Sales, administrative, public expenditures costs 75.71 113.09 126.18

Other income and operational costs 16.00 5.45 22.21

Operational profit 730 1,031.55 824.48

Financial costs 26.46 29.25 40.44

Other incomes and non-operational costs 5.02 19.28 1.45

Profit emanating from normal activities before deducting taxes 708.56 1,021.58 785.49

Profit tax of normal activities 82.34 122.75 59.02

Net profit 626.22 898.83 726.47

Dividends of each share-Net 0.11$ 0.15$ 0.12$

Profit/Loss account of N.I.C.I.Co for the recent triennial fiscal years

Net profit (annual) ≈ $750 million

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Eco

nom

ic a

naly

sis

Investment

Sale

analysis Cost

estimation

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Sale analysis is the process of breaking a complex topic such as sale into smaller parts to gain a better understanding of it.

A sale analysis is an investigation of a market that is used to forecast the next sales, according to past experiences and prediction of future conditions.

Sale analysis is vital when perfect competition prevails in a market, whereas it is not so important in cases of a monopoly producer.

Sale analysis

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The market for the production of copper in Iran is a pure monopoly market.

Many clients have had to endure long delays before being able to buy products from N.I.C.I.Co in Iran.

Furthermore a company enjoying monopoly power is not subjected to competitive pressure from the market.

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Production

For Import

For Export Total For

ImportFor

Export Total%

Weight (ton) Value (million $)

Sulfide’s ore 223,202 0 223,202 1.34 0.00 1.34 0.08

Concentration of copper 0 193,606 193,606 0.00 264.48 264.48 16.25

Cathode copper 75,519 57,766 133,285 409.42 299.42 708.84 43.55

Concentration of Molybdenum 3,953 494 4,447 108.90 18.08 126.98 7.80

Concentration of gold & silver 329 0 329 22.83 0.00 22.83 1.40

Wire rod 73,624 1,494 75,118 429.50 12.02 441.52 27.13

Slab 644 0 644 2.76 0.00 2.76 0.17

Low grade copper 2,694 50,944 53,638 2.46 56.06 58.52 3.60

Sulfuric acid 4,988 0 4,988 0.33 0.00 0.33 0.02

Total977.54

( 60%)650.06

( 40%)1,627.60(=100%)

100

Sale (Import & Export) analysis for 2009

The sale: Import 60% & Import 40% Main production: Cathode copper & Wire rod

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Cost estimationCosts as well as revenues must be calculated in economic analysis.

Costs are the monetary value of expenditures for:

- supplies

- services

- other items purchased for use by a company or other accounting entity

- labor

- products

- equipment

A cost i

s the v

alue of m

oney that has

been used

up to produce someth

ing.

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The rapid pace of change in the copper industry makes it even more important for producers and industry observers to truly understand the drivers on cost and profitability, as well as the implications for future copper mining.

The global recession and collapse of copper prices has forced the closure of many high cost mines and adversely impacted on project development.

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DescriptionFor the last fiscal year For the two fiscal year ago

million $ % to cost finished products million $ % to cost finished

products

Wages (Direct) -150.64 -18.69 -133.31 -16.58

Consumption material and parts -107.30 -13.31 -91.75 -11.41

Overhead -367.31 -45.58 -332.63 -41.38

The costs have not been expended to cause halt in production 6.57 0.82 18.61 2.31

Total of production costs -618.68 76.77 -539.08 -67.06

The cost of wastage in process production -67.41 8.36 -27.89 -3.47

The purchase of scrap & concentration copper -132.65 16.46 -279.55 -34.77

The purchase of cathode copper -9.55 1.19 0.00 0.00

Recovery of sulfide’s ore 10.68 -1.33 13.56 1.69

Production (inventory) value increase 11.72 -1.45 34.55 4.30

The purchase of oxide’s ore for leaching operation 0.00 0.00 -5.51 -0.69

Cost of finished products -805.89 100.00 -803.92 100.00

Total cost $800 million

The table of finished products cost for the fiscal years

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Overheads the largest group of costs (40% of the total costs)

It is usually used to group costs that are necessary for the continued functioning of the business, but which do not directly generate profits.

