Business Envrionment Analysis: New Earth Company's Investment into Mining Iron Ore

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17th Nov 2020 Business Assignment Reference this

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Part 1: The Business Environment

Business environment is the total of the internal and external factors that affect the running of the business. In some cases, these factors are beyond the control of the business. These factors are referred to as external business environment. In South Africa, one of the external business environments that New Earth had worries before they invest in the mining of iron ore was the political factors (Fruhan and Wei, 2013). Political factors are the activities of the government that may affect a business, for example, regulation regulations by the law, trade barriers, war and also unrest of the people. South Africa was ranked as one of the top most countries that are likely to be affected by political factors therefore affecting the mining of the iron expected to be mined. In the neighboring countries, there was a large risk of a civil war (Smit, De Beer and Pienaar, 2016). This was a threat to the mining of iron ore in South Africa since the war could always extend to South Africa hence causing disasters to the mine expected. There was constant fear that the government could decide to use the mineral for the benefit of the nation just like how many African non-developed countries do. If this was done, this could mean loss to the mining of iron ore in South Africa.

The Strategy for the project

According to the United States Geological Survey, South Africa was ranked 14 as the world iron ore reserves. It was estimated to have one billion of iron ore. Also, South Africa was ranked the 7th in the production of iron ore around the world (Ferreira and Leite, 2015). New Earth had a strategy when they learned of the existence of iron ore. New Earth’s strategy was to start the venture of mining in the year 2015. The extent of the iron ore deposit was analyzed by the Drexel Corporation by New Earth, a construction and an engineering firm. The firm found an estimated 30 million tons of the ore deposit that contained an average of 60% content of iron ore. It would have a great investment since the deposit of iron ore was massive and this meant profits alone. If the New Earth would extract 2 million tons each and every year, it would take them 15 years to completely diminish the deposits of ore in the reserve. According to the Drexel Corporation, there was less need for infrastructure development since the place was already developed according to the research that was done by the corporation. Therefore, the total investment for the mining of iron ore would amount to $ 200 million dollars. 40% would be required in the investment at the beginning of the year 2013 that is $ 80 million dollars. The rest, which is 60%, would be required at the beginning of 2014 which was 120 million dollars (Fruhan and Wei, 2013).

The Business Activity

Iron ore was mainly consumed by the companies that used steel. South Korea, China and Japan, were the top most countries that had the most needs of the iron ore. This is because vehicle production in these countries is wide to be exported all over hence high demand for iron ore. Also iron ore was to be used for various uses, not only the car industry. New Earth, therefore, had market already (Fruhan and Wei, 2013). They were to export this iron ore to the countries where ready market was available. By then, the demand for iron ore was at its peak and the prices were booming fast. This means that the mined mineral by New Earth could not possibly go to waste as there was high demand for iron ore.

Part 2: Organize the Financial Data

Accounting Environment

The environmental accounting is the subset of the accounting proper (Minnis & Sutherland, 2017). Its aim is to bring together the environmental information and the economic information. The accounting environment analyzes the resource to be used, the measures and the communication cost of the company. New Earth in this case is to use the resources it has generated in the mining of gold to invest in the mining of iron ore which currently has high demand especially from China, Japan and South Korea (Fruhan and Wei, 2013). 

Accounting Strategy

Accounting policies refers to the specific procedures and policies that are implemented by the management of the company’s team and it is mainly used to prepare the financial statement (Minnis & Sutherland, 2017). The strategy of New Earth was to firs look out the profits that could be raked in by the mining of the iron ore before it starts exploiting it. Then, the possibility of wars and political instability was analyzed before the investment was done. They had to ensure that there was no disturbance of their work before the even started. This made China come and ensure their safety so that mining can be done.

