CASE STUDIES IN FINANCE (FIN3CSF) – SEMESTER 2, 2017
CASE STUDY 2 – COMPANY FINANCIAL POLICY DECISION-MAKING
Your current role is the Manager of the Finance Division of Fortescue Metals Group Limited,
and you report directly to the Chief Financial Officer (CFO) of the company. The CFO has
requested you to attend a strategic retreat being held by the company to present to the Senior
Leadership Group, including the Chief Executive Officer (CEO) and the Board of Directors,
on the current financial policy platform of the company, the nature of the linkage or association
between these policies adopted by the company, and how they integrate to influence the
operating and share performance outcomes for Fortescue Metals Group Limited.
Fortescue Metals Group Limited (FMG) is a leading iron ore production and exploration
company which operates in the Pilbara region of northern Western Australia. The company is
the fourth-largest listed resources company in Australia, behind BHP Billiton Limited, Rio
Tinto Limited and Woodside Petroleum Limited, and the largest pure-play iron ore mining
company listed in Australia. The company currently has two primary production sites in
operation, namely the Chichester Hub located in the Chichester Ranges in the Pilbara region
comprising the Cloudbreak and Christmas Creek mining projects, and the Solomon Hub, which
is located 120 kilometres west of the Chichester Hub and comprises the Firetail and Kings
Valley mines. The company’s current operational objective is to achieve iron ore production
of at least 155 million tonnes per annum (Mtpa), and it has undertaken an aggressive expansion
program in the last decade in pursuit of this objective. The iron ore produced by the company’s
mining operations is transported to their port facilities at Port Hedland and is shipped for spot
market or futures contract trading in a number of overseas locations, but predominantly China.
The follow table provides a summary of financial and structural information for Fortescue
Metals Group Limited for their recent June 30th year ends (All figures, except for per share,
issued capital and percentage statistics, are expressed in A$Million):
2012 2013 2014 2015 2016
Key indicators
No. of issued shares (Mill.) 3,113.798 3,113.798 3,113.798 3,113.798 3,113.798
Market capitalisation 15,257.610 9,465.946 13,545.021 5,947.354 10,897.023
Share price ($) 4.900 3.040 4.350 1.910 3.500
Price/Earnings ratio (times) 11.086 5.704 4.657 14.470 8.216
Earnings per share ($) 0.442 0.533 0.934 0.132 0.426
Dividends per share ($) 0.080 0.100 0.200 0.050 0.150
Dividend payout ratio (%) 18.100 18.762 21.413 37.879 35.211
Trading Information
Iron ore processed (wet
metric tonnes)
53.900 76.100 126.000 153.600 167.600
Iron ore shipped (wet metric
tonnes)
57.500 80.900 124.200 165.400 169.400
Iron ore price (US$ per Mt) 134.62 114.82 96.26 61.84 52.34
Total revenue 6,558.728 8,686.792 12,325.902 10,924.479 9,354.969
Operating expenses 3,766.068 5,459.838 6,649.681 8,069.010 5,428.225
Earnings before interest and
taxes (EBIT)
2,563.045 3,032.884 4,918.259 1,365.885 2,702.666
Profit before tax 2,067.510 2,436.657 4,153.928 546.875 1,823.323
Net profit after tax before
abnormals
1,376.704 1,660.377 2,908.704 411.458 1,326.420
Net profit after tax after
abnormals
1,529.781 1,882.479 2,908.704 411.458 1,326.420
Net interest expense 495.535 596.226 764.331 819.010 879.342
Income tax expense 690.805 776.280 1,245.223 135.417 496.903
Net operating cash flows 2,755.372 3,238.814 6,632.696 2,652.344 4,070.832
Return on total assets (%) 9.314 7.380 12.074 1.479 5.094
Return on equity (%) 37.294 29.117 36.133 4.193 11.718
Structural information
Cash and cash equivalents 2,299.087 2,326.685 2,545.648 3,100.260 2,131.699
Current assets 3,581.592 3,948.248 4,752.654 4,595.052 3,262.860
Property,plant&equipment 10,869.394 18,215.633 18,746.346 22,084.635 21,673.848
Total assets 14,780.689 22,498.113 24,091.295 27,812.500 26,039.590
Current liabilities 2,096.948 1,524.528 3,471.338 2,197.917 2,200.377
Long-term debt 8,063.978 13,461.995 9,981.953 12,257.813 8,992.728
Total liabilities 11,089.196 16,795.687 16,041.401 17,998.700 14,719.903
Share capital 1,268.767 1,391.914 1,368.365 1,684.896 1,751.953
Retained earnings 2,382.494 4,359.030 6,593.418 8,052.083 9,504.444
Total shareholders’ equity 3,691.492 5,702.526 8,049.894 9,813.802 11,319.688
Long-term debt to Total
assets (%)
54.558 59.836 41.434 44.073 34.535
Total liabilities to
shareholders’ equity (%)
300.399 294.531 199.275 183.402 130.038
Further detailed overall summary, structure, financing and performance information can be
obtained from the 2016 Annual Report document for Fortescue Metals Group Limited, which
is available from the subject LMS site. Prior year annual report documents and other filings
and announcement information relating to the company can be obtained from the Fortescue
Metals Group Limited web-site (www.fmgl.com.au) or from the DatAnalysis Premium
database available through the Databases link on the University Library web-site. Other
relevant information relating to Fortescue Metals Group Limited or the wider corporate sector
is as follows:
• Assume this analysis is being undertaken as at Monday 10th July 2017.