They include

- Energy

- Depreciation

- Supplies

- Transport

- Repairs

- Rent

- Other such costs

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Description of costs2009 2008

$ million % to total overhead cost $ million % to total overhead

costDepreciation 117.30 31.94 120.91 36.35

Stripping 85.38 23.25 77.29 23.24Energy 23.88 6.50 23.29 7.00

Light transportation 21.35 5.81 14.67 4.41Cleanliness & horticulture 20.07 5.46 15.08 4.53Equipment maintenance 18.84 5.13 20.00 6.01

Rent of truck 14.62 3.98 5.40 1.62Engineering services 11.34 3.09 10.23 3.08

Rent of mining equipment 10.76 2.93 7.81 2.35Depletion 7.28 1.98 8.50 2.56

Health aids to personnel 6.47 1.76 5.33 1.60Ore haulage 5.99 1.63 4.56 1.37

Personnel nutrition 4.66 1.27 3.93 1.18Drilling 4.60 1.25 0.54 0.16

Non cash aids to personnel 4.58 1.25 4.14 1.25Other costs 4.40 1.20 5.11 1.54

Rent of office & guesthouse 2.34 0.64 2.27 0.68Gathering of the wastage copper 2.14 0.58 1.63 0.49

Heap embankment 1.31 0.36 1.93 0.58Total overhead cost 367.31 100% 332.63 100%

The table of overhead cost for fiscal years: 2009-2008

Depreciation + Stripping 55% of overhead cost

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The prediction of price

Pricing and breakeven analysis will determine the impact of a price change on the business.

Copper is a finite resource, but, unlike oil, it is not dissipated and therefore can be recycled.

Recycling is a major source of copper production in the modern world.

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As consumption in India and China increases, copper supplies are becoming scarcer.

Nevertheless some reports forecast an increasing demand in the near future as the global economic growth resumes. A rise in raw material prices, especially in the metals occurred in recent months.

11 Feb 2011 = $9,920.50 per ton

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The average price of cathode copper from 2000 to 2010

$1,377 per ton

$8,780 per ton

weakening global demand and a steep fall in commodity prices

$2,540 per ton

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Calculation

The values of the project in the future ≠ The value of the project in the past ≠ The value of the project in the present

Therefore in order to assess the profitability of a potential investment opportunity, one must compare the present value of a project with the value derived from other investments.

The Net Present Value [NPV] (a useful method for economical evaluation) =

The sum of discounted values of all future returns less initial investment

It is a standard method for using the time value of money to appraise long-term projects.

NPV

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Year

Cash in

Cash out NCF

PVIF (15%)

DCF(15%)

PVIF (20%)

DCF(20%)

PVIF (25%)

DCF(25%)

PVIF(27.8%)

DCF(27.8%)million

$million

$million

$

0 0 2,400 -2,400 1.000 -2400 1.000 -2400 1.000 -2,400 1.000 -2400

1 750 0 750 0.870 652.5 0.833 624.75 0.800 600.00 0.782 586.5

2 750 0 750 0.756 567 0.694 520.5 0.640 480.00 0.612 459

3 750 0 750 0.658 493.5 0.579 434.25 0.512 384.00 0.479 359.25

4 750 0 750 0.572 429 0.482 361.5 0.410 307.50 0.375 281.25

5 750 0 750 0.497 372.75 0.402 301.5 0.328 246.00 0.293 219.75

6 750 0 750 0.432 324 0.335 251.25 0.262 196.50 0.230 172.5

7 750 0 750 0.376 282 0.279 209.25 0.210 157.50 0.180 135

8 750 0 750 0.327 245.25 0.233 174.75 0.168 126.00 0.141 105.75

9 750 0 750 0.284 213 0.194 145.5 0.134 100.50 0.110 82.5

million $ 1,179.0 623.3 198 1.5

Economical evaluation of N.I.C.O.Co for the next 10 years

The cash flow table is formed according to the balance sheet and the profit and loss account

The total assets in 2008 were assumed as our cash flow for year 0

The sum of net profit and depreciation in 2009 were assumed as cash inflow for years 1, 2, 3, 4, 5, 6, 7, 8, and 9

Present Value Index Factor

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IRR is 27.8% where the amount of NPV becomes nil

The discount rate that makes the algebraic sum of future returns and initial investment is equal to zero and is called the Inter Rate Ratio (IRR).

Net present value is computed for:

PVIF = 15%, 20%, 25% and 27.8%

The NPV is positive for 15%, 20% and 25%

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Where inflation and risk are not accounted for, Net Growth is 10% and is therefore an acceptable rate.

• Therefore a project where the IRR is 27.8% will be UNECONOMICAL.

If however inflation is taken to be 20% in average (as it has been in Iran during the past 25 years)PVIF = 10 + 20 = 30%

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It is widely believed that if current governmental organizations are privatized they will need to become more efficient.

At present many are not profitable.

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Privatization in Practice40% of the shares of N.I.C.I.Co were offered to the public on two occasions, 20% each time.

In 2007 the first 20% of the company was sold for $1.1 billion.

- pension funds All shares sold in less than 7 minutes

The investors were other state-owned organizations!

- state broadcasting industry

Including:

The public did not have the opportunity to invest in the company.

- state banks

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Laws must be strengthened to minimize the potential for corruption before a privatization program can be effective.

Experiences in the last schemes of privatization indicate the desirability of speedy mass privatization techniques, resulting in full transfer of the interests, without special deals for insiders and without attaching lingering investment or employment obligations.

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Thank you very much for your attention