Accounting System

An accounting system refers to the system that is used to manage the expenses, income and financial activities that belongs to a business (Minnis & Sutherland, 2017). New Earth has kept its records clean and in a chronological order that enables them to see the finance clearly. The debts of the New Earth are clearly set and also the profits set. This data enables the firm to know what their target is and what they are aiming for. If it is a requirement for all companies to keep the records but it is also the company’s aim to keep these records for its own good.

Compile the Financial Data

The financial data is compiled in order so that the investor can decide whether to invest in the business or not (Minnis & Sutherland, 2017). New Earth has all of their data arranged in order. The investors cannot shy away from investing in their idea of the extraction of iron ore even if there is danger as the area, South Africa, has political instability. In the past, New Earth have been mining gold in South Africa, this is a good record since they have made considerable profits in the mining of gold. They have a good financial record and also, the most convincing aspect, a low debt accumulation (Fruhan and Wei, 2013).

Financial Statements

The financial statements are the records that indicate the financial activities and also the position of the business (Minnis & Sutherland, 2017). These statements are kept so that the business can know which position is in and whether it is making losses or not.

Corrections/Adjustments

The adjustments were to me made in the financial statements so that the investors could be attracted. This does not mean that the financial statements of the New Earth were not true. These statements were put in their best forms so that the true picture of the New Earth could be depicted on how they are doing in the market (Fruhan and Wei, 2013).

Other ‘public data’

This is the information from the public. The New Earth heard that was an iron ore deposit in an area and used that opportunity to go and make further investigations about the place.

Part 3: Business Financial Context

This refers to the money that is needed to establish and run the business. New Earth’s estimated invested price was 200 million dollars. Initially, New Earth had a gold mine in South Africa (Fruhan and Wei, 2013). Gold had earlier had a boom in price back in 2013 from 300 dollars per ounce to 1700 dollars per ounce. This meant that New Earth had enough capital to start and run the business.

Credit Analysis

Credit analysis is a method that can be used to calculate creditworthiness of the business (Minnis & Sutherland, 2017). In layman’s language, it is the evaluation of the company’s ability to honor its obligations financially. New Earth had no doubt enough money. This is because, as stated earlier, they had a gold mine which generated profit for them. Gold has a huge market all over the market and the price at that time kept rising. New Earth had accumulated a lot of cash in the mining of Gold. New Earth had less debt therefore they were still operation and still moving on (Fruhan and Wei, 2013).

Securities Analysis

It is the value of investing. In this case, the value of investment to the iron ore mining was the 200 million dollars. In order for the completion of the investment, the 200 million dollars had to be invested. 40% would be required in the investment at the beginning of the year 2013, that is, $ 80 million dollars. The rest, which is 60%, would be required at the beginning of 2014 which was 120 million dollars. National Assurance Corp which is an insurance company guaranteed New Earth’s investment against possible losses because of the civil war that had ensued in South Africa (Fruhan and Wei, 2013).

M & A Analysis

 This is the merger and the acquisition process. The process includes:

  • Developing of an acquisition strategy – The New Earth is working hard to invest in in the iron ore and they are still mining gold.
  • Setting of the M&A search criteria – The potential target companies are determined, for example, the geographic location. Iron ore had to be investigated if it actually existed in the set location.
  • Searching of the potential target of acquisition
  • Begin acquisition planning
  • Perform the valuation analysis
  • Negotiations are made
  • Merger and acquisition due diligence
  • Purchase and the sale of contacts
  • Financing the strategy for acquisition
  • Closing of the Integration of acquisition

Debt-Dividend Analysis

This is the ratio of the total amount dividend amount that is paid to the shareholders that is relative to the net income that is for the company (Minnis & Sutherland, 2017). The amount not issued to the shareholders is the amount that is to be set aside for the purpose of paying the debts of the company. In this case, the New Earth Company had debts but these debts were considerable debts. Therefore, with the investment they were intending, the profits generated would enable them to pay off the small debs they had so that they could operate independently.