• Fortescue Metals Group Limited’s share price on Monday 10th July 2017 is $5.09 per share,
and there are 3,113.798 million issued ordinary shares on this date.
• Fortescue Metals Group Limited is part of the Materials Sector based on the Global
Industry Classification Standards (GICS), and its GICS Industry is Metals and Mining.
• Fortescue Metals Group Limited’s beta coefficient on July 10th 2017 is 0.89, compared to
the beta coefficient for the overall industry of 1.04.
• The 5-year and 10-year Australian Government Bond yields are 2.258% and 2.784%,
respectively, on July 10th 2017.
• The 1-year London Interbank Offered Rates (LIBOR) on June 30th 2016 and July 10th 2017
were 1.2302% and 1.465%, respectively.
• The S&P/ASX 200 Accumulation Index, including dividend and franking credit
components, has provided an average annual return of 8.668% over the most-recent fiveyear
calendar period to July 10th 2017.
• The Australian dollar to US dollar (AUD/USD) exchange rates on June 30th 2016 and July
10th 2017 were 0.7782 and 0.7602, respectively.
• Fortescue Metals Group Limited is subject to a corporate tax rate of 30%.
Required:
The CFO has requested you to submit two documents in preparation for the strategic
retreat – 1) a PowerPoint presentation that will be presented at the retreat and 2) a
Background Analytical Report providing supporting calculation and analysis
information. The presentation, prepared employing information from the annual report
documentation and any other documentation or sources of information considered to be
relevant, is required to identify and outline the following aspects of Fortescue Metals
Group Limited’s current policy platform and operational activities and performance:
• The nature of the firm’s working capital management policies. Focus should be on
overall current asset investment and financing policies, rather than the company’s
adoption of policies relating to specific current asset categories, such as inventories or
receivables.
• The determination of the costs of the various sources of costly or interest-bearing
financing employed by the firm and, from this, the firm’s overall weighted average
cost of capital (WACC).
• The nature of the firm’s capital structure determination policy, including
identification of specific policy adoption or usage if relevant, whether the firm appears
to have target or optimal capital structure ratios, and the determinants of the firm’s
capital structure choice.
• The nature of the firm’s earnings distribution policy, including the type of dividend
policy employed if relevant, whether the firm has a target dividend policy or payout
ratio, and the influence of taxation or other relevant elements associated with the
firm’s overall earnings management and distribution practices.
• The nature of any association or relationship between these various corporate
financing policies employed by the firm, and how this may relate to Fortescue Metals
Group Limited’s share and/or accounting performance outcomes, and any other key
drivers of the firm’s performance outcomes.
These presentation documents should be submitted to the CFO by 6.00pm on August 28th
2017, via the FIN3CSF subject LMS site. This case study will represent 20% of the final
assessment for this subject. This case study can be submitted either individually or in a
group with up to a maximum of four members. The maximum word limit, excluding any
figures and calculations is the equivalent of 500 words per team member, so a case study
completed by a team of 4 should be a maximum of 2,000 words. The PowerPoint
presentation and background documents should be prepared in a professional manner,
be informative and interpretable by an audience with reasonable general finance
knowledge, and reflect creativity and thought about the most appropriate way to present
the information. The PowerPoint presentation should be a maximum of 15-20 slides. The
Background Report should provide supporting calculation and analytical information,
including any assumptions made, to expand on the information and conclusions provided
in the presentation.
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