Corporate Communication (strategy)

Corporate communication refers to the collection of activities that are involved in the internal and the external communications that is aimed at creating a condition that is favorable for the stakeholders that the company depends on (Minnis & Sutherland, 2017). The New Earth had been assisted by China so that the issues that came up in South Africa could not affect them and their operations.

General Business Analysis

Business analysis refers to the research discipline that is conducted to identify the needs of a business and also determining the solutions to the problems that affects the business (Minnis & Sutherland, 2017). In this case, the New Earth had issues about the business environment. The external business environment, that is, the political issues that were present in South Africa at that time, was the issue that was making them refrain from staring to mine the iron ore deposits. The problem was tackled by the insurance company in china that assured them that the danger that was in South Africa was not going to affect them in any way (Fruhan and Wei, 2013).

Part 4: Financial Analysis

Business Strategy Analysis – expectations from industry analysis and the firm’s Competitive   

Strategy analysis

The strategic analysis is to be analyzed using the SWOT analysis:

Strengths: The Company has a New Earth had support of the China government. Even if war erupted in South Africa, they were assured protection by China since they were benefiting from the export of iron ore to them after mining.

Also, the insurance company had insured the New Earth so that they cannot experience losses. With the insurance, they cannot be adamant to start the mining of the iron ore.

New Earth was previously mining gold. This means that they had money to start the mining of ore (Fruhan and Wei, 2013).

Weaknesses of the company: There would be a loss since iron ore has many deposits all over the world. If the demand for iron ore had just declined, that would have been a major loss for the company New Earth. The company may be closed down as a result of continuous losses from the mining of iron ore.

Opportunities of the company: The presence of iron ore is the opportunity available. The firm found an estimated 30 million tons of the ore deposit that contained an average of 60% content of iron ore. I would have a great investment since the deposit of iron ore was massive and this meant profits alone. If the New Earth would extract 2 million tons each and every year, it would take them 15 years to completely diminish the deposits of ore in the reserve (Fruhan and Wei, 2013). This means that the presence of the ore is definitely there, the main problem is when to start the mining process.

The cash Flows Estimation with price at $80 million/ton is $844.3 million dollars

The cash Flows Estimation with price at $100 million/ton is $1234.3 million dollars

The above is the opportunity that New Earth has when investing in the mining of iron ore when they sell at $80 million per ton and $100 million/ton respectively (Fruhan and Wei, 2013).

Threats to the company: South Africa was ranked as one of the top most countries that is likely to be affected by political factors therefore affecting the mining of the iron expected to be mined. In the neighboring countries, there was a large risk of a civil war. This was a threat to the mining of iron ore in South Africa since the war could always extend to South Africa hence causing disasters to the mine expected (Fruhan and Wei, 2013). There was constant fear that the government could decide to use the mineral for the benefit of the nation just like how many African non-developed countries do. If this was done, this could mean loss to the mining of iron ore in South Africa.

The threats that the mining of ore has is the mining that is done in other countries, that is:

China             748.2 million tons

Australia        334.2 million tons

Brazil             329.7 million tons

India              192.5 million tons

Russia            101 million tons

Ukraine          72.5 million tons

The above are the average of the production of iron ore in countries that are above South Africa.

South Africa produces 48.2 million tons in 6 years. This is a deficit of more than 700 million tons.

The mine in South Africa, that is, production of 48.2 million tons cannot be compared to the production of China, that is, 748.2 million tons in 6 years. This might render a loss to the South African Firm.

Accounting Analysis – adequacy of the accounting system

The accounting system of New Earth is adequate as how it has been presented and highly analyzed.The accounting system is adequate and is clearly presented in every aspect. The management is required to maintain the adequate required information and submit it to the government on time. This can be used by the government to determine how to tax the company (Minnis & Sutherland, 2017).

From 2015 – 2020, there is payment of $346.9 million in tax.

This has been indicated in the Cash flow estimation with the South African investment (in millions of dollars) if sold at $80 million per ton.

If sold at $100 million per ton, the company will have paid $556.9 million.

Therefore, the business might use this analysis to decide whether to use $80 million per ton or $100 million per ton.

Financial Analysis – performance and-or pro forma data

This is the process of evaluating the business, its intended projects, the budgets that it has and the financial related activities it is intended to complete. The financial analysis aim is to analyze the stability and the profitability of investment of the business. New Earth is intending to start mining of iron ore. The extent of the iron ore deposit was analyzed by the Drexel Corporation by New Earth, a construction and an engineering firm. The firm found an estimated 30 million tons of the ore deposit that contained an average of 60% content of iron ore. I would have a great investment since the deposit of iron ore was massive and this meant profits alone. If the New Earth would extract 2 million tons each and every year, it would take them 15 years to completely diminish the deposits of ore in the reserve.

The capital takedown schedule (Total) in the period of 16 years is $200 million 

The loan repayment schedule for the 16 years, starting from 2015 – 2029 totals is $160 million.

There is a deficit of $200-$160 = $40 million dollars (Fruhan and Wei, 2013)

Prospective Analysis – forecast and valuation

This is the final step in an analysis. This step can only be undertaken when the financial statements of the company have been analyzed effectively in the past (Minnis & Sutherland, 2017). New Earth has analyzed the financial statements of their income and their expenditure and put well in their financial books as seen. The importance of putting the prospective analysis is for, security evaluation, management assessment and assessment of solvency. The most common type of prospective analysis is the analysis of risk management. Risk management is very important for any business. This means that the company has to look at the risks that are impending when investing into a new project. New Earth knew that they had a challenge when they thought of the idea of staring to mine iron ore (Fruhan and Wei, 2013). But, they had to seek insurance from a company in China so as to insure them the risks that were impending, that is, political instability in South Africa.

This may include the debts that the company needs to repay. This includes:

  • Senior Secure debt
  • Senior unsecured debt
  • Senior subordinated debt

Therefore: Total contractual debt      $27.2 million dollars

                  Total prepayment             $132.8 million dollars

                  Total Debt Amortization $160 million dollars

Total amount to be repaid is $327.2 million dollars

Time Value of money

Time value of money tries to explain why an interest is paid or even earned in the first place (Minnis & Sutherland, 2017). New Earth focuses on earning an interest so that it can pay off its debts and be a huge company in the future. Every business in the world is started with an aim of making a profit and New Earth is not an exception.

Time value of money = PV × [1 + (i/n)](n×t)

FV = future value of money

PV = the present value

i = interest rate

t = number of years

n = number of compounding times

Time value of money = 327.2 × [1 + (5/100)] (16 * 5)

327.2 × [1.05] (80)

$1,621,6 million dollars

Part 5: Recommendations

The best course of action is that the New Earth Company should invest in the mining of iron ore. The demand for iron ore is going to rise as it is expected. Iron ore is the most integral mineral in the global economy as it makes up 95% of the metal that is used all over the earth. In the near future, iron ore will be regarded as the most valuable mineral in the world and those investing in its mining will rake in a lot of profits. Therefore, New Earth should see this as an investment opportunity and grab it as fast as possible since they will make a lot of profit by its exportation to China, Japan and also Korea.

References

  • Ferreira, H. and Leite, M.G.P., 2015. A Life Cycle Assessment study of iron ore mining. Journal of cleaner production108, pp.1081-1091.
  • Fruhan, W. E., and Wei W. 2013.  "New Earth Mining, Inc." Harvard Business School Brief Case 913-548.
  • Minnis, M., & Sutherland, A. 2017. Financial statements as monitoring mechanisms: Evidence from small commercial loans. Journal of Accounting Research55(1), 197-233.
  • Smit, N.W., De Beer, L.T. and Pienaar, J., 2016. Work stressors, job insecurity, union support, job satisfaction and safety outcomes within the iron ore mining environment.

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